Annual Report to parliament 2010-2011
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Canada Revenue AgencyAudited Financial Statements – Administered Activities
Independent Auditor’s Report
To the Board of Management of the Canada Revenue Agency and the Minister of National Revenue.
I have audited the accompanying statement of administered assets and liabilities of the Canada Revenue Agency as at 31 March 2011, the statement of administered revenues and pension contributions, statement of administered expenses and recoveries and statement of administered cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information (together “the financial information”). The financial information has been prepared by management using the basis of accounting described in Note 2.
Management’s Responsibility for the Financial Information
Management is responsible for the preparation and fair presentation of this financial information in accordance with the basis of accounting described in Note 2; this includes determining that the basis of accounting is an acceptable basis for the preparation of the financial information in the circumstances, and for such internal control as management determines is necessary to enable the preparation of the financial information that is free from material misstatement, whether due to fraud or error.
My responsibility is to express an opinion on the financial information based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial information is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial information. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial information, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial information in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial information.
I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.
In my opinion, the financial information presents fairly, in all material respects, the administered assets and liabilities of the Canada Revenue Agency as at 31 March 2011, and the results of its administered operations and its administered cash flows for the year then ended in accordance with the basis of accounting described in Note 2.
Without modifying my opinion, I draw attention to Note 2 to the financial information. This note describes the purpose and basis of accounting for reporting activities administered by the Canada Revenue Agency on behalf of others. This financial information may not be suitable for another purpose. Management prepares a separate set of financial statements to report the operational revenues and expenses of the Canada Revenue Agency.
John Wiersema, FCA
Interim Auditor General of Canada
30 August 2011
Ottawa, Canada
Canada Revenue Agency
Statement of Administered Assets and Liabilities
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Amounts receivable from taxpayers (Note 3)
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Amounts receivable under the Tobacco civil settlements (Note 4)
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Amounts payable to taxpayers (Note 5)
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Amounts payable to provinces (Note 6)
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Deposit accounts (Note 7)
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Net amount due to the Consolidated Revenue Fund on behalf of the Government of Canada and others (Note 8)
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Contingent liabilities (Note 9)
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Canada Revenue Agency
Statement of Administered Revenues and Pension Contributions
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Goods and Services Tax (Note 10)
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Miscellaneous charges (Note 11)
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Interest, penalties and other revenues (Note 12)
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Provincial portion of Harmonized Sales Tax (Note 13)
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Other revenues (Note 14)
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Pension Contributions, Interest and Penalties Administered on behalf of the Canada Pension Plan ( Note 15 )
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Canada Revenue Agency
Statement of Administered Expenses and Recoveries
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Provision for doubtful accounts (Note 3)
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Provision for Doubtful Accounts Administered for the Canada Pension Plan ( Note 3 )
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Canada Revenue Agency
Statement of Administered Cash Flows
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Canada Revenue Agency
Notes to the Financial Statements – Administered Activities
The Canada Revenue Agency (the “Agency”) is an agent of Her Majesty in right of Canada under the Canada Revenue Agency Act. The Agency is a departmental corporation named in Schedule II of the Financial Administration Act and reports to Parliament through the Minister of National Revenue.
The mandate of the Agency is to support the administration and enforcement of tax legislation as well as other related legislation. The Agency provides support, advice and services by:
- supporting the administration and enforcement of the program legislation;
- implementing agreements between the Government of Canada or the Agency and the government of a province, territory or other public body performing a function of government in Canada to carry out an activity or administer a tax or program;
- implementing agreements or arrangements between the Agency and departments or agencies of the Government of Canada to carry out an activity or administer a program; and
- implementing agreements between the Government of Canada and First Nations governments to administer a tax.
The Agency collects revenues, including income and sales taxes and Employment Insurance (EI) premiums, administers tax legislation, delivers a number of social benefit programs to Canadians for the federal government, as well as for provincial, territorial, and First Nations governments and collects amounts for other groups or organizations, including Canada Pension Plan (CPP) contributions. It is responsible for the administration and enforcement of the following acts or parts of acts: the Air Travellers Security Charge Act, the Canada Revenue Agency Act, the Children’s Special Allowances Act, Part V.1 of the Customs Act, section 2 of the Energy Costs Assistance Measures Act, the Excise Act, the Excise Tax Act (including the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) except for GST/HST on imported goods), the Excise Act, 2001, the Income Tax Act, the Softwood Lumber Products Export Charge Act, 2006, the Universal Child Care Benefit Act, and others including various provincial acts.
In the province of Quebec, the Ministère du Revenu du Québec (MRQ) acts as an agent of the Agency for the administration and enforcement of the GST. The Agency monitors cash transfers made by the MRQ, reports the GST revenues administered on its behalf, and transfers funds out of the Consolidated Revenue Fund to the MRQ for the issuing of refunds.
The Agency’s mandate regarding the administration of customs legislation is limited to the collection functions under Part V.1 of the Customs Act. As well, the Agency provides to Human Resources and Skills Development Canada (HRSDC) collection services for certain accounts receivable under various acts.
For financial reporting purposes, the activities of the Agency have been divided in two sets of financial statements: Agency activities and Administered Activities. The purpose of these Administered Activities statements is to present information about the tax-related revenues, expenses, assets, and liabilities that CRA administers on behalf of the federal government, provincial and territorial governments, First Nations and other organizations. CRA administers personal income tax for all provinces except Quebec and corporate income tax for all provinces except Quebec and Alberta. The financial statements - Agency Activities include those operational revenues and expenses, which are managed by the Agency and utilized in running the organization. Tax-related assets, liabilities, revenues and expenses are excluded from those financial statements because they can only accrue to a government, not the tax agency that administers those transactions.
As required by section 88(2)(a) of the Canada Revenue Agency Act, CRA reports against accounting principles that are consistent with those applied in the preparation of the financial statements of the Government of Canada. As such, the CRA Administered Activities stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles. A summary of the significant accounting policies follows:
Revenues and pension contributions are recognized in the year in which the event that generates the revenue or the pension contribution occurs. The following policies are applied for specific streams:
(i) Income taxes, Canada Pension Plan contributions, and Employment Insurance premiums:
Income tax revenues are recognized when the taxpayer has earned the income subject to the tax. Income earned is determined net of tax deductions and credits allowed under the Income Tax Act, including refundable taxes resulting from current year activity. Canada Pension Plan (CPP) contributions are recognized when the employee or the self‑employed person has earned pensionable income. Employment Insurance (EI) premiums are recognized as revenue when the employee has earned insurable earnings.
These revenues and pension contributions are measured from amounts assessed/reassessed and from estimates of amounts not yet assessed/reassessed based on cash received that relates to the fiscal year ended March 31. Revenues and pension contributions for the fiscal year also include adjustments between the estimated revenues of previous years and actual amounts, as well as revenues from reassessments relating to prior years. An additional estimate of future reassessments is only recorded when it can be reliably determined. At the present time, this is limited to cases where amounts for taxes previously assessed are under objection or are being appealed to various courts.
Reassessments include changes made to previously assessed taxes payable at the request of the taxpayer, for example to claim a subsequent loss carry-back, or are initiated by the Agency as a result of applying reporting compliance procedures such as taxpayer audits.
(ii) Other taxes, duties and charges:
Goods and Services Tax (GST) and Harmonized Sales Tax (HST) revenues on domestic goods and services are recognized at the time of the sale of goods or the provision of services. Revenues are reported net of Input Tax Credits (ITC), GST rebates and the GST quarterly tax credit. ITC’s are the recovery of GST/HST paid or owed on purchases related to domestic and imported commercial activities of the taxpayer. The GST quarterly tax credit for low income individuals and families is recorded in the period to which it relates. It is intended to offset the cost of the tax for low income individuals and families.
For Excise taxes, revenue is recognized when a taxpayer sells goods taxable under the Excise Tax Act. For Excise duties, revenue is recognized when the taxpayer manufactures goods taxable under the Excise Act and the Excise Act, 2001.
These revenues are measured from amounts assessed, and from estimates of amounts not yet assessed based on cash received that relate to the fiscal year ended March 31. Miscellaneous charges are recognized as revenue when they are earned.
(iii) Interest, penalties and other revenues:
Interest, penalties and other revenues are recorded when earned, except for the Nova Scotia worker’s compensation which is recorded as revenue when payments are received from employers. All interest and penalty revenues are reported as revenues administered for the federal government as per the terms of the tax collection agreements with the provinces and territories. Interest and penalties are recorded net of amounts waived under the various tax acts.
An assessment (or reassessment) of tax is defined as all decisions and other steps made or taken by the Minister of National Revenue and officials of the Agency under the federal, provincial and territorial acts or sections of the acts administered by the Agency to determine tax payable by taxpayers. When verifying a taxpayer’s return, the Agency uses applicable provisions of the various tax acts it administers as well as other internally developed criteria which are designed to substantially meet the provisions of these acts.
(v) Completeness of tax revenues:
The Canadian tax system is predicated on self-assessment where taxpayers are expected to understand the tax laws and comply with them. This has an impact on the completeness of tax revenues when taxpayers fail to comply with tax laws, for example, if they do not report all of their income. The Agency has implemented systems and controls in order to detect and correct situations where taxpayers are not complying with the various acts it administers. These systems and controls include performing audits of taxpayer records where determined necessary by the Agency. Such procedures cannot be expected to identify all sources of unreported income or other cases of non-compliance with tax laws. The Agency is unable to estimate the amount of unreported tax.
The Agency incurs interest expenses as a result of late refund payments. These are largely due to the resolution of long standing corporate tax files in favour of the taxpayer. Interest accrues from the date that the tax instalment was initially paid to the date that the case is resolved. The Agency records the interest expense in the fiscal year to which it relates.
(iii) Administered recoveries:
Recoveries of Old Age Security and Employment Insurance benefits are recognized when assessed, with an estimate for amounts not yet assessed. Only recoveries assessed through the personal income tax system are reported by the Agency. Recoveries determined by other federal government departments are not reported in these financial statements.
Cash on hand represents amounts received in the Agency’s offices or by agents of the Agency as at March 31 but not yet deposited to the credit of the Consolidated Revenue Fund of the Government of Canada.
Amounts receivable from taxpayers represent taxes, interest and penalties and other revenues assessed or estimated by the Agency but not yet collected. A significant portion of the receivable balance is due to the recording of accrued receivables, which relate to the current fiscal year but are not due to be paid by taxpayers until the next fiscal year.
The allowance for doubtful accounts reflects management’s best estimate of the collectability of amounts assessed, including the related interest and penalties, but not yet paid. The allowance for doubtful accounts has two components. A general allowance is calculated based on the age of the accounts. A specific allowance is calculated based on an annual review of all accounts over $10 million.
The allowance for doubtful accounts is adjusted by an annual provision for doubtful accounts and is reduced by amounts written off as uncollectible during the year. The annual provision is reported in the Statement of Administered Expenses and Recoveries. Except for the portion related to CPP contributions, which is charged to the CPP Account, the provision is charged to expenses administered for the federal government as it assumes all collection risks, as per the terms of the tax collection agreements with the provinces, territories and First Nations.
Amounts payable to taxpayers represent refunds and related interest assessed, or estimated by the Agency, not paid as at March 31. A significant portion of the payable is due to the recording of accrued payables, which relate to the current year but are not due for payment until the next fiscal year. They include refunds resulting from assessments completed after March 31, and estimates of refunds for personal and corporate income tax not yet assessed.
Contingent liabilities are potential liabilities resulting from, for example, previously assessed taxes recorded as revenue, which may become actual liabilities when one or more future events occur or fail to occur. If the future event is likely to occur or to fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and the revenues are reduced. If the likelihood is not determinable or an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the financial statements.
The preparation of these statements requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses and recoveries reported. Estimates are used to record unassessed tax revenues and the related amounts receivable and payable, as well as the allowance for doubtful accounts. In particular, estimates are made to determine personal and trust income tax revenues, corporate income tax revenues, non-resident tax withholdings, GST & HST revenues, Energy taxes, Other excise taxes and duties revenues, EI premiums, CPP contributions and the related amounts receivable and payable. Actual results could differ from the estimates and any difference would be recorded in the year the actual amounts are determined. The effect of changes to such estimates and assumptions in future periods could be significant. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable.
3. Amounts receivable from taxpayers
The following table presents details of the amounts receivable from taxpayers as reported in the Statement of Administered Assets and Liabilities. These amounts include related interest and penalties receivable. Amounts receivable from individuals and employers include Canada Pension Plan contributions and Employment Insurance premiums as applicable.
Changes in the allowance for doubtful accounts are as follows:
The provision of $3,452 million ($2,936 million in 2010) reported above includes an amount of $3,344 million ($2,847 million in 2010) recorded as an expense administered on behalf of the federal government (see Note 2 (e)) and $108 million ($89 million) charged against expenses administered on behalf of the Canada Pension Plan.
On July 31, 2008, the federal and provincial governments entered into civil settlement agreements with two tobacco companies to resolve potential civil claims. Under the terms of the agreements, payments totalling $850 million are to be made to Canada, for Canada and the provinces. The federal government and provincial governments’ share of this amount are $325 million and $525 million respectively. In accordance with the settlement agreements, the amounts receivable are expected to be fully paid by 2023. Up to $650 million is expected to be received in the first 10 years of the agreements and about $50 million in the following five years. These amounts are recorded at the nominal value.
The following table presents details of the amounts receivable related to the Tobacco civil settlement agreements:
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On April 13, 2010, the federal, provincial and territorial governments entered into civil settlement agreements with two other tobacco companies to resolve civil claims or potential civil claims. Under the terms of the agreements, payments totalling $325 million were made to Canada, for Canada, the provinces and Territories on the same day. The federal government and the provincial and territorial governments’ share of this amount are $41 million and $284 million respectively. One of these companies also pleaded guilty in court to violation of the Excise Act, the fine imposed totalled $150 million. The other company pleaded guilty to a Criminal Code of Canada conspiracy and was fined $75 million. Both fines were paid to Canada on April 13, 2010. The federal revenues are included in Interest, penalties and other revenues (Note 12) and the provincial revenues are included in Other revenues (Note 14).
The following table presents details of the amounts payable to taxpayers as reported in the Statement of Administered Assets and Liabilities:
The following table presents details of amounts payable to provinces as reported in the Statement of Administered Assets and Liabilities:
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It should be noted that the Canada Revenue Agency is acting as an agent for the provinces under the Tobacco civil settlements. CRA’s liability to the provinces for their expected share of the settlement amounts is limited to the amounts that will be ultimately collected from the tobacco companies.
Amounts payable to provinces, territories and other organizations, which are settled by other departments such as the Department of Finance for Provincial, Territorial, and First Nations taxes, are not recorded in these financial statements because these amounts are outside of the Agency’s responsibility.
Deposit accounts are established to record cash and securities required to guarantee payment of GST as it relates to non-resident registrants and certain licensees as it relates to excise taxes, which are both payable pursuant to the Excise Tax Act. The following table presents activity on the deposit accounts as reported in the Statement of Administered Assets and Liabilities:
The net amount due to the Consolidated Revenue Fund (CRF) on behalf of the Government of Canada and others is the difference between administered assets (taxes not yet received and/or deposited in the CRF) and other administered liabilities payable by the Agency out of the CRF.
