Quarterly Financial Report—Quarter ended December 31, 2021

1. Introduction

This Quarterly Financial Report (QFR) 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 document should be read in conjunction with the Main Estimates and Supplementary Estimates for fiscal year 2021–22.

1.1 Our organization

Innovation, Science and Economic Development Canada (ISED) works with Canadians in all areas of the economy and in all parts of the country to improve conditions for investment, enhance Canada's innovation performance, increase Canada's share of global trade and build a fair, efficient and competitive marketplace.

ISED helps Canadian businesses grow, innovate and expand so they can create good-quality jobs and wealth for Canadians. It also supports science research and the integration of scientific considerations into investment and policy choices. The Department helps small businesses grow through trade and innovation and promotes increased tourism in Canada. The Department also works to position Canada as a global centre for innovation where investments support clean and inclusive growth, the middle class prospers through more job opportunities and companies become global leaders.

As Canadians continue to face the global COVID-19 pandemic together, ISED is committed to fostering conditions for investment, enhancing Canadian innovation, and driving growth in key sectors to equip the department for new global challenges. ISED and its Portfolio partners will continue to work together to prepare the Canadian economy for the future through strategic actions and investments, including support for Canadian businesses as they adapt and grow in a digital economy.

A summary description of Innovation, Science and Economic Development Canada's core responsibilities can be found in Part II of the Estimates.

1.2 Basis of presentation

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 for specific purposes. The accompanying Statement of Authorities includes the department's spending authorities granted by Parliament, and those used by the department consistent with the Main Estimates and Supplementary Estimates (as applicable) for the 2021–22 fiscal year. This 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.

As part of the departmental performance reporting process, ISED prepares its annual departmental financial statements on a full accrual basis in accordance with Treasury Board accounting policies, which are based on Canadian Generally Accepted Accounting Principles for the public sector. The spending authorities are voted by Parliament on an expenditure basis. Therefore, management has prepared this report using an expenditure basis of accounting.

The accompanying Statement of Authorities contains ISED's spending authorities granted by Parliament, which includes the 2021–22 Main and Supplementary Estimates as well as any adjustments, warrants and transfers.

This report has not been subject to an external audit or review. However, it has been reviewed by ISED's Departmental Audit Committee (DAC) in accordance with Treasury Board guidance. No material misstatements or omissions have been identified.

1.3. General Descriptions

The following descriptions are referred to throughout the report:

• Authority: Approvals from Parliament to spend up to a specific amount.
• Operating (Vote 1): Amount approved for the fiscal year for the Department to spend on salary and operating expenditures.
• Capital (Vote 5): Amount approved for the fiscal year for the Department to spend on capital purchases or for the construction of assets.
• Grants and Contributions (Vote 10 and Statutory):
  • Vote 10: Amount approved for the fiscal year for the Department to provide Grants and Contribution (G&C) funding to prospective recipients.
  • Statutory: Amount approved through an existing Act of Parliament where additional annual approvals are not required by the Department to access G&C funding for recipients.
• Operating and Capital Carry Forward: Eligible funds lapsed in the previous fiscal year brought forward to the following year.
• Employee Benefit Plan (EBP): The department's contribution to public service employee benefit plans.
• Vote Netted Revenue (VNR): Authority to apply revenues earned by the organization to cover costs incurred for specific activities by that organization.
• Standard Object (SO): Classification or coding of transactions to permit the reporting of information about the nature of transactions in the Estimates and Public Accounts (i.e. personnel, professional and special services, and transfer payments).

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

The variances in authorities available for use in 2021–22, versus 2020–21, primarily result from a combination of increases in Grants and Contributions authorities attributable to new funding for various Budget initiatives, funding changes based on cash flow requirements of existing programs and decreases related to the winding down of some initiatives.

Variances in Q3 and year-to-date authorities used are mainly due to timing differences of payments and/or variances in cash flow requirements for programs such as Sustainable Development Technology Canada, the Innovation Superclusters Initiative and the Strategic Innovation Fund.

On August 12, 2021, following Orders in Council 2021-0839/0849, the Federal Economic Development Initiative for Northern Ontario (FedNor) became a separate agency, the Federal Economic Development Agency for Northern Ontario. Authorities and actual expenditures after this date are now being reported in a separate QFR for FedNor.

2.1 Authorities available for use for the fiscal year and planned expenditures

ISED's current total authorities of $4.8 billion that are available for use in 2021–22 are $0.9 billion higher than the same period in 2020–21. This is illustrated in Graph 1, in the Statement of Authorities, and in Table 1: Departmental Budgetary Expenditures by Standard Object. The figures reported as available for use include amounts that have been approved for reprofiling ($856 million) to future fiscal years. Some of ISED Grants and Contributions programs involve complex, large-scale projects that can often take multiple years to roll-out. The payment timeframe is dependent on how quickly recipients implement their projects and seek reimbursement. These complexities, combined with the impact of the COVID-19 pandemic on various facets of the industry, can cause changes in spending profiles.  As such, ISED continues to closely monitor its G&C planned expenditures and assess if funds will need to be reprofiled to future years to better align with the expected reimbursements.

Graph 1: Comparison of Total Net Budgetary Authorities Available for Use as of December 31, 2021 and December 31, 2020

The overall increase in total net budgetary Authorities available for use includes:

• Grants and Contributions (Vote 10 and Statutory): $733.7 million increase
• Net Operating Expenditures (Vote 1): $111.1 million increase
• Capital Expenditures (Vote 5): $40.7 million increase
• Other: $8.6 million increase
  • Employee Benefit Plan (EBP): $11.9 million increase
  • Canadian Intellectual Property Office (CIPO) Revolving Fund: $3.1 million decrease
  • Other: $0.2 million decrease

Variances for each type of appropriation are explained in detail throughout this document.

