For the quarter ended December 31, 2016

Statement outlining results, risks and significant changes in operations, personnel and program

Introduction

This quarterly financial report has been prepared by management as required by section 65.1 of the Financial Administration Act in the form and manner prescribed by the Treasury Board. This report should be read in conjunction with the Main Estimates.

Further details on the Canada Revenue Agency’s (CRA) program activities can be found in the Report on Plans and Priorities, and Main Estimates.

Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the CRA's spending authorities granted by Parliament and those used by the CRA consistent with the Main Estimates for the 2016-2017 fiscal year. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before moneys can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation of statutory spending authority for specific purposes.

The CRA uses the full accrual method of accounting to prepare and present its annual departmental financial statements that are part of the departmental performance reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis.

This quarterly report has not been subject to an external audit or review.

Highlights of fiscal quarter and fiscal year to date (YTD) results

Analysis of Authorities

This report reflects the results for the current fiscal year in relation to the Main Estimates for which full supply was released on June 23, 2016, including authorities available for use from the prior fiscal year and technical adjustments. When compared to the same point in time, the 2015-2016 authorities did not include Supplementary Estimates B.

As shown in the Statement of Authorities, the CRA’s total Budgetary Authorities available for use have increased by $338 million, or 8%, from $4,067 million in 2015-2016 to $4,405 million in 2016-2017. The components of this growth are outlined below.

The Vote 1 Gross Operating Expenditure Authority increased by $290 million, or 8%, from $3,436 million in 2015-2016 to $3,726 million in 2016-2017. This is largely due to the effect of the following factors:

• $103 million increase for the implementation of tax measures announced in Budget 2016, including Cracking Down on Tax Evasion and Combatting Tax Avoidance, Enhancing Tax Collections, and Client-focused services for Canadians and Canadian businesses;
• $77 million increase for the implementation of tax measures announced in Budget 2015, including $54 million aimed at enhancing compliance measures and $23 million for various legislative measures. Funding is included in 2016-2017 Main Estimates but was received late in the fiscal year in 2015-2016 and therefore not included in this third quarter comparison;
• $62 million increase related to adjustments in accommodation and real property services provided by Public Services and Procurement Canada (PSPC), including $20 million as a result of a technical adjustment following the review of the Agency’s multi-year occupancy requirements;
• $52 million increase through a vote realignment, which transferred funding in 2016-2017 from the Capital Expenditure Authority (Vote 5) to the Operating Expenditure Authority (Vote 1) to better align the CRA Strategic Investment Plan (SIP) reference levels with planned expenditures; this adjustment is technical in nature and does not represent a change in the Agency’s planned acquisitions or overall authorities;
• $13 million increase in authorities available for use from the prior fiscal year;
• $12 million decrease as a result of efficiencies announced in Budget 2012, which aimed to refocus tax and benefit programs, reduce administrative costs through modernization, and make it easier for individual Canadians and businesses to deal with the CRA; and
• $9 million decrease as a result of a transfer to the Canada School of Public Service for its new funding model.

In 2016-2017 the CRA expects to spend $326 million to fulfill its administrative responsibilities in support of the Canada Pension Plan (CPP) and Employment Insurance (EI) program, up from $322 million in 2015-2016. This $4 million increase in Vote 1 Gross Operating Expenditure Authority is offset by an equivalent increase in revenues recovered from the CPP and EI Accounts.

The Vote 5 Capital Expenditure Authority decreased by $35 million, or 27%, from $128 million in 2015-2016 to $93 million in 2016-2017. This decrease is primarily due to the following factors:

• $52 million decrease, through a vote realignment, which as previously mentioned, transferred funding in 2016-2017 from the Capital Expenditure Authority (Vote 5) to the Operating Expenditure Authority (Vote 1) to better align the CRA Strategic Investment Plan (SIP) reference levels with planned expenditures; this adjustment is technical in nature and does not represent a change in the Agency’s planned acquisitions or overall authorities;
• $6 million increase for the implementation of tax measures announced in Budget 2016, including Cracking Down on Tax Evasion and Combatting Tax Avoidance, Enhancing Tax Collections, and Client-focused services for Canadians and Canadian businesses;
• $5 million increase for the implementation of common reporting standard for the automatic exchange of tax information announced in Budget 2015;
• $4 million increase as a result of Budget 2014, to Reduce the Administrative Burden on Charities; and
• $3 million increase in authorities available for use from the prior fiscal year.

Total Budgetary Statutory Authorities are forecasted to increase by $86 million, or 10%, from $826 million in 2015-2016 to $912 million in 2016-2017. This increase is attributable to the following:

• $52 million increase in payments under the Children’s Special Allowances Act due to an increase to the recently implemented Enhanced Universal Child Care Benefit (UCCB) program and to an enrichment to the base Children’s Special Allowance (CSA) benefit and supplements for the 2014 benefit year (July 2015 to June 2016);
• $35 million increase in the contributions to employee benefit plans;
• $2 million increase for the disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006; and
• $3 million decrease in cost recovery revenues to be received through the conduct of CRA operations, primarily attributable to initiatives administered on behalf of the Canada Border Services Agency and the Province of Ontario.