The net cash deposited in the CRF of the Government of Canada includes amounts received on behalf of the federal government, provinces, territories, and other organizations by the Agency and deposited in the CRF, less refunds and payments issued from the CRF during the year.
The change in the net amount due to the CRF during the fiscal year is presented in the table below:
Contingent liabilities include previously assessed taxes where amounts are under objection or are being appealed to the Tax Court of Canada, the Federal Court of Canada or the Supreme Court of Canada. As at March 31, 2011, an amount of $17,117 million was under objection at the Agency level ($17,102 million for 2010) and an amount of $3,299 million was being appealed to the courts ($3,509 million for 2010). The Agency has recorded, in the amounts payable to taxpayers or in reduction of the amounts receivable from taxpayers as applicable, the estimated amount of objections or appeals that are considered likely to be lost and that can be reasonably estimated.
The GST reported on the Statement of Administered Revenues and Pension Contributions is net of Input Tax Credits (ITC), rebates, the provincial portion of HST and the GST quarterly tax credit for low income individuals and families administered by the Agency. It does not include GST revenues on imported goods of $18,228 million in 2011 ($16,247 million in 2010), which are administered and reported by the Canada Border Services Agency (CBSA). The Canada Revenue Agency has sole responsibility for the administration of all ITC including those claimed on imported goods. ITC relating to GST on imports are not accounted for separately from ITC relating to GST on domestic transactions.
The following table presents details of the GST revenues administered by the Agency for the Government of Canada as reported in the Statement of Administered Revenues and Pension Contributions:
The amounts of GST net revenues reported above are net of receipts and disbursements resulting from the processing of GST returns. During the period, the Agency has processed $69,567 million in receipts ($44,384 million in 2010) and $62,051 million in disbursements and transfers ($32,529 million in 2010).
The following table presents details of miscellaneous charges administered by the Agency for the federal government as reported in the Statement of Administered Revenues and Pension Contributions:
Various tax legislation gives the Agency the authority, under certain conditions, to collect interest and penalties related to taxes due and regulations not met by taxpayers. The Agency has the authority to waive the interest and penalties that would normally be charged under certain circumstances such as Agency processing delays, financial hardship by taxpayers, or other extraordinary circumstances.
Other revenues consist of miscellaneous fees and charges such as court fines and administration charges for dishonoured payments instruments.
The following table presents details on interest, penalties and other revenues administered by the Agency for the federal government as reported in the Statement of Administered Revenues and Pension Contributions:
The Province of Ontario and the Province of British Columbia announced on March 26, and July 23, 2009 respectively that they had entered into Comprehensive Integrated Tax Coordination Agreements with the Government of Canada to bring Ontario and British Columbia into the HST revenue allocation framework. In accordance with the agreements, the Agency started to administer the harmonized sales tax for these provinces on July 1, 2010. The Agency recorded the provincial portion of HST administered for the provinces of Ontario and British Columbia as well as Nova Scotia, New Brunswick and Newfoundland and Labrador, which already had HST agreements in place, in these financial statements in accordance with the accounting policies described at Note 2.
The following table presents details of other revenues administered by the Agency for Provincial and Territorial Governments and First Nations as reported in the Statement of Administered Revenues and Pension Contributions. Revenues that are directly paid or payable to the provinces as received by the CRA, such as the Tobacco civil settlement amounts and the Nova Scotia workers’ compensation amounts, are flow-through collection activities rather than payments made under legislative authority. These amounts are included as administered revenue and then subsequently deducted from the Statement of Administered Revenues and Pension Contributions.
The following table presents details of the transactions administered by the Agency on behalf of the Canada Pension Plan (CPP) as reported in the Statement of Administered Revenues and Pension Contributions:
The Agency is related in terms of common ownership to all Government of Canada departments, agencies, and Crown corporations. The Agency deposits all monies received to the CRF, the Department of Finance makes payments out of the CRF to provinces, territories, and other organizations for revenue amounts such as provincial, territorial, and First Nations taxes, for which the Agency administers the revenue collection process. Old Age Security benefit recoveries, Canada Pension Plan contributions, net of overpayments refunded by the Agency, and Employment Insurance premiums are credited to Human Resources and Skills Development Canada (HRSDC) which administers the Old Age Security program, the Canada Pension Plan, and the Employment Insurance Account. The Agency also administers a refund set-off program by which tax refunds of individuals may be used to pay debts owed by clients under federal, provincial or territorial programs.
The Agency provides collection services to CBSA under Part V.I of the Customs Act. As well, the Agency provides to HRSDC collection services for certain accounts receivable under the Canada Education Savings Act, the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Canada Pension Plan and the Old Age Security Act. The related payments are paid directly to either CBSA or HRSDC who are responsible for their deposits to the CRF, as well as their accounting and reporting. These payments are not recorded in the Agency’s accounts.
Employment Insurance premiums administered on behalf of the Federal Government include the employer’s share paid by the Federal Government. GST declared to the Agency includes the GST paid by the Federal Government to its suppliers on domestic purchases. GST collected by other Federal Government departments is deposited to the CRF, declared to the Agency, and are included in the GST domestic revenues.
On August 26, 2011 the Province of British Columbia announced that it will return to the provincial sales tax. The impact, if any, on these financial statements is unknown at this time.
Certain comparative figures have been reclassified to conform with the presentation used in the current year.
Financial Statements Discussion and Analysis – Administered Activities
Introduction
The Financial Statements – Administered Activities reflect the total assets and liabilities, tax and non-tax revenues, expenses and recoveries, and cash flows administered by the Canada Revenue Agency on behalf of the Government of Canada, provinces, territories, First Nations, and other government organizations. Tax revenues are recognized on an accrual basis and are net of the applicable deductions and credits allowed under various Acts.
Tax Revenues
The Canada Revenue Agency collects the majority of federal tax revenues. However, other agencies and departments, such as the Canada Border Services Agency, account for the balance of total federal revenues. For further information on revenue collected by the Government of Canada as a whole, please refer to the Annual Financial Report of the Government of Canada, available at www.fin.gc.ca/purl/afr-eng.asp.
Revenues Administered on Behalf of the Government of Canada
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Net revenues were $191.0 billion in 2010-2011, some $10.6 billion higher than in 2009-2010. All administered revenues were higher except Corporate Taxes, Non-Resident Tax Withholdings, Goods and Services Tax, and Interest expense.
Personal Income Tax
Personal Income Tax revenues increased by $9.5 billion, or 9.1%. The increase reflects economic growth and higher employment, along with the expiry of some tax credits associated with Canada’s Economic Action Plan (Budget 2009).
Corporate Income Tax
Corporate Income Tax revenues decreased by $391.9 million or 1.3%. The decline in the tax rate and the impact of large one-time gains in 2009-2010 were mostly offset by an increase in corporate revenues.
Non-Resident Tax Withholdings
Non-Resident Tax Withholdings revenues decreased by $156.7 million or 3.0%. This decline stems from large reassessments of prior year revenues, partially offset by a growth in revenues from the current taxation year.
Goods and Services Tax
GST revenues decreased by $264.0 million or 2.2%. This resulted from an increase in Input Tax Credits claimed due to higher corporate investments in capital assets. This was mostly offset by an increase in gross GST revenues. On July 1, 2010, the Agency commenced the administration of PSTAR, leading to higher transfers and rebates.
Energy Taxes
Energy taxes increased by $148.7 million or 2.9%. This increase was due to a moderate growth in the consumption of gasoline and diesel fuel. The consumption of aviation fuel also grew in line with the strong growth in the airline sector.