2.1.1 Highlights of Changes in Authorities Available for Use (2021–22 compared to 2020–21)

The following tables highlight the larger changes in authorities available for use, as reported in the Statement of Authorities (unaudited):

2.1.2 Highlights of Changes in Planned Expenditures (2021–22 compared to 2020–21)

Table 1: Departmental Budgetary Expenditures by Standard Object displays initial planned expenditure plans. These plans are subject to change during the fiscal year. The annual variances in planned expenditures are primarily due to the following:

2.2 Authorities used to date and actual expenditures

Authorities used and actual expenditures for the third quarter of 2021–22 and year-to-date have decreased by $19.9 million and $207.2 million respectively when compared to the same periods last year (Graph 2: Statement of Authorities; Table 1: Departmental budgetary expenditures by Standard Object). The variances occurred primarily in Grants and Contributions (Vote 10) and are largely attributable to adjustments in the timing of payments and cash flow requirements due to uncertainties associated with the supply chain, and the negative effects of the COVID-19 pandemic that are affecting the recipients' ability to accurately predict spending forecasts for existing agreements.

Graph 2: Comparison of Net Third Quarter Authorities and Year-to-date Authorities used and expended as at December 31, 2021 and December 31, 2020

By category, the authorities used and expended in the third quarter and year-to-date compared to the same time last year have changed as follows:

• Grants and Contributions (Vote 10 and Statutory):
  • Q3 - $26.4 million decrease
  • YTD - $233.2 million decrease
• Net Operating Expenditures (Vote 1):
  • Q3 - $1.2 million increase
  • YTD - $17.3 million increase
• Other:
  • Capital Expenditures (Vote 5)
    • Q3 - $1.0 million increase
    • YTD - $0.9 million increase
  • CIPO Revolving Fund:
    • Q3 - $3.6 million increase
    • YTD - $5.4 million increase
  • Other minor items including EBP:
    • Q3 - $0.8 million increase
    • YTD - $2.4 million increase

Section 2.2.1 provides a detailed breakdown of the changes in authorities used year-to-date and for the third quarter.

2.2.1 Highlights of Changes in Authorities used for the Third Quarter and Year-to-date

The following tables highlight, by authority, the larger changes in authorities used, as reported in the Statement of Authorities:

2.2.2 Highlights of Changes in Actual Expenditures (2021–22 compared to 2020–21)

Variances in actual expenditures by standard object (Table 1: Departmental Budgetary Expenditures by Standard Object) are primarily due to the following:

3. Significant changes in relation to operations, personnel and programs

Budget 2021 announced the creation of the Federal Economic Development Initiative for Northern Ontario (FedNor) as a standalone agency. As of August 12, 2021, FedNor is now one of seven Regional Development Agencies in Canada.

Effective January 10, 2022, Francis Bilodeau became the Associate Deputy Minister of ISED. He replaced Paul Thompson who was appointed the Deputy Minister of Public Services and Procurement Canada (PSPC).

With the easing of COVID-19 restrictions along with the vaccination rollout across the country, Canada is experiencing an increase in economic activity despite a resurgence of COVID-19 due to the Omicron variant. The increased activity has resulted in a decrease in the unemployment rate. Given the increase in program activities, ISED's program expenditures are expected to continue to increase moving forward. In the meantime,the department is also continuing to evaluate employee' return to the workplace and future of work initiatives.

In addition to funding received for initiatives in the Government of Canada's COVID-19 Economic Response Plan, ISED also received funding for new and existing grants and contributions. These programs continue to require ISED's programming and operations to be adjusted to ensure that objectives are met in a prudent and timely manner. For a more detailed breakdown on significant program and initiative funding, as well as related expenditures, please refer to Section 2.1.1 and Section 2.2.1.

4. Financial risks and uncertainties

As the COVID-19 pandemic evolves, the risk landscape has continued to shift in Canada, especially with the arrival of the Omicron variant. However, ISED's priorities continue to be focused on how government investments can support businesses and help them recover.

With this in mind, there are risks associated with the rapid delivery of new and enhanced programming to ensure timely implementation of Budget 2021 initiatives and related commitments. As the majority of Grant and Contribution funding is being provided through existing programs with well-functioning internal controls, the department continues to seek improvements to enhance those controls, particularly considering the new and increased investments at ISED.

ISED strives to accurately and reliably forecast its operational spending and has effective controls in place to ensure predictability and strong management of its operating vote.  The department's program spending differs from its operating spending in that it is almost entirely allocated to third parties through legally-binding contribution agreements. Under the rules governing such agreements, the funding, although legally committed through contribution agreements, generally is not recorded as spent until the third party undertakes the work being funded and submits receipts to the department for reimbursement. There are several financial uncertainties associated with ISED's large and complex transfer payment programs which largely influence spending patterns. More recently, there have been significant challenges faced by recipients, including securing partner funding, labour shortages, construction and supply delays and other external factors. These issues have had a direct impact on their ability to deliver projects and spend as planned, resulting in the need to realign some program funding profiles.  

From an internal management perspective, ISED continues to monitor financial risks and uncertainties and develop clear mitigation actions when required. Increased analysis and monitoring, including a focus on higher risk Grants and Contributions programs, more frequent discussions through governance committees, the review of ISED's investment planning framework, the review of internal controls for financial management, and the continued work on fraud prevention and detection are just a few examples of mitigation actions to support the department's sound stewardship of public funds.

Approved by: