Statement of Management Responsibility Including Internal Control over Financial Reporting
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Statement of Management Responsibility Including Internal Control over Financial Reporting
We have prepared the accompanying financial statements of the Canada Revenue Agency (CRA) according to accounting principles consistent with those applie464d in preparing the financial statements of the Government of Canada. Significant accounting policies are set out in note 2 to the financial statements. Some of the information included in the financial statements, such as accruals and the allowance for doubtful accounts, is based on management's best estimates and judgment, with due consideration to materiality. The CRA's management is responsible for the integrity and objectivity of data in these financial statements. Financial information submitted to the Public Accounts of Canada and included in the CRA's Annual Report, is consistent with these financial statements.
To fulfill its accounting and reporting responsibilities, management maintains sets of accounts which provide records of the CRA's financial transactions. Management also maintains financial management and an effective system of internal control over financial reporting (ICFR) that take into account costs, benefits, and risks. They are designed to provide reasonable assurance that transactions are within the authorities provided by Parliament, and by others such as provinces and territories, are executed in accordance with prescribed regulations and the Financial Administration Act, and are properly recorded to maintain the accountability of funds and safeguarding of assets.
Financial management and internal control systems are reinforced by the maintenance of internal audit programs. The CRA also seeks to assure the objectivity and integrity of data in its financial statements by the careful selection, training, and development of qualified staff, by organizational arrangements that provide appropriate divisions of responsibility, by communication programs aimed at ensuring that its regulations, policies, standards, and managerial authorities are understood throughout the organization, and by conducting an annual assessment of the effectiveness of its system of ICFR. An assessment for the year ended March 31, 2012 was completed in accordance with the Policy on Internal Control and the results and action plans are summarized in the annex.
The system of ICFR is designed to mitigate risks to a reasonable level based on an on-going process to identify key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments. The effectiveness and adequacy of the CRA's financial management and its system of internal control are reviewed by the work of internal audit staff, who conduct periodic audits of different areas of the CRA's operations and by the Board of Management which is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control and exercises this responsibility through the Audit Committee of the Board of Management. To assure objectivity and freedom from bias, these financial statements have been reviewed by the Audit Committee and approved by the Board of Management. The Audit Committee is independent of management and meets with management, the internal auditors, and the Auditor General of Canada on a regular basis. The auditors have full and free access to the Audit Committee.
The Auditor General of Canada conducts independent audits and expresses separate opinions on the accompanying financial statements which do not include an audit opinion on the annual assessment of the effectiveness of the CRA's internal controls over financial reporting.
Canada Revenue Agency Audited Financial Statements – Agency 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 financial statements of the Agency Activities of the Canada Revenue Agency, which comprise the statement of financial position as at 31 March 2012, and the statement of operations and agency net financial position, statement of change in agency net debt and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
My responsibility is to express an opinion on these financial statements 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 statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, 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 statements 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 statements.
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 statements present fairly, in all material respects, the financial position of the Agency Activities of the Canada Revenue Agency as at 31 March 2012, and the results of its operations, changes in its net debt, and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.
Statement of Financial Position – Agency Activities
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Restated (note 13)
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Accounts payable and accrued liabilities (note 4)
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Employee severance benefits (note 5c)
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Accounts receivable and advances (note 6)
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Tangible capital assets (note 7)
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Contingent liabilities (note 14)
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Statement of Operations and Agency Net Financial Position– Agency Activities
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2012
Planned results |
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Expenses (note 8)
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Non-tax revenue (note 9)
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Revenues earned on behalf of Government (note 13)
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Net cash provided by the Government of Canada (note 13)
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Services provided without charge from other government agencies and departments (note 10)
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Transfer of assets and liabilities to Shared Services Canada (note 11)
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Net cost of activities administered on behalf of Shared Services Canada (note 11)
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Statement of Change in Agency Net Debt – Agency Activities
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Acquisition of tangible capital assets (note 7)
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Amortization of tangible capital assets (note 7)
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Transfer of tangible capital assets to Shared Services Canada (note 7)
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The accompanying notes form an integral part of these financial statements.
Statement of Cash Flows – Agency Activities
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Restated (note 13)
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Amortization of tangible capital assets (note 7)
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Services provided without charge from other government agencies and departments (note 10)
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Shared Services Canada (note 11)
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Cash used on behalf of Shared Services Canada
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The accompanying notes form an integral part of these financial statements.
Notes to the Financial Statements – Agency Activities
The Canada Revenue Agency (CRA) is an agent of Her Majesty in right of Canada under the Canada Revenue Agency Act. The CRA 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 CRA is to support the administration and enforcement of tax legislation and other related legislation. The CRA provides support, advice, and services by:
TheCRA collects revenues, including income and sales taxes and employment insurance premiums, administers tax legislation, delivers a number of social benefit programs to Canadians for the federal, provincial, territorial, and First Nations governments, and collects amounts, including Canada Pension Plan contributions, for other groups or organizations. It is responsible for administering and enforcing 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 delivering its mandate, the CRA operates under the following program activities:
For financial reporting purposes, the CRA's activities have been divided into two sets of financial statements: agency activities and administered activities. The Financial Statements - Agency Activities include those operational revenues and expenses which are managed by the CRA and utilized in running the organization. The Financial Statements - Administered Activities include those revenues and expenses that are administered on behalf of the federal, provincial, and territorial governments, First Nations, and other organizations. The purpose of the distinction between agency and administered activities is to facilitate, among other things, the assessment of the administrative efficiency of the CRA in achieving its mandate. Tax-related assets, liabilities, revenues and expenses are excluded from these financial statements because they can only accrue to a government, not to the tax agency that administers those transactions.
As required by the Canada Revenue Agency Act, the Financial Statements - Agency Activities have been prepared using accounting principles consistent with those applied in the preparation of the financial statements of the Government of Canada. The accounting principles used are based on Canadian public sector accounting standards. A summary of significant accounting policies follows:
The CRA receives most of its funding through annual Parliamentary appropriations. Items recognized in the Statement of Financial Position and the Statement of Operations and Agency Net Financial Position in one year may be funded through Parliamentary appropriations in prior, current, or future years. Accordingly, the CRA has different net results of operations for the year on a government funding basis than on an accrual accounting basis. These differences are reconciled below.
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Disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 Footnote 1
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Appropriations available for future years Footnote 2:
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Shared Services Canada deemed appropriations (note 11):
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Restated (note 13)
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Amortization of tangible capital assets (note 7)
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Services provided without charge from other government agencies and departments (note 10)
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Non-tax revenue available for spending (note 9)
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The CRA has recorded at March 31, 2012 and obligation for termination benefits as part of accrued liabilities to reflect the estimated workforce adjustment costs associated with CRA's commitment to the Government's deficit reduction measures.
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Transfer to Shared Services Canada (note 11)
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As part of changes to conditions of employment for certain employee groups effective October 1, 2011, the accumulation of severance benefits ceased for these employees. Employees subject to these changes have been given the option to be immediately paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits on termination from the public service. These changes have been reflected in the calculation of the outstanding severance benefit obligation.
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Cost Transfer to Shared Services Canada (note 11)
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The cost of software in development, which is not amortized, is $86,835,856 as at March 31, 2012 ($154,329,914 as at March 31, 2011).
The following table presents the expenses by program activity and expense category as described in note 1 of these financial statements.
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Other allowances and benefits (including employee benefits described in note 5)
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Amortization of tangible capital assets (note 7)
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Other allowances and benefits (including employee benefits described in note 5)
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Amortization of tangible capital assets (note 7)
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The following table presents the revenues generated by program activity and revenue category as described in note 1 of these financial statements.