Other Excise Taxes and Duties
Other Excise taxes and duties increased by $234.7 million or 7.7%. This increase is in line with the growth in tobacco production.
Miscellaneous Charges
Miscellaneous charges increased by $231.1 million or 38.4%. This reflected higher Air Travellers Security Charge revenues, which rose due to an increase in the rate as well as an increase in air travel.
Employment Insurance Premiums
Employment Insurance premiums increased by $741.6 million or 4.3%. This was in line with the growth in Source Deduction revenues due to higher employment, higher taxable income, and an increase in the maximum contribution ceiling.
Interest, Penalties, and Other Revenues
Interest, penalties, and other revenues rose by $543.5 million or 15.6%. This was due to a settlement of court fines related to the tobacco settlement agreements, along with an increase in arrears balances. Prescribed interest rates were stable.
Interest Expense
Interest expense rose by $36.8 million or 7.0%. This was due to higher interest paid on corporate refunds, partially offset by a reduction on interest paid on Personal Income Tax and GST refunds.
Figure 23 Direct Tax Revenues
As shown in Figure 23, the largest component of Direct Tax Revenues is Personal and Trust Income Tax, followed by Corporate Income Tax and Non-Resident Tax Withholdings.
Figure 24 Indirect Tax Revenues
As shown in Figure 24, the largest component of Indirect Tax Revenues is GST, followed by Energy taxes, Other Excise taxes and duties, and Miscellaneous charges. The proportion of GST has declined due to the decrease in net GST assessed and the strong growth in Energy taxes and Miscellaneous charges.
Revenues Administered on Behalf of the Provincial, Territorial Governments, First Nations, and the Canada Pension Plan
Provincial, Territorial, and First Nations Revenues were $83.0 billion in 2010-2011, some $20.9 billion higher than in 2009-2010. Canada Pension Plan Revenues were $37.2 billion in 2010-2011; $811.5 million more than in 2009-2010.
Income Tax Revenues – Personal and Trust
Personal Income Tax revenues increased by $975.8 million, or 2.1%. The increase reflects economic growth as well as higher employment, partially offset by tax reductions announced in many 2009 provincial budgets.
Income Tax Revenues – Corporate
Corporate Income Tax revenues increased by $879.7 million or 7.4%. This increase is due to higher corporate profits, partially offset by corporate tax cuts in Ontario and British Columbia. Prior year losses from large corporate taxpayers had little impact on provincial Corporate Income Tax as they pertained to taxation years prior to the introduction of the corporate tax harmonization in Ontario.
Harmonized Sales Tax (HST)
HST revenues increased by $18.8 billion. The increase was due to the implementation of harmonized sales tax for Ontario and British Columbia on July 1, 2010, along with a rate increase in Nova Scotia. This was partially offset by an increase in provincial rebates, also associated with the PSTAR implementation. On August 26, 2011 the Province of British Columbia announced that it will return to the provincial sales tax. The transition period is expected to take a minimum of 18 months. During this period, the Agency will continue to administer the HST in British Columbia.
Other Revenues
Other revenue increased by $293.6 million or 110.3%, and is related to the tobacco civil settlement agreements.
Revenues Administered On Behalf of the Canada Pension Plan
Canada Pension Plan revenues rose by $811.5 million or 2.2%. The increase is in line with the growth in Source Deduction revenues due to higher employment, higher taxable income, and an increase in the maximum contribution ceiling.
Figure 25 Revenues Administered on behalf of the Provincial and Territorial Governments and First Nations
As shown in Figure 25, Personal and Trust Income Tax represented the largest component of revenues administered on behalf of the Provincial and Territorial governments, and First Nations. This is followed by Harmonized Sales Tax and Corporate Income Tax. The proportion of Personal Income Tax decreased dramatically from the previous year, due to the implementation of harmonized sales tax in Ontario and British Columbia on July 1, 2010.
Expenses and Recoveries Administered on Behalf of the Government of Canada, Provincial, and Territorial Governments
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Net Federal Expenses and Recoveries were $15.2 billion in 2010-2011, $721.4 million higher than in 2009-2010. Net Provincial and Territorial Expenses were $5.2 billion, $3.8 billion higher than in 2009-2010.
Federal Administered Expenses
Federal Administered Expenses rose by $835.2 million or 5.4%. This resulted from a higher allowance for doubtful accounts (ADA) and an increase in child tax benefits (CTB). The growth in the provision for doubtful accounts was due to higher arrears and a moderate increase in the ADA rate. The growth in CTB was due to the indexation of benefits and improvements to the Child Disability Benefit, in accordance with the changes announced in the 2009 Budget.
Federal Administered Recoveries
Federal Administered Recoveries rose by $113.8 million or 9.7%. This largely resulted from higher Old Age Security (OAS) recoveries, due to a rise in the number of OAS benefit recipients and higher income reported.
Net Expenses Administered for Provinces and Territories
Net Expenses Administered for Provinces and Territories increased by $3,819.5 million or 276.8%. This increase was due to the implementation of the Ontario Sales Tax Transition Benefit, the Ontario Sales Tax Credit, and the British Columbia Sales Tax Credit.
Provision for Doubtful Accounts Administered for the Canada Pension Plan
The provision for doubtful accounts administered for the Canada Pension Plan increased by $18.8 million or 21.0%. This increase was due to higher arrears.
Figure 26 Expenses and Recoveries Administered on Behalf of the Government of Canada, Provincial, and Territorial Governments
As shown in Figure 26, Net Expenses and recoveries administered for the Federal Government made up most of the Expenses and Recoveries administered on behalf of the Government of Canada, Provincial, and Territorial Governments. The proportion of Federal Administered Expenses and Recoveries has fallen due to the implementation of the Ontario Sales Tax Transition Benefit, the Ontario Sales Tax Credit, and the British Columbia Sales Tax Credit.
Summary of the assessment of effectiveness of the systems of internal control over financial reporting and the action plan of the Canada Revenue Agency
Fiscal year 2010-2011
Annex to the Statement of Management Responsibility Including Internal Control Over Financial Reporting.
Note to the reader
With the Treasury Board Policy on Internal Control, effective April 1, 2009, departments and agencies are now required to demonstrate the measures they are taking to maintain an effective system of internal control over financial reporting (ICFR).
As part of this policy departments are expected to conduct annual assessments of their system of ICFR, establish action plans to address any necessary adjustments, and to attach to their Statements of Management Responsibility a summary of their assessment results and action plan.
Effective systems of ICFR aim to achieve reliable financial statements and to provide assurances that:
- Transactions are appropriately authorized;
- Financial records are properly maintained;
- Assets are safeguarded from risks such as waste, abuse, loss, fraud and mismanagement; and
- Applicable laws, regulations and policies are followed.
It is important to note that the system of ICFR is not designed to eliminate all risks, rather to mitigate risk to a reasonable level with controls that are balanced with and proportionate to the risks they aim to mitigate.
The maintenance of an effective system of ICFR is an ongoing process which involves identifying key risks, assessing the effectiveness of associated key controls and adjusting them as required, as well as monitoring the system in support of continuous improvement. As a result, the scope, pace and status of departmental assessments of the effectiveness of their systems of ICFR will vary from one organization to another based on risks and taking into account their unique circumstances.
