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Financial Statements Discussion and Analysis – Agency Activities (unaudited)

Introduction

This section of the financial statements provides unaudited complementary information on Agency Activities, on an accrual basis, in respect of matters reported in the audited financial statements. The Canada Revenue Agency's (CRA) management is responsible for the preparation of this financial statements discussion and analysis.

Capacity to deliver services

The CRA's workforce of more than 40,000 employees is fundamental to the achievement of its mandate. In fiscal year 2014-2015, this workforce was comprised of 79% permanent employees, 19% term employees, and 2% students.

CRA employees are located throughout Canada, in the following operational regions: Ontario (31%), Headquarters (24%), Prairies (13%), Québec (12%), Pacific (11%), and Atlantic (9%). They provide services to taxpayers in more than 30 tax services offices and tax centers, as well as program services and internal services supporting those programs.

The CRA's information technology (IT) capacity is also critical to its ability to deliver services to Canadians. It involves an extensive IT infrastructure that is managed primarily by Shared Services Canada, and includes the development and maintenance of applications across a distributed computing environment.

Risk management

The CRA recognizes that a variety of risks could have potential implications on its financial position and operations. The Enterprise Risk Management (ERM) Division of the Audit, Evaluation, and Risk Branch plays a key role in ensuring that corporate risks are identified, impacts are assessed, and strategies for risk management are adopted, notably by producing the CRA Risk Profile.

Further details on ERM at the CRA are discussed in this report. This financial statements discussion and analysis will elaborate on specific financial risks throughout its content, where applicable.

Financial highlights

Two developments have significantly influenced the 2014-2015 results in the financial statements.

Pay in arrears

As per the transformation of pay administration, the Government of Canada is working towards modernizing its pay solution and streamlining business processes. In doing so, it will adopt industry standard payroll practices, which align with the Government's agenda to modernize its common services and improve pay services to employees. In order to adapt its processes, the Government of Canada has implemented the payment in arrears initiative in 2014-2015 for all employees paid on a bi-weekly basis. In May 2014, a one-time transition payment was issued to employees who were paid every two weeks on a current basis. The payment was made to avoid any financial hardship to employees as the Government transitions to payment in arrears.

Prior to the transition, employees' pay was calculated and processed in advance of the work being performed in order for payment to be made on the last working day of the two-week period. Now, employees are paid for the period worked ending two weeks prior to the issuance of payment. This allowed pay services to employees to improve through timelier processing of changes in their pay resulting in a reduction in the number of adjustments to an employee's pay on subsequent payments, increased transparency, and predictability in earnings.

CRA resource management

The CRA has managed within the Parliamentary approved authorities for 2014-2015, with underspending of $261.4 million or 6.0%, while complying with the budget restrictions. This amount largely planned and available for use in 2015-2016, is a crucial element of the current Resource Management Strategy to address known and emerging financial challenges.

For 2014-2015, the delays in the ratification of collective agreements required the establishment of a provision for retroactive payments, which is a significant component of the CRA's net position. Another important component is the internally funded strategic investment plan. Major IT projects can face challenges due to the long-term and complex nature of these projects.

As part of its resource management strategy, the CRA continuously reviews and revises plans and priorities to ensure the effective and efficient use of government resources and the achievement of its core business outcomes. In 2014-2015, the majority of key performance targets were met or exceeded.

Discussion and analysis

Net cost of operations before government funding and transfers

The CRA's 2014-2015 net cost of operations before government funding and transfers amounted to $4,126.9 million, an increase of $58.3 million from the $4,068.6 million net cost of operations before government funding and transfers in 2013-2014.

Details of the net cost of operations before government funding and transfers are illustrated below (see note 8 of the Financial Statements – Agency Activities for a further breakdown of expenses by category):

Personnel expenses (salaries, other allowances and benefits), representing 74% of total expenses, are the CRA's primary costs, while the remaining 26% of expenses are comprised of other costs such as accommodation, information technology equipment and services.

The increase in personnel costs of $27.8 million is mostly attributable to economic salary increases and increments pursuant to collective agreement provisions and increases in employee severance benefit expenses; partly offset by a slight reduction in the workforce decreasing salary expenses and a decrease in the employer's portion of contributions to the Public Service pension plan.

Non-personnel expenses have increased by $17.6 million in 2014-2015. This variance mainly results from an increase in postage cost due to higher postage fees charged by Canada Post Corporation, new external storage and warehousing services for the administration of the CRA's records, and an increase in IT services; partly offset by a decrease in fit-up cost and decreased legal services.