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Restated (note 13)
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Revenues earned on behalf of Government (note 13)
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Restated (note 13)
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Revenues earned on behalf of Government (note 13)
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The CRA is related in terms of common ownership to all Government of Canada departments, agencies, and Crown corporations. Transactions with Crown corporations entered into by the CRA are in the normal course of business and on normal trade terms applicable to all individuals and enterprises. Transactions with other Government of Canada departments and agencies are conducted on a cost recovery basis.
During the year, the CRA received various services without charge from other government agencies and departments. The estimated costs for significant services provided without charge that have been recorded include:
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Information technology services - Shared Services Canada (note 11)
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Effective November 15, 2011, the CRA transferred email, data centre and network responsibility to Shared Services Canada in accordance with Order in Council (OIC) P.C. 2011-1291 to P.C. 2011-1297, including the stewardship responsibility for the related assets and liabilities.
The CRA continued to administer the transferred information technology activities on behalf of Shared Services Canada during the transition period from November 15, 2011 to March 31, 2012. In accordance with section 31.1 of the Financial Administration Act, the Parliamentary appropriations that the CRA has received to fund those activities for the transition period ($72,266,484) were deemed appropriated to Shared Services Canada.
The information on the transfer to Shared Services Canada and the temporary administration by the CRA of those information technology (IT) activities is presented in the following table:
The net of these administered revenues and expenses totalling $64,174,890 are recorded as services provided without charge in these financial statements (note 10).
To administer the transferred information technology activities during the transition period, the CRA used $56,900,845 of net cash on behalf of Shared Services Canada, as presented in the Statement of Cash Flows.
Pursuant to the Canada Revenue Agency Act, a Board of Management is appointed to oversee the organization and administration of the CRA and the management of its resources, services, property, personnel and contracts. The expenses relating to the board's activities for the year included in the net cost of operations were as follows:
During the fiscal year, amendments were made based on Canadian public sector accounting standards to improve financial reporting. The significant changes to the CRA's financial statements are described below. These changes have been applied retroactively, and comparative information for 2010-11 has been restated.
Agency net debt (calculated as liabilities less financial assets) is now presented in the Statement of Financial Position. Accompanying this change, the CRA now presents a Statement of Change in Agency Net Debt. The equity of Canada presented in the Statement of Financial Position in previous years is now referred to as agency net financial position.
Government funding and transfers are now recognized in the Statement of Operations and Agency Net Financial Position (formerly the Statement of Operations) below the net cost of operations before government funding and transfers (formerly the net cost of operations), which resulted in the introduction of the net cost of operations after government funding and transfers. In previous years, the CRA recognized these transactions in the Statement of Equity of Canada, which is no longer presented.
Non-tax revenue is now presented net of non-tax revenue not available for spending in the Statement of Operations and Agency Net Financial Position (refer to note 2 e). The effect of this change was to decrease the total non-tax revenue which increased the net cost of operations before government funding and transfers as well as the net cash provided by the Government of Canada by $62,711,706 for 2012.
The following table presents the impact of this accounting change on the 2011 financial statements:
The CRA is a defendant in certain cases of pending and threatened litigation which arose in the normal course of business of agency activities as defined in note 2. The current best estimate of the amount to be paid in respect of the cases identified as likely to be lost has been recorded in accounts payable and accrued liabilities. All other cases, excluding those assessed as unlikely to be lost, are considered contingent liabilities and the related amounts are disclosed whenever the amount of the contingency can be reasonably estimated. As at March 31, 2012, contingent liabilities for claims and pending and threatened litigation have been estimated by management at $36,772,645 ($52,131,223 as at March 31, 2011).
Certain comparative figures have been reclassified to conform with the presentation used in the current year.
Financial Statements Discussion and Analysis – Agency Activities
Introduction
This section of the financial statements provides unaudited complementary and supplementary information on Agency Activities, on an accrual basis, in respect of matters reported in the audited financial statements. Responsibility for the preparation of this financial statements discussion and analysis rests with the CRA's management.