The annual assessment of ICFR contemplated in the Treasury Board (TB) Policy on Internal Control is intended to be a management self-assessment led and administered by the Chief Financial Officer and supported by senior management. However, key external audit findings and results can inform this self-assessment. In the case of the CRA, changes to Federal-Provincial Tax Collection Agreements (TCAs) that took effect starting with the 2004 tax year introduced a new audit provision requiring the Auditor General to periodically perform a review of the adequacy of CRA’s internal controls relevant to the annual financial statements provided under the TCAs, the results of which are reported to provincial and territorial finance Ministers. In fulfilment of these requirements, the Office of the Auditor General (OAG) audits, periodically, those aspects of the CRA’s self-assessment of ICFR that are relevant to the TCAs. The portion of CRA’s ICFR that is subject to audit under the TCAs and the results of the controls audits performed to date by the OAG are explained and described in Sections 3 and 4 of the Annex.
1. Introduction
This document is attached to the CRA’s Statement of Management Responsibility Including Internal Control Over Financial Reporting for the fiscal year 2010-2011. As required by the TB Policy on Internal Control, effective April 1, 2009, this document provides summary information on the measures taken by the CRA to maintain an effective system of ICFR. In particular, it provides summary information on the assessments conducted by the CRA as of March 31, 2011, including progress, results and related action plans along with some financial highlights pertinent to understanding the CRA’s unique control environment.
1.1 Authority, Mandate and Program Activities
The CRA’s mandate is based upon a framework of complex laws enacted by Parliament and by provincial and territorial legislatures. To fulfil its mandate the CRA administers a range of tax, benefits and related programs aimed at ensuring that taxpayers meet their obligations and receive their entitlements and at protecting Canada’s tax base. For more detailed information on the CRA’s authority, mandate and program activities, please refer to the Overview section of the Annual Report on or the CRA’s Report on Plans and Priorities http://www.tbs-sct.gc.ca/rpp/2011-2012/inst/nar/nar00-eng.asp. Information on the expenses and revenues related to the CRA’s operations and activities can also be found in the Public Accounts of Canada http://www.tpsgc-pwgsc.gc.ca/recgen/txt/72-eng.html.
1.2 Financial highlights
The CRA’s key results for fiscal-year 2010-2011 are as follows:
- Total expenses of $4,606 million, 74% of which is personnel expenses.
- Total assets and liabilities of $793 million and $1,068 million respectively. Capital assets comprise 68% of the Agency’s total assets. Employee severance benefits comprise about 59% of total liabilities and accounts payable and accrued liabilities comprise about 16%.
- Total administered revenues of about $311 billion, comprised of $191 billion in revenue administered under tax and other related federal legislation on behalf of the Government of Canada, $83 billion in revenue administered on behalf of provincial, territorial and First Nations governments under various Memoranda of Understanding and similar arrangements, and $37.2 billion in revenue administered on behalf of the Canada Pension Plan.
- Total payments of about $20.5 billion in benefits and credits administered under benefit programs and services on behalf of the Government of Canada and provincial and territorial governments.
Responsibility for delivering CRA’s mandate is shared by program branches and corporate functions located at headquarters and within regional operations across Canada including at 48 Tax Services Offices and 7 Tax Centres. The CRA’s Information Technology (IT) capacity is critical to its ability to deliver services to Canadians and involves the support of two data centres that process up to 4.5 million transactions per hour, five mainframe computers, about 1,400 servers and maintenance of over 450 national business applications across a distributed computing environment covering more than 400 locations.
The Agency’s Finance and Administration (F&A) Branch supports the delivery of CRA programs and services by providing sound advice, products, and services related to a number of key functions including financial administration, resource management, security, internal affairs, and administration. It also helps ensure compliance and accountability with related legislation, policies, and directives. F&A activities are performed by a team of almost 3,000 employees, about 30% of whom are located in headquarters and 70% of whom are located in the regions. This team is integral to the effectiveness of CRA’s system of control over financial reporting, which encompasses two sets of financial statements - one for Agency Activities and one for Administered Activities. Also of importance to financial reporting, in particular in relation to Administered Activities, are many of the procedures carried out as part of regional or headquarters operations, such as collection, data entry and processing of income tax returns, as well as a majority of the system applications in use at the CRA. This makes CRA’s task of scoping, documenting and assessing the related controls uniquely challenging.
1.3 Audited financial statements
As noted above, for financial reporting purposes, the activities of the Agency have been divided into two sets of financial statements: Agency Activities and Administered Activities. The Agency Activities financial statements include those operational revenues and expenses which are managed by the Agency and utilized in running the organization. The Administered Activities financial statements include those revenues and expenses that are administered for someone other than the Agency, such as the federal government, a province or territory, or another group or organization.
The CRA has issued annual audited financial statements since 1999-2000 and has consistently received a clean audit opinion from the Auditor General of Canada.
1.4 Service arrangements relevant to financial statements
1.4.1 CRA reliance on other government service providers:
The CRA relies on other organizations for the processing of certain transactions that are recorded in its financial statements.
- Public Works and Government Services Canada (PWGSC) centrally administers salary payments and looks after such items as calculation of general pay, payroll deductions, security over pay information, and automatic retroactive adjustments through the Regional Pay System (RPS),
- Treasury Board Secretariat (TBS) provides the CRA with information used to calculate various accruals and allowances such as the accrued severance liability,
- the Department of Justice provides legal advisory, litigation and legislative services to the CRA, and
- the Office of the Auditor General of Canada (OAG) provides auditing services to the CRA.
- The Ministère du Revenu du Québec is responsible for the joint administration of the goods and services tax (GST) and Québec Sales Tax for businesses in the Province of Quebec.
1.4.2 CRA services upon which other departments and agencies rely:
- The CRA provides IT services in relation to the Canada Border Services Agency’s operational financial system.
1.5 Significant changes in fiscal-year 2010-2011
- Starting for fiscal year 2010-2011 the CRA implemented a separate Capital Vote in order to segregate its capital budget and expenditures from its operating budget and expenditures when seeking spending authority from, and reporting to, Parliament. This involved changes to systems and procedures to project, fund, code and monitor capital costs separately.
- In December 2009, the CRA decided to move the Chief Risk Officer responsibilities from the CFO and Assistant Commissioner, F&A and to create a new, independent Chief Risk Officer position reporting directly to the Commissioner. Following that decision, in June 2010, Mr. Brian Philbin was appointed to the new position and a separate branch was created to deliver the re-defined Enterprise Risk Management (ERM) function.
- Effective July 1, 2010 the Ontario and the British Columbia provincial sales tax (PST) and the federal GST were replaced by a single harmonized sales tax (HST) which is administered by the CRA. Preparing to meet the new HST business requirements involved modifying and in some cases expanding CRA business processes and IT infrastructure. However, on August 26, 2011 the Province of British Columbia announced that it will return to the PST. The transition period is expected to take a minimum of 18 months. During this period, the Agency will continue to administer the HST in British Columbia.
- In December 2010 the CRA Board of Management approved the five new CRA policies listed below which support the CRA Policy Framework for Financial Management and Corporate Finance. Four of the five new policies flow from the TB financial management policy suite, while the Policy on Financial Administration, established further to the authority over general administrative policy granted to the CRA under the Canada Revenue Agency Act, covers financial entitlements to compensate individuals for expenses incurred while conducting CRA business (e.g., travel and hospitality).
- On December 3, 2010 Mr. Filipe Dinis, Deputy Assistant Commissioner, F&A, assumed the duties of CFO and Assistant Commissioner on an acting basis. Mr. Dinis was permanently appointed to this position on January 27, 2011.
2. CRA’s control environment relevant to ICRF
The CRA recognizes the importance of setting the tone from the top to help ensure that staff at all levels understand their roles in maintaining an effective system of ICFR and are well equipped to exercise these responsibilities effectively. The CRA’s focus is to ensure risks are managed well through a responsive and risk-based control environment that enables continuous improvement and innovation.
