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 Departmental Plan 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 2019-2020 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 25, 2019, authorities available for use from the prior fiscal year, allocations from centrally held Budget Implementation Votes, as well as other technical adjustments.

As shown in the Statement of Authorities, the CRA's total Budgetary Authorities available for use have increased by $314 million, from $4,363 million in 2018-2019 to $4,677 million in 2019-2020. The components of the Vote 1 Gross Operating Expenditures Authority, Vote 5 Capital Expenditures Authority and Budgetary Statutory Authorities are outlined below.

The Vote 1 Gross Operating Expenditures Authority increased by $290 million, from $3,719 million in 2018-2019 to $4,009 million in 2019-2020. This is mainly due to the following legislative and technical changes:

Legislative

• $79 million increase for the implementation and administration of measures that pertain to compliance, cracking down on tax evasion, combatting tax avoidance, and enhancing tax collections announced in Budget 2016, Budget 2017, Budget 2018, and Budget 2019;
• $46 million increase to support the implementation and administration of the federal carbon pollution pricing system; and
• $30 million increase for the implementation and administration of measures to improve client services, including service excellence, at the CRA announced in Budget 2016, Budget 2018, and Budget 2019.

Other technical items

• $53 million increase primarily related to the settlement of the Professional Institute of the Public Service of Canada, Audit, Financial and Scientific (PIPSC-AFS) collective agreement;
• $35 million increase as a result of a technical adjustment realigning the Operating Expenditure Authority (Vote 1) and the Capital Expenditure Authority (Vote 5) for the CRA Strategic Investment Plan (SIP). This change has no impact on the Agency's overall authorities;
• $34 million increase in authorities available for use from the prior fiscal year;
• $11 million increase to fulfill administrative responsibilities in support of the Canada Pension Plan (CPP) and Employment Insurance (EI) program; and
• $2 million increase related to the re-imbursement of salary overpayments and advances incurred as a result of issues with the government pay system.

In 2019-2020, the CRA expects to spend $364 million to fulfill its administrative responsibilities in support of the CPP and EI program, up from $353 million in 2018-2019. This $11 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 Expenditures Authority decreased by $20 million, from $77 million in 2018-2019 to $57 million in 2019-2020. This decrease is primarily the result of the following factors:

• $35 million decrease, as a result of a vote realignment as previously mentioned, which has been offset by a $20 million increase in authorities available for use from the prior fiscal year;
• $4 million planned decrease in the spending profile for the redesign of the individual income tax processing system; and
• $1 million planned decrease related to various tax measures announced in previous Federal Budgets.

Total Budgetary Statutory Authorities are forecasted to increase by $55 million, from $920 million in 2018-2019 to $975 million in 2019-2020. This increase is attributable to the following:

• $34 million in increased contributions to employee benefit plans;
• $19 million in increased spending of revenues received, primarily attributable to initiatives administered on behalf of the province of Ontario; and
• $2 million in increased payments under the Children's Special Allowances Act as a result of a technical change in the forecasting methodology.

Analysis of Expenditures

A two-year comparison of the CRA's annual net authorities available for use against Year to date and second quarter net expenditures as at September 30 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 will be resolved by the end of the fiscal year.

A) Expended in the Second Quarter by Authority

As displayed in the Statement of Authorities, the second quarter expenditures have increased by $210 million, or 23%, from $901 million in 2018-2019 to $1,111 million in 2019-2020. The components of this year-over-year change are presented below.

The CRA’s second quarter net Vote 1 Operating Expenditures increased by $201 million, or 31%, from $648 million in 2018-2019 to $849 million in 2019-2020. Timing related to the payment of invoices for the Department of Justice (JUS) accounts for $35 million of the $201 million increase. The remainder primarily relates to a technical adjustment to remove the retroactive salary payments for collective agreements paid in 2018-2019 and is largely resolved on a year to date basis.

An offsetting $1 million reduction in expenditures relates to the CRA’s second quarter Vote 5 Capital Expenditures, going from $16 million in 2018-2019 to $15 million in 2019-2020, a decrease of 7%.