Non-tax revenues slightly decreased in 2014-2015 as a result of a modification to the cost recovery approach employed by the CRA for the provision of services to Employment and Social Development Canada (ESDC) for the administration of the Canada Pension Plan and the Employment Insurance Act.

Financial position

The change in the Agency's net financial position compared to the previous year is as follows:

Liabilities

Liabilities have increased by $88.1M as a result of the implementation of the pay in arrears initiative in 2014-2015. An amount of $25.5M payable to Treasury Board Secretariat (TBS) at year-end for the employer's portion of the employee benefit plans contributed to the increase in liabilities.

Employee benefits represent a significant component of the CRA liabilities. They include obligations for severance and sick leave benefits as well as vacation pay and compensatory leave accrual.

Employee severance benefits remain the CRA's most important obligation as illustrated in the table below.

Figure 3: Liabilities by category

Employee sick leave and severance benefits account for 60% of the CRA total liabilities in 2014-2015. These are significant liabilities that require the use of management estimates and assumptions to determine their present value as at March 31 of each year. As such, there is a financial risk of imprecision in the financial position of the CRA where actual liabilities and the related expenses may differ significantly from current estimates. To minimize this risk, the CRA uses the expertise of the Office of the Chief Actuary, who provides an actuarial valuation report on a yearly basis, discussing the actuarial assumptions and method used to determine the actuarial present value of those employee benefits. Actuarial assumptions used by the CRA are consistent with those used by the Government of Canada.

While the employee severance benefit obligation increased in 2014-2015 as a result of benefits earned by employees, its proportion as part of the total CRA liabilities decreased in light of the additional accrued salaries arising from the implementation of pay in arrears.

Financial assets

The increase in financial assets is correlated to specific increases in liabilities, as an account receivable is created for liabilities that are not settled at year-end, but for which appropriations were used. This account receivable, the Due from the Consolidated Revenue Fund (CRF) represents the net amount of cash that the CRA is entitled to draw from the CRF that is administered by the Receiver General for Canada without using further appropriations to discharge its liabilities. The salary accrual resulting from the transition to pay in arrears as well as the account payable to TBS for employee benefit plans mostly contributed to the increase in financial assets.

Non-financial assets

Non-financial assets are comprised of 97% tangible capital assets. The CRA managed a capital budget of $123.4 million for the year 2014-2015 ($110.0 million for 2013-2014), of which a total of $47.1 million ($46.7 million for 2013-2014) remains available for use in future years in accordance with the CRA's multi-year resource management strategy.

The net book value of tangible capital assets remained fairly stable in 2014-2015 with a net increase of $7.1 million. The vast majority of tangible capital assets owned by the CRA relates to IT, specifically in-house developed software. As a large organization responsible for delivering an extensive range of tax and benefits programs on behalf of the federal and of provincial governments, the CRA has specialized software needs that are primarily fulfilled internally through the development of in-house tailored applications by the CRA employees.

To prioritize investment decisions regarding in-house developed software and support the effective management of resources, the CRA Finance Committee (FC) oversees investment projects above $1 million. All projects brought to the FC require a formal attestation from the ERM Division that the CRA risk management process was followed and that sound risk information forms part of the submission. The attestation process takes place at various project development stages. Enterprise risk information is also used to inform the development of the CRA Strategic Investment Plan, a long-term plan of significant future investments. Alignment with the priorities outlined in the CRA Risk Profile is one of the considerations used to inform the priority ranking of initiatives.

Five year comparative financial information

The following tables provide a five year comparison of financial information based on the accounting policies described in note 2 to the audited financial statements.

Outlook

Looking ahead, the CRA will continue to modernize its services and compliance activities to improve the efficiency and effectiveness of its operations and programs while contributing to the Government of Canada's priorities. The CRA will continue to achieve further savings through various initiatives, including enhancing tax collection strategies and increasing internet filing for individual tax returns. In 2014-2015, MyCRA was launched, the first mobile application for individuals of its kind in Canada.

As announced in the 2015 federal budget, the Government will invest an additional $200 million over the next five years to strengthen the CRA's capacity to combat the underground economy, international tax evasion, and aggressive tax avoidance. Finally, as per Blueprint 2020, the CRA's strategic direction will be concentrated on five elements: service, compliance, integrity and security, innovation, and people.

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