Capacity to deliver services
The CRA's workforce of over 40,000 employees is fundamental to the achievement of its mandate. In the course of 2011-2012, this workforce was comprised on average of 83% permanent employees, 16% term employees and 1% students.
The CRA's employees are located throughout Canada, in the following operational regions: Ontario (32%), Headquarters (21%), Prairies (15%); Québec (12%); Pacific (12%) and Atlantic (8%). They provide services to taxpayers in over 40 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. This is a sizeable task which requires the involvement of two data centres which process up to 4 million transactions per hour, 7 mainframe computers, about 1,700 servers, and the maintenance of over 495 applications across a distributed computing environment covering more than 400 locations. As explained below, effective November 15, 2011, IT infrastructure services related to email, data centres and network services are provided through Shared Services Canada in partnership with the CRA.
Financial highlights
Four developments have significantly influenced the 2011-2012 results in the financial statements.
In fiscal year 2011-2012, the Government of Canada announced the creation of Shared Services Canada, a new organization with a mandate to establish a government-wide approach to managing the delivery of information technology infrastructure services. In light of Shared Services Canada's responsibilities, the CRA transferred to Shared Services Canada the control and supervision of operational domains related to email, data centres and network services.
By Order-in-Council, effective November 15, 2011, $72.3 million in CRA resources were deemed appropriated to Shared Services Canada for 2011-2012. The deemed appropriations included $11.7 million in planned carry forwards required by Shared Services Canada to meet existing contractual agreements in 2012-2013.
The cost of IT activities that were transferred to Shared Services Canada continues to be fully reflected in the financial statements as professional services received without charge (refer to note 10 of the Financial Statements - Agency Activities).
The CRA worked closely with the Treasury Board Secretariat, the Office of the Receiver General and Shared Services Canada to ensure that accounting and reporting requirements were met for the deemed appropriations and associated expenditures.
As part of the 2010 Federal Budget, the Government announced a freeze on the operating budgets of departments and agencies up to and including 2012-2013. As a result, no incremental central funding is being provided to organizations for the cost of wage increases that take effect between April 1, 2010 and March 31, 2013.
In fiscal year 2011-2012, the funding shortfall associated with these wage increases amounted to approximately $48.0 million. The CRA managed this operating pressure with internal funding from general administrative and program efficiencies identified through a targeted program spending review.
The CRA employs a multi-year resource management strategy by utilizing its two-year spending authority to better position itself in future years to address known pressures and / or respond quickly to unforeseen and extraordinary operating pressures. In 2011-2012 the total appropriations available for future years was $248.3 million. While this was higher than prior years, it was due in large part to plans to re-profile funds to 2012-2013 in order to mitigate the impacts of the operating budget freeze.
As part of its resource management strategy, the CRA continuously reviews and revises plans and priorities to ensure the effective use of government resources and the achievement of our core business outcomes. In 2011-12, the majority of key performance targets were met or exceeded.
On July 1, 2010, the CRA implemented the harmonized sales tax (HST) in the provinces of Ontario and British Columbia. The CRA received funding in 2011-2012 of $137.8 million (including employee benefit plan contributions and accommodation charges) for the continued implementation and administration of the HST in both provinces. This funding was used to transition affected provincial employees to the CRA, identify and address risk of HST non-compliance, and administer province-specific HST flexibilities in Ontario and British Columbia. Since that time, the province of British Columbia has confirmed it will return to the provincial sales tax model effective April 1, 2013. In addition, on April 18, 2012, the province of Prince Edward Island announced that it will transition to the HST effective April 1, 2013. Adjustments to the CRA funding associated with these announcements will be reflected in future years, as necessary.
Discussion and analysis
Analysis of net cost of operations
The CRA's 2011-2012 net cost of operations amounted to $4,198.8 million, increasing by $143.8 million from the $4,055.0 million net cost of operations in 2010-2011.