Expenditures for Total Budgetary Statutory Authorities have increased by $10 million, or 4%, from $237 million in 2018-2019 to $247 million in 2019-2020. This change is explained by increases to Employee Benefit Plan contributions and Children’s Special Allowance payments of $7 million and $4 million respectively, and are offset by a $1 million decrease in the spending of revenues due to timing.

B) Expended in the Second Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditures by Standard Object table, the CRA’s personnel expenditures have increased by $163 million, or 23%, from $724 million in 2018-2019 to $887 million in 2019-2020. As noted above, the main contributing reason for the increase includes the reversal of retroactive salary payments of collective agreements in 2018‑2019.

Transportation and communications expenditures have increased by $1 million, or 4%, from $27 million in 2018-2019 to $28 million in 2019-2020 and is attributable to increased travel expenditures linked to recent Federal Budget initiatives.

Information expenditures have increased by $3 million, from $1 million in 2018-2019 to $4 million in 2019-2020 due to a reclassification of accounts in 2018-2019 moved from standard object “Professional and Special Services”.

Professional and special services expenditures have increased by $37 million, or 57%, from $66 million in 2018-2019 to $103 million in 2019-2020. This is primarily the result of timing differences in the payment of invoices for JUS, as previously mentioned.

Rentals expenditures have decreased by $12 million, or 17%, from $68 million in 2018-2019 to $56 million in 2019-2020. Similarly, purchased repair and maintenance expenditures have increased by $11 million, from $9 million in 2018-2019 to $20 million in 2019-2020. The year over year variances for these two standard objects are related to the accounting classification of expenditures for accommodation and real property services and are resolved on a year to date basis.

Acquisition of machinery and equipment expenditures increased by $2 million from $7 million in 2018-2019 to $9 million in 2019-2020, or 23%. The majority of the increase pertains to growth in the renewal of the CRA’s Information Technology (IT) assets as well as maintaining a larger inventory of computer equipment to better manage the ongoing requirements and timely delivery to end users.

Transfer payments have increased by $4 million, or 5%, from $84 million in 2018-2019 to $88 million in 2019-2020, and as noted earlier, are due to increased payments under the Children’s Special Allowances Act.

Other subsidies and payments expenditures related to salary overpayments decreased in the second quarter by $1 million, or 40%, from $2 million in 2018-2019 to $1 million in 2019-2020.

C) Year to date Expenditures by Authority

The CRA’s Year to date expenditures by authority have increased by $63 million, or 3%, from $2,168 million in 2018-2019 to $2,231 million in 2019-2020. The components of this year-over-year increase are discussed below.

Net Vote 1 Operating Year to date Expenditures have increased by $43 million, or 3%, from $1,699 million in 2018-2019 to $1,742 million in 2019-2020. The Year to date increase is primarily attributable to various Federal Budgets, as well as Treasury Board funded initiatives, such as the implementation and administration of the federal carbon pollution pricing system.

Year to date Vote 5 Capital Expenditures have decreased by $3 million, or 13%, from $26 million in 2018-2019 to $23 million in 2019-2020. As explained earlier, capital expenditures can vary from year to year depending on the status of major project investments and the timing of capital procurements.

Total Budgetary Statutory Authorities have increased by $23 million, or 5%, from $443 million in 2018-2019 to $466 million in 2019-2020. The main components of the change consist of $15 million in increased contributions to Employee Benefit Plans and a $8 million increase for payments under the Children’s Special Allowances Act.

D) Year to date expenditures by Standard Object

The CRA’s Year to date personnel expenditures have increased by $39 million, or 2%, from $1,752 million in 2018-2019 to $1,791 million in 2019-2020 and, as explained earlier, mainly relate to the implementation of various Federal Budgets and Treasury Board funded initiatives.