Analysis of Expenditures

A two-year comparison of the CRA's annual net authorities available for use against year-to-date and third quarter net expenditures as at December 31 is presented in Figure 1.

Certain components of the quarterly year-over-year expenditure variances are attributable to timing differences in invoices and payments as well as the status of major project investments, which are often resolved by the end of the fiscal year.

A) Expended in the Third Quarter by Authority

As displayed in the Statement of Authorities, the third quarter expenditures have decreased by $23 million, from $979 million in 2015-2016 to $956 million in 2016-2017. The components of this year-over-year change are discussed below.

The CRA’s third quarter net Vote 1 Operating Expenditures have decreased by $51 million, or 7% from $756 million in 2015-2016 to $705 million in 2016-2017. The decrease is a result of efficiencies announced in Budget 2012, which aimed to refocus tax and benefit programs, reduce administrative costs through modernization, and make it easier for individual Canadians and businesses to deal with the CRA. In addition, the variance is primarily due to a system release resulting in $64 million in expenditures not being captured in the CRA’s financial system in time for the third quarter. This variance has since been corrected. These main contributors to the decrease are partially offset by an increase due to the implementation of tax measures announced in Budget 2016, including Cracking Down on Tax Evasion and Combatting Tax Avoidance, Enhancing Tax Collections, and Client-focused services for Canadians and Canadian businesses.

The CRA’s third quarter Vote 5 Capital Expenditures have increased by $9 million from $13 million in 2015-2016 to $22 million in 2016-2017. Quarterly variations in capital expenditures may occur from year-to-year, depending on the status of major project investments and the timing of capital procurements.

Expenditures for Total Budgetary Statutory Authorities have increased by $20 million, or 9%, from $209 million in 2015-2016 to $229 million in 2016-2017. This increase is mainly attributable to a $13 million increase in Children's Special Allowance payments due to changes in legislation.

B) Expended in the Third Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditure tables, the CRA’s personnel expenditures have decreased by $31 million, or 4%, from $779 million in 2015-2016 to $748 million in 2016-2017. As mentioned above, the variance is primarily due to a system release resulting in $64 million in expenditures not being captured in the CRA’s financial system in time for the third quarter. This variance has since been corrected. This major component is partially offset by an increase due to the implementation of tax measures announced in Budget 2016, as well as a portion of the impacts of the ratification of the collective bargaining agreement between the Public Service Alliance of Canada (PSAC) and the CRA.

Professional and special services expenditures have decreased by $12 million, or 14%, from $88 million in 2015-2016 to $76 million in 2016-2017. The variance is mainly attributable to timing in the payment of invoices for the Department of Justice which introduced a new government wide approach to billing, requiring the collection of 50% in advance. The variance will be resolved by year-end.

Purchase repair and maintenance expenditures have increased by $11 million from $11 million in 2015-2016 to $22 million in 2016-2017. The variance is in line with the increase in authorities following the review of the Agency’s multi-year occupancy requirements.

Transfer payments have increased by $14 million, or 20%, from $69 million in 2015-2016 to $83 million in 2016-2017. The increase is attributable to an increase of $14 million in Children's Special Allowance payments as a result of recent changes in legislation.

Transportation expenditures have decreased by $3 million, or 11%, from $27 million in 2015-2016 to $24 million in 2016-2017. The decrease can be attributed to an early release of notices in order to mitigate the impact of a possible postal disruption, the introduction of the new Canada Child Benefit which replaced three former benefit programs and reduced overall correspondence, and additional take-up of e-delivery of personal tax notices.

Acquisition of machinery and equipment expenditures have increased by $3 million from $5 million in 2015-2016 to $8 million in 2016-2017. The variance is the result of an increase in the expenditures for computer purchased software. In 2015-2016 CRA benefited from a bulk discount as a result of CRA contracting negotiated pricing which is no longer in effect for 2016-2017 under the Shared Services Canada contract.

C) Year-to-Date Expenditures by Authority

As displayed in the Statement of Authorities, the year-to-date expenditures have increased by $42 million, or 1%, from $2,946 million in 2015-2016 to $2,988 million in 2016-2017. The components of this year-over-year increase are discussed below.

Net Vote 1 Operating year-to-date Expenditures have decreased by $21 million, or 1%, from $2,262 million in 2015-2016 to $2,241 million in 2016-2017. As previously mentioned, the variance is primarily due to a system release resulting in $64 million in expenditures not being captured in the CRA’s financial system in time for the third quarter. This variance has since been corrected. In addition, there was $21 million less in maternity and severance payments as well as efficiencies announced in Budget 2012, which aimed to refocus tax and benefit programs, reduce administrative costs through modernization, and make it easier for individual Canadians and businesses to deal with the CRA. These decreases are partially offset by an increase due to the implementation of tax measures announced in Budget 2016, including Cracking Down on Tax Evasion and Combatting Tax Avoidance, Enhancing Tax Collections, and Client-focused services for Canadians and Canadian businesses.