2.1 Key positions, roles and responsibilities
Below are the CRA’s key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR.
Commissioner – The Commissioner and Chief Executive Officer (CEO) of the CRA, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control. In this role, the Commissioner chairs the Agency Management Committee, sits on the CRA Board of Management, and attends meetings of the Audit Committee.
Chief Financial Officer ( CFO ) – The Chief Financial Officer (CFO) reports directly to the Commissioner and provides leadership for the coordination, coherence and focus of efforts to design and maintain an effective and integrated system of ICFR, including its annual assessment. In this role the CFO chairs the CRA CEO/CFO Certification Steering Committee and attends meetings of the Audit Committee.
CEO / CFO Certification Steering Committee – The CEO/CFO Certification Steering Committee, which is chaired by the CFO and composed of Assistant Commissioners with significant responsibility for ICFR including the Chief Information Officer, the Chief Audit Executive and Assistant Commissioner, Corporate Audit and Evaluation Branch and the Chief Risk Officer, is responsible for reviewing the progress and results of CRA’s ICFR assessment process and approving action plans to address significant control issues.
Audit Committee of the Board of Management – The Audit Committee assists the Board of Management (the Board) in fulfilling its oversight responsibilities by reviewing the Agency’s accounting framework, financial and performance information, internal controls and financial risks, and compliance with financial and environmental legislation. On the recommendation of the Audit Committee, the Board approves the Agency’s annual financial statements. The Commissioner, the CFO, and the Chief Audit Executive and Assistant Commissioner, Corporate Audit and Evaluation Branch, as well as a representative of the Office of the Auditor General (OAG) each attend Audit Committee meetings. The Audit Committee was established in 1999 and is comprised of five external members all of whom are independent of the CRA.
Agency Management Committee – As the sole decision-making Committee in the Agency, the Agency Management Committee oversees program development and delivery, as well as the day-to-day business operations of the Agency and all associated risks. The Agency Management Committee reviews, approves and monitors the Corporate Risk Profile.
Chief Audit Executive – The Chief Audit Executive and Assistant Commissioner, Corporate Audit and Evaluation Branch reports directly to the Commissioner and provides, through an effective internal audit function, independent and objective assurance on the CRA’s risk management, internal control and governance practices. In this role, the Chief Audit Executive is a member of the CEO/CFO Certification Steering Committee and attends meetings of the Audit Committee.
Chief Risk Officer – The Chief Risk Officer and Assistant Commissioner of the Enterprise Risk Management Branch reports directly to the Commissioner and oversees the Agency’s ERM function designed to provide sound risk information for use in decision-making at the corporate, operational, and project levels.
Internal Controls Division – The Internal Controls Division within the F&A function supports the CRA’s efforts to design and maintain an effective and integrated system of ICFR by, in collaboration with IT and business process control owners, documenting and testing the adequacy of ICFR and reporting results to the CEO/CFO Certification Steering Committee, the Commissioner and the Audit Committee of the Board including, if applicable, information on action plans to strengthen controls.
2.2 Key measures taken by the CRA
The CRA also helps to ensure the effectiveness of its control environment in mitigating financial reporting risks by promoting ethical conduct and through its commitment to competence, its governance and organization structure, its ERM function, and its systems and processes that help ensure relevant information is communicated to appropriate individuals accurately and on a timely basis. Key elements and activities are described below.
- Building and maintaining awareness of the CRA Code of Ethics and Conduct .
- Formalizing management’s commitment to values and ethics via the performance management system.
- Providing mechanisms that help ensure appropriate action is taken in response to violations of the Code.
- A competency-based human resources management system that develops and promotes employees based on competencies identified as crucial to organizational success, including in the area of financial management.
- A formal Learning Policy that outlines specific roles and responsibilities of senior management, managers and employees in relation to employee development.
- An annual Individual Learning Plan process through which employees work with their managers to identify training opportunities for the upcoming year, linked to job requirements and competency development.
- A well established succession planning process for executive positions.
- An organizational structure and accountability regime that clearly set out reporting relationships and the assignment of authority and responsibility including for the initiation and approval of transactions.
- Establishment of yearly performance agreements for executives, based on guidelines aligned with Corporate Business Plan (CBP) priorities and deliverables including in relation to financial management.
- An independent and knowledgeable audit committee that is actively involved in overseeing the Agency’s ICFR.
- An integrated ERM function led by the Chief Risk Officer who reports directly to the Commissioner/CEO that provides the corporate view of risks to support effective decision-making and fosters a risk management culture within the Agency.
- An annual strategic planning process that links strategic initiatives and priorities to the Corporate Risk Profile.
- An annual corporate planning process which establishes, documents and communicates entity-level objectives and priorities and aligns the Agency’s activities and budget allocations with them.
- The Resource Investment Management Committee that oversees the management and progress of major project investments including the identification, monitoring and management of internally and externally driven risks.
Information Systems and Communication
- Monthly financial reports and analyses (for budget projections and for revenues and expenditures) that are reviewed and approved by senior management.
- Quarterly financial reports and analysis reviewed by the Agency Management Committee and the Board.
- A formal IT Strategy that guides IT development and maintenance, updated annually to help ensure continued support for the achievement of the strategies and priorities outlined in the CBP, including in relation to financial management.
- An annual application sustainability assessment to identify and manage application sustainability risks by setting system-by-system priorities for modernization.
- Interaction between the CRA F&A Branch and TBS, Department of Finance and OAG officials to ensure that emerging accounting issues and developments are identified and suitably addressed.
- The Internal Disclosures Office within the Corporate Audit and Evaluation Branch which provides a confidential channel through which employees can disclose wrongdoing.
- The Internal Controls Division within the F&A Branch tasked with providing those charged with governance with assurance that suitably designed ICFR are in place in the Agency and operating effectively.
- Monitoring units within the F&A function, both at headquarters and at regional offices, that are responsible for monitoring transactions, both for Agency Activities (e.g., payroll) and Administered Activities (e.g., Personal (T1) income tax returns), to help ensure that risks to accurate financial reporting are suitably mitigated.
- An internal audit function that provides professional, independent and objective information, advice and assurance on the soundness of the Agency’s management framework and on the effectiveness, efficiency, and economy of the Agency’s strategies, systems, programs and practices.
- Presentation of internal audit recommendations and management action plans to the Management Audit and Evaluation Committee, chaired by the CRA Commissioner and to the Audit Committee.
- An annual follow-up process to monitor management's progress in implementing action plans responding to external and internal audit recommendations including in relation to financial reporting.
3. Assessment of CRA's system of ICFR
The CRA’s financial statements have been audited, as required under the Canada Revenue Agency Act, by the Office of the Auditor General (OAG), for eleven years. In parallel, the Audit Committee of the Board and CRA senior management have been providing increased oversight of the preparation and presentation of financial information including review of information regarding the design and adequacy of its system of ICFR with the objective of obtaining greater assurance that significant financial reporting risks are being properly mitigated.
In addition, revised federal-provincial Tax Collection Agreements (TCAs) that took effect starting with the 2004 tax year introduced new audit provisions requiring reports to be provided periodically to provincial and territorial finance Ministers on the results of Auditor General audits of the adequacy of CRA’s internal controls relevant to the annual financial statement provided under the TCAs. The OAG and CRA agreed that the new audit engagement would be according to the Canadian Institute of Chartered Accountants Handbook (CICA HB) Section 5970 standard (Auditor’s Report on Controls at a Service Organization), a new standard introduced in 2005 in recognition of the dramatic increase in outsourcing and use of service organizations including for the provision of varied and complex services.
