Quarterly Financial Report (QFR) for the Quarter Ended December 31, 2021

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

This section provides financial highlights and explanations for differences between the fiscal-quarter and fiscal-year-to-date results for the quarter ended on December 31, 2021, and the results of the same period last year.

2.1 Statement of authorities

When compared to those of the same quarter of the previous year, the department's year-to-date budgetary authorities available for use have increased by $752.4 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities increased from $25,180.6 million in 2020–21 to $25,933.0 million in 2021–22. Major reasons for the changes are outlined below.

Year-to-date variances in authorities available for use

(in millions of dollars)

*A positive variance indicates an increase in cumulative authorities available for use in the year-to-date (YTD) third quarter (Q3) 2021–22 compared to YTD Q3 2020–21 and a negative variance indicates a decrease in cumulative authorities available for use in YTD Q3 2021–22 compared to YTD Q3 2020–21.

The year-to-date net increase in authorities of $752.4 million over the third quarter in 2021–22 can be explained by variances in funding for a number of initiatives.

• Pay administration – Federal public servants and Canadian Armed Forces (increase of $562.8 million)

The increase is due to receiving incremental funding in 2021–22 for increases to the rates of pay and allowances for Canadian Armed Forces members and adjustments made to the terms and conditions of service or employment of the federal public administration in various collective agreements.

• Miscellaneous departmental requirements (increase of $289.0 million)

The net increase is mainly related to an increase in the operating budget carry forward from 2020–21 to 2021–22 for miscellaneous activities. Additionally, the department requested a vote transfer from Operating to Capital in support of the implementation of a common definition of the Capital expenditures vote.

• Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (increase of $231.9 million)

In order to provide ongoing support for operating and capital requirements, the department received additional funding to offset sustainment growth and the inflationary impact on the defence budget.

• Funding for the implementation of the Heyder-Beattie Class Action Final Settlement Agreement (increase of $134.3 million)

The Heyder and Beattie class actions sought damages related to gender-based discrimination, sexual assault and sexual harassment. This funding will be used to continue to fulfill obligations and payments under the final agreement, including compensating claimants and the administration of claims.

• Funding for expanded contributions to the North Atlantic Treaty Organization (NATO) (increase of $63.9 million)

The department received incremental funding in 2021–22 to cover higher Canadian contributions to NATO’s common budget.

• Implementation of SSE (increase of $34.5 million)

The net increase in funding is primarily related to incremental demands required to execute the overall SSE policy commitments, including funding requirements for the expansion of the Canadian Armed Forces and civilian support and the Total Health and Wellness Strategy.

• Major capital equipment and infrastructure projects (decrease of $119.3 million)

The net decrease in funding is due to modifications to the multi-year spending profile of major capital equipment and infrastructure projects. These adjustments serve to align financial resources with project acquisition timelines. The decrease in cash requirements is mainly related to the Joint Support Ship and the Fixed-Wing Search and Rescue projects. The decreases were partially offset by increases related to the Canadian Surface Combatant and Hornet Extension projects.

• Incremental funding for deployed operations (decrease of $152.3 million)

The decrease is mainly due to the timing requirements for funding. Incremental funding for various deployed operations will be requested in the last quarter of 2021–22.

• Incremental funding for COVID-19 related activities (decrease of $292.4 million)

The department received $292.4 million in 2020–21 to support the Canadian Armed Forces’ response to COVID-19 (including Operation LASER). No incremental funding for COVID-19 related activities was requested in 2021–22.

2.2 Departmental budgetary expenditures by standard object

When compared to those of the same quarter of the previous fiscal year, the department’s year-to-date total net budgetary expenditures have increased by $1,074.6 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures increased from $14,995.0 million in 2020–21 to $16,069.6 million in 2021–22.

Year-to-date variances in net budgetary expenditures (presented by standard object)

(in millions of dollars)

The year-to-date net increase in budgetary expenditures of $1,074.6 million can be mainly explained by the variances detailed below.

