Audit of Revenues for the Air Travellers Security Charge for the Fiscal Year 2002-2003 and of Expenses for the Enhanced Air Travel Security System for the Period from September 11, 2001 to March 31, 2002 and the Fiscal Year 2002-2003

Conducted by the Auditor General of Canada on the Request of the Governor General in Council as Recommended by the Minister of Finance Canada

  
Auditor General of Canada
Vérificatrice générale du Canada

Auditor's Report

To the Minister of Finance

I have audited the Statement of Revenues for the Air Travellers Security Charge for the year ended March 31, 2003 and the Statement of Expenses for the Enhanced Air Travel Security System for the seven-month period ended March 31, 2002 and the year ended March 31, 2003. This financial information is the responsibility of the Department of Finance, in accordance with the terms described in note 1 to the statements. My responsibility is to express an opinion on this financial information based on my audit.

I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial information is free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial information. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial information.

In my opinion, these statements present fairly, in all material respects, the revenues for the year ended March 31, 2003 and the expenses for the seven-month period ended March 31, 2002 and for the year ended March 31, 2003 in accordance with Canadian generally accepted accounting principles.

Richard Flageole, FCA
Assistant Auditor General
for the Auditor General of Canada

Ottawa, Ontario
August 24, 2004

Statement of Revenues for the Air Travellers Security Charge

For the year ended March 31
(in thousands of dollars)

Statement of Expenses for the Enhanced Air Travel Security System

For the year ended March 31
(in thousands of dollars)

Approved by:
Original version signed by
Kevin G. Lynch
Deputy Minister of Finance

Ottawa, Canada
Date: August 24, 2004

Notes to the Statements

1. Purpose

The federal budget of December 10, 2001 announced planned spending of $2.2 billion through 2006-07 for an enhanced air travel security system and the creation of the Canadian Air Transport Security Authority to consolidate the delivery of key aviation security services.

To fund these initiatives, the Air Travellers Security Charge (ATSC or "the charge") was introduced. The ATSC is levied pursuant to the terms of the Air Travellers Security Charge Act and is payable by every person who acquires a qualifying air transportation service that includes a chargeable emplanement, defined as an embarkation by an individual on an aircraft operated by an air carrier at a listed airport in Canada.

For a qualifying air transportation service acquired in Canada, the charge applies to air travel occurring after March 31, 2002 for which a ticket is acquired after that date. For a qualifying service acquired outside Canada, the charge applies to air travel occurring after May 31, 2002 for which a ticket is acquired after March 31, 2002.

The ATSC was initially set at a level to recover the expected expenditures of $2.2 billion through 2006-07 on a cash basis. When the charge was announced in Budget 2001, the Government committed to review the charge over time to ensure that revenue for the five years through 2006-07, including the applicable Goods and Services Tax (GST) and the federal portion of the Harmonized Sales Tax (HST), is roughly equivalent to expenditures for the enhanced air travel security system. In this context, these statements provide information on revenue for the fiscal year ended March 31, 2003 and expenses from September 11, 2001 to March 31, 2003.

It is the responsibility of management of the Canada Revenue Agency (CRA), the Department of Transport (Transport Canada), the Royal Canadian Mounted Police (RCMP) and the Canadian Air Transport Security Authority (CATSA) to maintain books, records, systems and practices in such a manner as will provide reasonable assurance that assets are safeguarded and controlled, that transactions are in accordance with the relevant authorities and to ensure fair presentation of its financial information in accordance with Canadian generally accepted accounting principles (GAAP). Management of the Department of Finance (Finance Canada) is responsible for the fair presentation of the revenue and expense information in accordance with Canadian GAAP.

Information on revenues includes ATSC revenue, related penalty and interest revenue as reported by the CRA, interest revenue as reported by CATSA, as well as related GST/HST revenue as estimated by Finance Canada. Expense information includes expenses on enhanced air travel security as reported by Transport Canada, the RCMP and CATSA.