Year-to-date Vote 5 Capital Expenditures have increased by $3 million, or 7%, from $45 million in 2015-2016 to $48 million in 2016-2017. As previously mentioned, this fluctuation in expenditures is not unusual depending on the status of major project investments and the timing of capital procurements.

Total Budgetary Statutory Authorities have increased by $60 million, or 9%, from $639 million in 2015-2016 to $699 million in 2016-2017. The majority of the variance, $47 million, is due to an increase in disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006.

D) Year-to-Date Expenditures by Standard Object

The CRA’s personnel year-to-date expenditures have decreased by $67 million, or 3% from $2,345 million in 2015-2016 to $2,278 million in 2016-2017. As mentioned above, the variance is primarily due to a system release resulting in $64 million in expenditures not being captured in the CRA’s financial system in time for the third quarter. This variance has since been corrected. In addition, efficiencies announced in Budget 2012 have been realized and resources have been set aside and unexpended as a provision to address the operating budget freeze announced in Budget 2014. Furthermore, $21 million can be attributed to a reduction in maternity and severance payments. These major contributors to the decrease are partially offset by an increase due to the implementation of tax measures announced in Budget 2016.

Purchased repair and maintenance expenditures have increased by $29 million, from $30 million in 2015-2016 to $59 million in 2016-2017. The increase is primarily the result of an in-year change in 2015-2016 to a more detailed distribution of expenditures for accommodations and real property services between two standard objects.

Professional and special services expenditures have increased by $22 million, or 9%, from $252 million in 2015-2016 to $274 million in 2016-2017. The variance is mainly attributed to timing in the payment of invoices for legal services provided by the Department of Justice.

Transfer payments have increased by $65 million, or 29%, from $219 million in 2015-2016 to $284 million in 2016-2017 mainly due to an increase of $47 million in disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 as well as an increase of $18 million in Children's Special Allowance payments as the result of recent changes in legislation.

Transportation and communications expenditures have decreased by $6 million, or 6%, from $95 million in 2015-2016 to $89 million in 2016-2017. The majority of the variance is attributable to a decrease in postage costs due to the introduction of the new Canada Child Benefit which replaced three former benefit programs and reduced overall correspondence, and additional take-up of e-delivery for personal tax notices.

Risks and Uncertainties

The CRA maintains a corporate risk inventory to identify and address organizational risks. Mitigation strategies have been put in place to protect the CRA from exposure to these risks and the associated financial impacts.

In a continuing effort to contain administrative costs across the government, Budget 2014 introduced a two year operating budget freeze which was in effect until March 31, 2016. Operating budgets for all government departments and agencies were frozen at 2014-2015 levels and as a result, departments and agencies were required to absorb the cost of wage increases that took effect after April 1, 2014.

The collective agreements between the CRA and both the Public Service Alliance of Canada (PSAC) and Professional Institute of the Public Service of Canada (PIPSC) expired in October 2012 and December 2014, respectively. An agreement was reached between CRA and PSAC and after ratification by the members and approval from the Governor in Council, was signed on October 25, 2016. Contract negotiations between PIPSC and the CRA are ongoing. The CRA established a provision to cover amounts for collective bargaining increases, therefore mitigating risk to the Agency.

With the implementation of the government-wide Pay Modernization Project (Phoenix), departments and individuals across government have been affected. CRA’s main issue relates to the additional manual work that has been transferred to Compensation following the introduction of the Phoenix pay system. The CRA’s compensation team has worked closely with the Phoenix project team to implement interim solutions and address system issues which has minimized the impact. The CRA’s Compensation Client Services Centre (CCSC) has established a tactical team to process outstanding service requests as quickly as possible. Additional resources have been hired since implementation and the inventory of outstanding issues is decreasing. Any financial risk to the CRA has been minimized as a result of the efforts of the CCSC and frequent monitoring by the financial reporting unit.

Significant changes in relation to operations, personnel and programs

Through Budget 2015, the Government announced several legislative and enhanced compliance measures to improve the fairness and integrity of the tax system as well as strengthen tax compliance which the CRA has implemented and administered.

The CRA is internally risk managing the remainder of its Budget 2016 initiatives and is seeking incremental funding through Supplementary Estimates C. Budget 2016 is focused on cracking down on tax evasion and combatting tax avoidance, enhancing tax collections, client focused services for Canadians and Canadian businesses, and the implementation and administration of various tax measures.

There are no significant financial or non-financial impacts to report at this time.

Budget 2012 Efficiency Measures Implementation

This section provides a summary of the 2016-2017 budgetary impact of efficiencies announced in Budget 2012, which aimed to refocus tax and benefit programs, reduce administrative costs through modernization, and make it easier for individual Canadians and businesses to deal with the CRA. As one of the federal government’s largest institutions, the CRA is a significant contributor to this initiative, with planned efficiencies of $210 million at maturity in 2016-2017.

Approval by Senior Officials

Approved by:

Ottawa, Canada
Date: February 24, 2017