• Professional and special services (increase of $457.6 million)

The increase in spending is primarily due to an increase in engineering services and in contracts/contractors due to COVID-19 related delays and restrictions being lifted in comparison to the third quarter of last fiscal year. There was also an increase in referral healthcare services to military members compared to the previous year, mainly due to the COVID-19 related restrictions in 2020–21 that deferred or delayed most routine services.

• Personnel (increase of $338.7 million)

The increase in spending is primarily due to Canadian Armed Forces members and several civilian employees receiving pay increases, which also resulted in an increase to employer contributions to pension and benefit funds. There was also an increase in full time reservists to assist with Operation LASER as their ability to train and parade has increased due to the lifting of COVID-19 restrictions. In addition, there was an increase in workers compensation/mental health services payments.

• Other subsidies and payments (increase of $195.9 million)

The increase in expenditures is primarily due to a large settlement and class action payments this fiscal year.

• Transportation and communications (increase of $102.3 million)

The increase in expenditures is primarily due to the resumption of military members’ relocations which were cancelled or postponed in the previous fiscal year as well as the resumption of activities that involve travel due to lifting of COVID-19 restrictions. There was also an increase in military travel this fiscal year compared to the previous year in relation to the administration of COVID-19 vaccines across Canada and health protection measures.

• Utilities, materials and supplies (increase of $92.8 million)

The increase in spending is primarily due to a relaxation in 2021–22 of federal and provincial restrictions implemented in 2020–21 as a result of COVID-19. This resulted in increases in fuel requirements due to a higher number of flights, utility costs due to increased access to buildings, and the general supply and food usage as military operations and training resumed.

• Repair and maintenance (increase of $88.8 million)

The increase in expenditures is due to a resumption of infrastructure-related repairs and maintenance projects which were previously halted or postponed due to COVID-19, and the timing of Foreign Military Sales case payments under the Lightweight Torpedo Upgrade project.

• Rentals (increase of $73.8 million)

The increase in expenditures is due to the timing of payments for occupancy instruments for National Defence Headquarters (Carling) that were not paid last fiscal year, an increase in software and application licensing for Microsoft Office 365 as well as other software due to remote work, and an increase in rental aircraft in support of Operation AIEGIS. As restrictions have been lifted, the return of training and day-to-day activities has also led to an increase in rentals.

• Acquisition of land, buildings and works (increase of $60.9 million)

The increase in spending is primarily due to reduced COVID-19 related delays and restrictions that were implemented last fiscal year, the purchase of a new armoury, the construction of a jetty as the well as the timing of payments compared to last fiscal year.

• Acquisition of machinery and equipment (decrease of $414.8 million)

The decrease in spending is primarily due to the timing of milestone payments and higher volume of deliveries in the previous year for various major projects, including the Defence Cryptographic Modernization Project, the Joint Support Ship Project, and the Fixed-Wing Search and Rescue Aircraft Replacement Project.

• Revenues netted against expenditures (decrease of $58.7 million)

The decrease in revenues netted against expenditures is mainly due to the timing of payments received from foreign countries.

3. Risks and uncertainties

As the threat of the COVID-19 pandemic continues to evolve, the department remains committed to adapting its mitigation strategy to align with updated public health guidance for gradual resumption of business across Canada. The department has assessed its business resumption plan to determine the required steps and conditions for resuming work. Until the risk of transmission between individuals drops significantly, and where civilian rates of disease and of vaccination warrant, the department will continue to apply its Layered Risk Mitigation Strategy in its facilities. This includes restricting the number of people in facilities, continuing to enforce public health measures like mask wearing and physical distancing, and implementing the voluntary Rapid Antigen Detection Testing (RADT) program in higher risk departmental workplaces. How quickly restrictions are lifted in each departmental facility will depend on provincial/territorial and regional public health guidance, which is based on evidence and judgment around the different levels of risk that apply to different activities. Management will continue to adjust activities according to local situations. In all decisions, leadership will carefully consider the health of Defence Team members, Senior Medical Authority advice, and guidance from regional health authorities. In addition to the risks associated with COVID-19, the other risks discussed below are still relevant.