These new reports are aimed at providing provincial and territorial governments and their auditors with independent, audit-level assurance that the controls at the CRA supporting the administration and reporting of provincial and territorial income tax revenue are properly designed to mitigate key risks and are operating effectively. The reports are intended for the specific use of provincial and territorial ministries with primary responsibility for income tax and their auditors; they are not public documents. To date CRA has issued two Section 5970 reports, both relating to the design and implementation of all key controls relating to the Corporation Income Tax Program (T2) as at a specific point in time. The third report covers the design and implementation of all key controls relating to the Personal Income Tax Program (T1) as at November 30, 2010.
The audits of ICFR that the OAG performs periodically in fulfilment of TCA requirements are a significant source of information on the state of CRA’s system of ICFR for its Administered Activities financial statements; however, they have a limited scope insofar as they only cover processes and systems involved in reporting on income tax assessed. They exclude certain of the CRA’s Administered Activities related to other revenue streams (e.g., GST, Excise Taxes and Duties) and certain significant accounts that, while not relevant to amounts payable under TCAs, are important aspects of the CRA’s financial information for Administered Activities (e.g., Accounts Receivable and the Allowance for Doubtful Accounts). As explained in subsection 3.2 below, the CRA’s approach to assessing its ICFR for Administered Activities, for purposes of the Policy on Internal Control, will encompass key control aspects falling outside TCA-related assessment and audit requirements.
3.1 Assessment baseline
The CRA’s assessment of ICFR involves first the assessment of design effectiveness to help ensure that all key controls relevant to its financial information have been properly identified, documented, and implemented and that they are aligned with the risks they aim to mitigate. Management will take action to address any areas of concern appropriately and in a timely manner. Once the CRA has verified the design effectiveness of its controls, it will assess operating effectiveness by testing the operation of controls over a defined period of time to determine whether they are working as intended. Management will take action to strengthen controls if needed. Testing of design and operating effectiveness will lead eventually to ongoing monitoring according to which the CRA’s repository of controls will be re-assessed on a multi-year, rotational basis according to risk, including consideration of any new financial reporting risks that have emerged since the last assessment.
CRA’s assessment covers the following three major categories of controls:
- Entity Level Controls: the controls and management practices across an entity that, when taken together, comprise the core organizational management control framework. Among these controls are the “tone from the top” including the organization’s culture, values and ethics, governance, transparency and accountability mechanisms as well as the activities and tools put in place across the organization to raise staff awareness, ensure clear understanding of roles and responsibilities and solid capacities and abilities in managing risks well. These controls constitute a critical component of an organization's system of internal control as they have a pervasive effect on the organization and can have significant consequences for the overall assessment of the effectiveness of ICFR.
- IT General Controls: the umbrella controls over the computer environments that support relevant business processes and related applications. Given how data moves between multiple business groups and IT systems on its way from initial transactions to the financial reports it is important that management obtains assurance regarding the processes and controls over the IT systems and databases that house, move, and transform this data. Key controls in specific IT applications that support financial data and transactions are typically addressed at the business process level.
- Business Process Controls: the controls that help mitigate the financial reporting risks associated with relevant procedures that take place in the organization's business units. Management must identify the business units and business processes (manual and automated) that handle transactions that impact significant accounts and related assertions, identify the risks that could reasonably result in a material misstatement and evaluate the adequacy of the controls, policies, procedures and validities that are in place to mitigate each of the identified risks.
3.2 Scope of CRA assessment as of March 31, 2011
In order to define the scope of its ICFR assessment, the CRA examined the main accounts and line items used in the preparation of its two sets of financial statements to determine where there are risks that, individually or in combination with others, could reasonably result in a material misstatement (financial reporting risks). Items at a higher risk were then mapped to the related business processes which were in turn risk rated and used to determine the key applications and systems to be included in the scope of the assessment.
Based on this analysis, the CRA determined the scope of its assessment to include controls related to financial reporting within the following business processes:
Agency Activities Financial Statements:
Financial Close and Reporting
Risk Rating: High
Fixed Assets
Risk Rating: High
Operating Expenditures (Procurement to Pay)
Risk Rating: Medium
Administered Activities Financial Statements Footnote 1:
T1 Personal Income Tax
Risk Rating: High
T2 Corporation Income Tax
Risk Rating: High
T3 Trust Income Tax
Risk Rating: High
Non-resident Income Tax
Risk Rating: High
Goods and Services Tax (GST) / Harmonized Sales Tax (HST)
Risk Rating: Medium
The CRA uses the Committee of Sponsoring Organizations (COSO) framework to assess the design effectiveness of its system of internal controls, since it is the most widely used and recognized model of control for purposes of assessing ICFR. The COSO framework is based upon five interrelated components of control, each of which contains a number of principles and attributes against which an organization’s ICFR may be assessed: Control Environment, Risk Assessment, Control Activities, Information Systems and Communication, and Monitoring.
Because COSO only provides limited guidance to assist organizations in establishing and evaluating IT controls, the CRA uses the COBIT (Control Objectives for Information and related Technology) for SOX (Sarbanes-Oxley Act of 2002) Footnote 2 framework to document and assess the design of its IT controls of relevance to financial reporting. COBIT for SOX identifies three control areas for review when assessing the adequacy of controls over the key applications and systems involved in the organization’s financial reporting:
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COBiT for SOX Control Areas
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4. Progress and assessment results as of March 31, 2011
This section summarizes the CRA’s key assessment results from the design and operating effectiveness testing completed to date.
4.1 Design effectiveness of key controls
Agency Activities Financial Reporting
In 2010-2011, the CRA completed an assessment of the design effectiveness of its key controls related to financial reporting on Agency Activities. This review included key controls over the five business processes in scope (Payroll, Fixed Assets, Operating Expenditures, Budgeting and Projections, and Financial Close and Reporting) as well as relevant application controls and IT general controls, including for:
- The Corporate Administrative System (CAS), the CRA’s SAP-based Enterprise Resource Planning system which is the financial system of record at the CRA.
- Synergy (Ariba), the Agency’s e-procurement tool used to manage the purchasing life cycle.
- The Budget Tracking System designed to manage the Agency’s financial resources from an internal (budgeting) and central agency (Estimates) perspective.
Based on this review CRA management determined that a number of its controls related to access management, segregation of duties and certain review and monitoring activities could be improved and established action plans to make the necessary adjustments. As a lessons learned exercise, the CRA also performed selected operating effectiveness testing of controls over Agency Activities financial reporting. The CRA is using the results of this work to plan and perform more comprehensive testing in order to evaluate the operating effectiveness of these controls for the 2011-2012 period.
Administered Activities Financial Reporting
In 2010-2011, the CRA self-assessed the design effectiveness of certain of its business process controls over financial reporting on the Personal Income Tax Program (T1 Program) and of the application controls and IT general controls related to the key information systems involved in processing T1 transactions. Close to 60 information systems were reviewed in total. The Agency used the results to prepare a description of the design of these controls as at November 30, 2010 which was then submitted to the OAG for audit as per TCA requirements.
Based on the T1 self-assessment and OAG audit, CRA management determined that improvements are needed to the design of certain of its controls involved in the processing of non-routine assessments and reassessments, the management of systems changes and in relation to management of user access and proper segregation of duties.
In 2008, the CRA self-assessed the design effectiveness of certain of its business process controls over the Corporation Income Tax Program (T2 Program) and of the application controls and IT general controls related to the key information systems involved in processing T2 transactions. The Agency used the results to prepare a description of the design of these controls as at November 30, 2008 which the OAG audited in 2009, as per TCA requirements. In response to the findings of the self-assessment and OAG audit, CRA management took steps to improve controls over management of legislative and systems changes and over management of privileged user access as well as to strengthen procedures for managers’ semi-annual review of employee access privileges and for facilitating proper segregation of duties.