Year to date transportation and communications expenditures have increased by $3 million, or 5%, from $61 million in 2018-2019 to $64 million in 2019-2020 and is attributable to increased travel expenditures associated with recent Federal Budget initiatives.

Year to date information expenditures have increased by $6 million, from $1 million in 2018-2019 to $7 million in 2019-2020 due to a reclassification of accounts in 2018-2019 moved from standard object “Professional and Special Services”.

Year to date professional and special services expenditures have increased by $4 million, or 2%, from $183 million in 2018-2019 to $187 million in 2019-2020. The majority of the increase, $3 million, pertains to the timing of legal fees and disbursements, as well as an increase to auditing and pre-litigation workloads for JUS.

Acquisition of machinery and equipment Year to date expenditures increased by $1 million from $14 million in 2018-2019 to $15 million in 2019-2020, or 11%. The majority of the increase pertains to growth in the renewal of the CRA’s IT assets as well as maintaining a larger inventory of computer equipment.

Year to date transfer payments under the Children’s Special Allowances Act have increased by $8 million, or 5%, from $167 million in 2018-2019 to $175 million in 2019-2020, as mentioned earlier.

Year to date other subsidies and payments primarily related to salary overpayments decreased by $3 million, or 39%, from $8 million in 2018-2019 to $5 million in 2019-2020.

Risks and uncertainties

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

As a result of the CRA’s vast information holdings and the increasing number of external incidents occurring in the private sector, protection of taxpayer information and cybersecurity have been assessed as the risks with the highest potential impact in the its 2020-2021 corporate risk profile. Over the past few years, the CRA has invested to protect data under its responsibility, including taxpayer information, in order to manage this risk appropriately. Threats to cyber security, such as email fraud, continue to be on the rise and are becoming increasingly more sophisticated to manage. The CRA is taking action to ensure that its cyber security posture keeps pace with the changing environment.

As mentioned in the previous year’s quarterly reports, the implementation of the government-wide Pay Modernization Project (Phoenix) has affected departments and individuals across government. The CRA continues to monitor pay transactions and makes appropriate adjustments, when necessary, in a timely manner.

Significant changes in relation to operations, personnel and programs

Budget 2019 supports the Minister of National Revenue's top priorities, to improve client services and ensure a fair tax system for all Canadians by:

• Strengthening the CRA's ability to combat tax evasion and aggressive tax avoidance by investing more than $150 million in proposed additional funding over five years, allowing the CRA to fund new initiatives and extend existing programs, including:
  • hiring additional auditors, conducting outreach, and building technical expertise to target non-compliance associated with cryptocurrency transactions and the digital economy;
  • creating a new data quality examination team to ensure proper withholding, remitting, and reporting of income earned by non-residents; and
  • extending programs aimed at combatting offshore non-compliance.
• Investing a proposed $50 million over five years to create four new dedicated residential and commercial real estate audit teams.
• Investing a proposed $34 million over five years to hire additional staff to process adjustments to T1 returns post-filing more quickly, reducing frustration for taxpayers and ensuring that vulnerable Canadians do not encounter unnecessary delays in calculating the credits and benefits to which they are entitled.
• Establishing dedicated telephone support line for tax service providers through proposed funding of $16 million over five years in order to provide more reliable access to experienced CRA officers and improving service for the millions of Canadians who work with tax service providers each year.
• Improving the CRA's information technology systems by investing more than $65 million proposed over five years, including replacing legacy systems, so that the infrastructure used to fight tax evasion and aggressive tax avoidance continues to evolve.
• Providing low-income workers with improved access to support throughout the year, through a proposed investment of $4 million over two years to conduct targeted outreach.

In addition, the government has demonstrated its commitment to continuing to resolve issues related to the Phoenix Pay System and has proposed an investment of $9.2 million for the CRA in 2019-2020. This will ensure that the CRA is able to quickly and accurately process income tax reassessments for federal government employees that are required due to Phoenix pay issues, and to support related telephone enquiries.

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

Approval by Senior Officials

Approved by:

Ottawa, Canada
Date: November 25, 2019