To fulfill its mission, the department purchases goods and services necessary to train military forces, conduct operations at the request of the Government of Canada and acquire related infrastructure and equipment both domestically and internationally.

The department’s financial transactions are exposed to a broad range of external financial and economic risks such as inflation, foreign exchange and commodity price fluctuations. Depending on how these risks unfold, they could lead to higher- or lower-than-anticipated spending. For example, an appreciation of the Canadian dollar or a deterioration of commodity prices could result in lower spending. Conversely, an increase in spending could result in a depreciation of the Canadian dollar or an increase in commodity prices (in particular oil prices that have, for instance, sharply rebounded over the past several months in response to prospects of improving economic conditions).

The department continues to address the financial risks associated with the Phoenix pay issues through the implementation of new controls and the strengthening of existing ones. As part of the department’s Phoenix risk mitigation efforts, several initiatives have been implemented such as the establishment of a centralized data entry capability, the creation of data integrity, and training working groups to improve payment accuracy and to identify training needs across the department. In addition, the Civilian Compensation Quality Assurance Program has increased payment accuracy verification significantly for basic and acting pay, the results of which are analyzed and sent, as appropriate, to compensation advisors for corrective action.

While the department considers key economic and financial risk factors (including defence-specific inflation and foreign exchange) in developing expenditure strategies, these risks are outside of the control of the department.

The department’s capital acquisition program includes a number of large multi-year acquisition projects. Delays in contracting and procurement activities or delays in deliveries by suppliers for individual projects can lead to reduced expenditures or budgetary surpluses.

Risks also flow from claims and litigations involving the department’s normal operations. When the department receives a claim or litigation alleging liability in tort or extra contractual responsibility to cover losses, expenditures or damages, it is analyzed and an appropriate position is developed, based on legal advice. Litigation or settlement may be pursued and they are tracked through the department’s reporting.

Additionally, significant unforecasted operational demands can occur at any time, requiring the department to respond anywhere around the globe. Depending on the extent of the operational demand, the cost of unforecasted operations would be mitigated either through internal reallocations or by requesting incremental funding from the government.

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

The worldwide spread of COVID-19 has impacted Canadian Armed Forces operations across all regions, personnel and programs. Since the start of the COVID-19 pandemic, numerous directives have been issued to the Defence Team to preserve force health and to ensure the Canadian Armed Forces’ ability to defend and assist Canada and Canadians. In that time, the department and the Canadian Armed Forces have been instrumental to the COVID-19 response and vaccine roll-out operations of the Government of Canada. For example, Operation LASER and Operation VECTOR were launched in 2020 to facilitate the Canadian Armed Forces’ support to the federal, provincial, and territorial governments for the distribution and administration of COVID-19 vaccines. The Canadian Armed Forces have the unique ability to rapidly deploy anywhere in Canada to offer assistance to communities in need. This assistance complements and enhances federal, provincial and local resources with well-trained military personnel and specialized equipment.

The Defence Team continues with Operation LASER and Operation VECTOR to provide support to the federal, provincial, and territorial governments in support of countering COVID-19.

Canadian Armed Forces were deployed in support of Operation AEGIS, contributing to the Government of Canada’s effort in the non-combatant evacuation operation from Afghanistan and the extraction of the Canadian Embassy in Kabul.

In an environment impacted by a global pandemic, the department continues to implement its various SSE initiatives such as the renewal of its major equipment fleets including fighter aircraft and maritime warships.

On November 25, 2021, General Wayne Eyre, previously Acting Chief of the Defence Staff, was appointed as Chief of the Defence Staff.

In January 2022, Mr. Bill Matthews was appointed as the new Deputy Minister of National Defence and Ms. Stefanie Beck as the Associate Deputy Minister of National Defence.

Approved by:

Dated: March 1, 2022

Ottawa, Canada

5. Financial tables

• Table 1: Statement of authorities
• Table 2: Departmental budgetary expenditures by standard object