In 2011-2012, the CRA plans to self-assess the operating effectiveness of these T2 controls, document the results, and, further to the TCA audit provisions, engage the OAG to perform an audit in order to provide an independent opinion on the operating effectiveness of these controls over a six-month period.
4.2 Operating effectiveness of key controls
From February to September 2009 F&A led an exercise to assess the operating effectiveness of the CRA’s entity level controls (ELCs) relevant to both the Agency Activities financial statements and the Administered Activities financial statements. Key activities included:
- interviews with CRA senior officials to understand and identify and corroborate the key ELCs;
- documentation of key ELCs using the COSO control framework as a starting reference and customizing the framework as needed to reflect the Agency’s environment; and,
- review of supporting documentation and a sample of processes to substantiate and demonstrate the design effectiveness and, where applicable, the operating effectiveness of the controls.
This initial assessment indicated that the CRA has a strong system of controls at the entity level, that most of these controls are operating effectively and that all relevant control objectives within the COSO framework are being achieved. While several potential opportunities for improvement were observed and were discussed by management there were no significant gaps identified.
In 2010-2011 F&A conducted a risk-based assessment of the operating effectiveness of these controls both for purposes of the OAG’s audit of the design of CRA’s controls over financial reporting on the T1 program under the TCAs and for purposes of the Statement of Management Responsibility including ICFR for the 2010-2011 financial statements. This assessment revealed that the CRA continues to have a strong system of ELCs.
5. CRA’s Action Plan
This section summarizes how CRA is addressing the results of 2010-2011 control assessment activities and its plans for completing the assessment of the design and operating effectiveness of its system of internal control.
5.1 Progress as of March 31, 2011
Agency Activities Financial Reporting
In 2010-2011, in response to the results of the design effectiveness and the selected operating effectiveness testing performed, CRA management identified and partially completed a number of corrective measures to strengthen controls over Agency Activities financial reporting. These measures include greater restriction or segregation of access to perform certain transactions, introduction of new directives to clarify and reinforce responsibilities and accountability for role definition and management, and improved documentation of review and monitoring activities for audit trail purposes.
Administered Activities Financial Reporting
In 2010-2011 the CRA mostly completed its plans to strengthen controls over management of legislative and systems changes and over access management in response to the findings of the OAG’s 2009 audit of the design of T2 controls relevant to TCAs. In addition, the CRA made substantial progress in developing action plans in response to preliminary findings from the 2011 OAG audit of the design of T1 controls relevant to TCAs. These preliminary findings indicated the need to strengthen certain of the controls involved in the processing of non-routine assessments and reassessments, the management of systems changes and access management.
5.2 Action plan for the next fiscal year and subsequent years
The CRA’s assessment efforts to date have revealed that the CRA has a strong and effective system of ELCs that constitutes an important component of the Agency’s ICFR for both Agency Activities and Administered Activities. Because maintaining public trust is crucial to the fulfilment of its mandate, in 2011-2012 the CRA will continue with the implementation of its new Integrity Framework, comprised of policy instruments, programs, and processes designed to reinforce a culture of integrity by more systematically engaging management and staff in preventing, monitoring, detecting and managing breaches that put employees, assets, information and revenues at risk. Given the significance of ELCs for the overall assessment of the effectiveness of ICFR, the CRA will continue to monitor them annually based on risk to obtain assurance regarding their continued effectiveness.
Agency Activities Financial Reporting
The CRA’s plan for 2011-2012 is to substantially complete action plans to strengthen the design of controls where required and to complete the assessment of the operating effectiveness of all key ICFR for Agency Activities. Once it is confirmed that these ICFR are operating effectively, the CRA plans to move to an annual monitoring program to track and test changes to these controls and to perform other testing on a selective basis according to risk. This approach will allow the CRA to focus efforts on areas requiring re-testing based on feedback from business and IT control owners regarding changes that have occurred during the period and on higher risk areas.
Administered Activities Financial Reporting
In 2011-2012 the CRA plans to substantially complete action plans developed to address issues from the 2009 OAG audit related to design effectiveness of controls over the T2 program and the 2011 audit related to the design effectiveness of controls over the T1 program.
The CRA plans to build on the progress achieved in documenting and assessing the design effectiveness of its controls over both T1 and T2 financial reporting in support of TCA audit requirements, by completing assessments of the operating effectiveness of these controls starting with the T2 program in 2011-2012. As noted above, the CRA plans to engage the OAG to conduct an audit of the operating effectiveness of T2 controls over a six-month period. The OAG’s report will be in accordance with the new Canadian Standard on Assurance Engagements (CSAE) 3416, which has replaced the CICA HB Section 5970 standard and is effective starting with reporting periods ending in 2011.
The approach and timing for assessing the operating effectiveness of controls over the T1 Program as well as for assessing both the design and operating effectiveness of the ICFR for the remainder of the CRA’s Administered Activities including IT general controls and application level IT controls will depend on a number of factors including:
- plans currently under development to re-design the business processes and systems related to the T1 Program,
- significant shifts in the Agency’s program delivery agenda (e.g., if the CRA assumes responsibility for the implementation and administration of new federal, provincial, territorial or First Nations tax, benefit or credit programs),
- reductions to the Agency’s approved program spending levels due to Strategic and Operating Review or other government-wide restraint measures, or
- other developments that exert significant pressure on program and IT staff’s time and capacity.
In 2011-2012 CRA management will evaluate the level of effort involved in completing the assessment of the operating effectiveness of its system of internal control and will establish a suitable timeline. This timeline will be examined at a minimum annually in order to confirm the feasibility of the key deliverables and to take into account new information on financial reporting risks.
The table below provides an overview of CRA’s plans for completing its assessment and moving to a program of ongoing monitoring.
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Planned 2013-2014 Table note 1
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ICFR relevant to TCAs Table note 2
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As per 2011-2012 analysis Table note 3
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As per 2011-2012 analysisTable note 3
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ICFR relevant to TCAs2
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As per 2011-2012 analysis Table note 3
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As per 2011-2012 analysis Table note 3
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T3 Trust Income Tax Table note 2
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- Table note 1
- Timing for the on-going monitoring of ICFR for Agency Activities depends on the results of the 2011-2012 operating effectiveness assessment and any action plans established in response to these results. Return to table note 1 source text
- Table note 2
- ICFR related to tax assessed are audited by the Office of the Auditor General in fulfilment of audit requirements in federal-provincial Tax Collection Agreements (TCAs); ICFR related to tax accruals and cash receipts are not subject to OAG audit.
- Table note 3
- In 2011-2012 F&A, in consultation with management responsible for relevant business processes and with management in the Information Technology Branch as well as with input from external stakeholders such as provincial and territorial revenue ministry officials and the Office of the Auditor General, will analyse and prioritize the work required to complete the assessment of the operating effectiveness of all key ICFR for the CRA’s Administered Activities and will establish a plan for 2012-2013 and beyond to complete this work. Certain variables, including the factors listed and described above, may impact the CRA’s ability to complete this work as planned and necessitate adjustments to timelines.
- Footnote 1
- For purposes of assessing controls over the Administered Activities Financial Statements the CRA is only covering those processes associated with generating high and medium risk rated financial balances. Return to Footnote 1 source text
- Footnote 2
- Because most financial reporting processes are now driven by IT systems, ISACA (Information Systems Audit and Control Association) and its research affiliate, the IT Governance Institute (ITGI), developed COBIT for SOX to provide guidance on the design and evaluation of IT controls for the purposes of financial reporting objectives and ICFR. Return to Footnote 1 source text
- Date modified:
- 2011-11-02