Audited Financial Statements – Agency Activities

Financial Statements Discussion and Analysis – Agency Activities

Introduction

This section of the Financial Statements provides unaudited supplementary information on Agency Activities, as reported in the audited Financial Statements – Agency Activities. The information is on an accrual basis.

Financial Statements Highlights

There are four significant program administration changes which have resulted in considerable variances contained in the Financial Statements.

Effective April 1, 2007, CRA and PWGSC successfully implemented a new regime that governs the accommodation and real property funding portfolio. In previous years, CRA, as with most other government departments and agencies, received accommodation services without charge from PWGSC. The value of these services was appropriately reflected in CRA’s financial statements as cost of operations, however, the funding for these costs were voted to PWGSC and, as such, were reflected in PWGSC budget rather than CRA’s. The implementation of this change has resulted in the transfer of this budgetary element from PWGSC to CRA as a voted appropriation.

The agreement governing the new real property regime between PWGSC and CRA was made possible as a result of the 1999 passage of the Canada Customs and Revenue Agency Act. The change in status from department to agency provided CRA with increased authority and responsibility for the administration and delivery of its programs and services. Accommodation services and real property is one such area where CRA has increased accountability and authority and accomplishing the agreement with PWGSC is a direct result of this governance change.

The financial effect of this initiative is reflected in the statements as a $225 million decrease in ‘Services received without charge from other government agencies and departments’.

Effective March 27, 2007, the approval of a joint Treasury Board Submission between Human Resources and Social Development Canada (HRSDC) and CRA provided a new funding model for the recovery of administrative costs incurred by CRA in the course of administering elements of the EI program which legislatively are the responsibility of CRA.

Prior to this Submission, CRA was required to recover the administrative costs of administering these EI related activities by establishing a debt under CRA accounts payable and accrued liabilities. At the culmination of each fiscal year this debt would be settled through a payment from the EI fund via HRSDC. The March 2007 agreement provided CRA with the appropriate authority to acquire the resources directly from the EI fund without necessitating HRSDC involvement.

This new funding practice, specific to EI administration, more accurately reflects CRA’s legislative responsibility for these activities mandated by legislation. Furthermore, the funding model mirrors the process that was in place for the Canada Pension Plan.

The transition to this new funding model has created several extraordinary variances between fiscal year 2007 and 2008 that are evident in the CRA financial statements. Specifically, it has resulted in a $111 million decrease in the Due from the Consolidated Revenue Fund and a corresponding decrease of the same amount in the accounts payable and accrued liabilities which resulted from the fact that the TBS agreement was finalized late in the 2007 fiscal year. The funding model change has also caused a $171 million variance in the accounts receivable which reflects a billing adjustment made late in fiscal year 2007.

From fiscal year 2008 forward, these variances will no longer appear in the CRA financial statements as the funding model will be consistent in year to year comparisons and accurately reflect CRA’s legislative authority.

Over the course of fiscal year 2008, the CRA had several large-scale projects that required substantial investments in the development of IT systems: the Integrated Revenue Collection System, Compliance Systems Redesign, Individual Identification Renewal Project, and the completion of the GST Redesign Project. Together, these projects have combined for $145 million of investment in in-house developed software and the acquisition of IT hardware such as mainframe processors and tape storage solutions.

The value of these new capital assets has been considerably offset due to a high proportion of amortization that became eligible in the same fiscal year. Large-scale IT projects, by nature, generally require multi-year investments as the project develops and advances. These incremental investments add to the overall capital assets of the CRA as they occur, however, the associated amortization of these assets only commences once a project is completed and the system enters production. Due to this restriction, CRA experienced considerable amortization in fiscal year 2008 as systems from previous projects entered production mode and became eligible for amortization. The total amortization claimed by CRA in 2008 was $80 million.

The combination of these two factors has resulted in a pronounced variance in the year over year comparison of the capital assets reflected in CRA’s Statement of Financial Position.

The following figure outlines investments in IT that have been accounted for as capital assets in the last three years.

Figure 26 Information Technology Investment in Capital Assets

The CRA financial statements demonstrate a noticeable increase in non-tax revenue which is largely generated from a $42 million increase in service fees. This amount can be directly attributed to the increase in IT related services that CRA performs on behalf of CBSA.

Analysis of Net Cost of Operations

The Agency’s 2007-2008 net cost of operations increased by $100 million from 2006-2007. Agency expenses totaled $4,028 million in 2007-2008 (2006-2007 – $3,863 million) (see Note 9 of the Financial Statements – Agency Activities for the breakdown of expenses by type). When adjusting for non-tax revenue of $480 million (2006-2007 – $414 million), the net cost of operations amounts to $3,548 million, as illustrated below:

Details on the net cost of operations

The Agency’s expenses are composed of 73% in personnel expenses (salaries, other allowances and benefits) and 27% in non-personnel expenses, as illustrated in the figure below.

Personnel expenses are the primary drivers for the Agency. A number of factors contributed to the net increase of $80 million for this type of expenses in 2007-2008. These include salary revisions pursuant to collective agreements provisions, initiatives announced in recent Federal Budgets, as well as costs related to the National Initiative to address Inter-provincial Tax Avoidance by Corporations, the Corporate Tax Administration for Ontario and the administration of the Softwood Lumber Products Export Charge Act, 2006.

Significant elements of non-personnel expenses are mostly made up of accommodation, information technology and transportation and communications expenses, which are, for the most part, linked to personnel expenses. Federal sales tax administration costs by the Province of Québec also account for a large portion of non-personnel expenses. In total, non-personnel expenses increased by $86 million. This is mainly attributable to accommodation related cost, which increased by $41 million due to program growth, rental rate escalation, and higher fit-up costs. The growth in information technology costs are linked to investment projects and infrastructure growth and renewal. The increase in transportation and communications is attributable to investments in our voice and data communications services and infrastructure. Growth in amortization, which is directly related to significant investments in IT related capital assets over the last three years, contributed to the increase in other expenses. A decrease in the federal sales tax administration costs by the Province of Québec partly offsets these increases. The decline is attributable to additional costs incurred in the previous fiscal year to upgrade their information technology systems.

Figure 27 Total Expense by Type

Date modified:

2009-01-29