Details of the net cost of operations are illustrated below (see note 8 of the Financial Statements - Agency Activities for a further breakdown of expenses by category):
The CRA's expenses are comprised of 74% personnel expenses (salaries, other allowances and benefits) and 26% non-personnel expenses.
Personnel expenses are the primary drivers for the CRA. A number of significant factors contributed to the increase of $109.8 million for these expenses in 2011-2012: annual economic salary increases pursuant to collective agreement provisions; the increase in the actuarial rate used to calculate severance benefits; termination benefits related to workforce adjustments resulting from the CRA's ongoing transformation. These increases were partially offset by salaries and benefits transferred to Shared Services Canada.
A significant portion of non-personnel expenses relates to accommodation and IT equipment and services. The net increase of $43.1 million in non-personnel expenses in 2011-2012 is mainly attributable to greater expenses relating to accommodations, as well as IT related expenses, and reflects an offset related to a decrease in transportation and communications costs.
Financial position
The change in the Agency net financial position compared to the previous year is as follows:
The increase in the Agency net financial position is attributable to both an increase in the liabilities due to employee severance benefits as explained below and to a decrease in financial and non-financial assets due in part to the transfer of assets to Shared Services Canada.
Liabilities increased by $77.7 million in 2011-2012. A significant part of this increase is attributable to changes in the economic assumptions used to estimate the actuarial present value as at March 31 of the expected future employee severance benefit payments.
Employee severance benefits is the CRA's most significant liability, as illustrated in the table below.
In the course of 2011-2012, conditions of employment for certain employee groups within the CRA were modified so that their employee severance benefits would cease to accrue. The employees concerned were given the option to be paid their accrued severance benefits as at the effective date of the new terms of employment. These modifications that were also introduced for other employee groups in the following fiscal year are expected to reduce the CRA's employee severance benefits liability in the coming and future years.
Non-financial assets are comprised of 97% tangible capital assets. The CRA managed a capital budget of $89.0 million for the year 2011-2012, of which $9.4 million was deemed appropriated to Shared Services Canada and $28.0 million remains available for use in future years in accordance with the CRA's multi-year resource management strategy.
The vast majority of tangible capital assets owned by the CRA relates to IT. A substantial portion of CRA's costs related to IT equipment was transferred to Shared Services Canada during the year as part of the Government's effort to streamline the delivery of email, data centre, network and telephony services across the Public Service.
Software remains the most significant type of tangible capital asset required by the CRA to deliver its mandate. As a large organisation 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. During the year, the CRA invested $39.8 million in capital expenditures to develop customized software that will allow it to continue to administer and enforce tax legislation efficiently.
Risk
Risk management plays a key role in supporting sound financial management as it allows the CRA to protect its assets and reinforces a strong sense of prioritization in investment decisions. At the CRA, the Enterprise Risk Management (ERM) Branch supports the effective management of resources in multiple ways. Firstly, as a member of the committee overseeing investment projects above $1 million, the Chief Risk Officer and Assistant Commissioner of the ERM Branch brings a risk perspective to the committee's review activities. Secondly, all projects brought to the committee require a formal attestation from the ERM Branch that the CRA structured 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. Lastly, enterprise risk information is used to inform the development of the CRA Strategic Investment Plan (SIP); a long-term plan for significant future investments. More specifically, project alignment with the priorities outlined in the Corporate Risk Profile is one of the considerations used to inform the priority ranking of initiatives.
For further details on ERM at the CRA, please see the Enabling core business operations section of the annual report.
Outlook
The CRA continues to modernize its operations and reduce red tape to enhance services to Canadians while reducing its overall costs. It is increasingly providing services electronically to make it easier for Canadians and businesses to interact with the CRA at the lowest possible cost. By simplifying the way it collects taxes and distributes benefit payments, the CRA will ensure Canadians and small and medium-sized enterprises receive the benefits and credits to which they are entitled as efficiently and quickly as possible.
- Date modified:
- 2012-11-29