The Minister of National Revenue, through the CRA, is responsible for the administration and enforcement of the Air Travellers Security Charge Act. In this capacity, the CRA deals with air carriers to address issues of interpretation and application, collection and remittance, as well as records, filings and assessments.

Finance Canada is responsible for the determination of the GST/HST revenues that are attributable to the ATSC. Finance Canada estimates GST/HST revenues based on ATSC revenue data provided by the CRA and air passenger data provided by Transport Canada.

Transport Canada is responsible for the safety and security of the Canadian air transportation system. The federal budget of December 10, 2001 provided Transport Canada with additional funding to strengthen its capacity to set regulations, review standards, and to monitor and inspect all air security services. Specific initiatives undertaken by Transport Canada for the enhanced air travel security system include security modifications for aircraft cockpit doors and one-time payments associated with increased security measures immediately following the events of September 11, 2001.

CATSA was created on April 1, 2002 to consolidate the delivery of air security services under a single new federal authority. CATSA is responsible for:

• Pre-board screening of passengers and their belongings;

• Acquisition, deployment and operation of explosives detection systems;

• Implementation of the Canadian Air Carrier Protective Program;

• Implementation of a restricted area identification card;

• Screening of non-passengers entering airport restricted areas; and,

• Contributions for supplemental airport policing services.

CATSA operates on a not for profit basis and is responsible to the Minister of Transport for the delivery of consistent, effective and professional services at or above the standards set by federal regulations.

The RCMP provides the training and officers necessary for the delivery of the services of armed undercover police on Canadian aircraft. These services are provided to CATSA on a contractual basis as authorized by section 28 of the Canadian Air Transport Security Authority Act. Following the events of September 11, 2001, and prior to CATSA assuming its mandate on April 1, 2002, the RCMP provided these security services directly, without a contracting intermediary.

2. Summary of Significant Accounting Policies

The Statement of Revenues for the Air Travellers Security Charge and the Statement of Expenses for the Enhanced Air Travel Security System have been prepared in accordance with Canadian GAAP. The significant accounting policies are set out below.

(a) Revenue Recognition

ATSC revenues are recognized in the period in which a ticket for a qualifying air transportation service is acquired. Revenues for the year are estimated based on amounts assessed/reassessed at the time of preparation of the statements. ATSC revenues are reported net of credits and refunds allowed.

The GST or the federal portion of the HST that applies to domestic air travel within Canada and to transborder air travel to the continental United States that is acquired in Canada is recognized at the same time as the ATSC revenue.

Penalties are assessed and recorded in the period in which returns are processed by the CRA. Interest is accrued and recorded in the period in which it is earned.

The system used to collect the ATSC is based on self-assessment, where air carriers are expected to understand the laws and to comply with them. The nature of such a system has inherent impacts on the completeness of ATSC related revenues, as air carriers may fail to comply with relevant laws or to report all charges collected on the Government’s behalf. The CRA has implemented systems and controls in order to detect and correct situations where air carriers are not complying with the various acts it administers. These systems and controls include performing audits of air carrier records where determined necessary. Such procedures cannot be expected to identify all sources of unreported charges or other cases of non-compliance with the laws.

(b) Amortization of capital assets is recorded on a straight-line basis over the estimated useful life of the capital asset as follows:

(c) Grants and contributions are recorded as expenses when eligibility criteria have been met, the commitment has been authorized and approved and the payment is due to the recipient at the end of the period.

(d) Foreign currency transactions - transactions involving foreign currencies are translated into Canadian dollar equivalents using rates of exchange in effect at the time of those transactions.

(e) Measurement uncertainty - the preparation of financial information requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant items where estimates are used are GST/HST revenues and the useful lives of capital assets.

(f) In the interest of security at airports in Canada and pursuant to section 32 of the Canadian Air Transport Security Authority Act, information relating to air security related policing programs is not made public. To achieve this, the Statement of Expenses combines operating expenses and contributions for air security related policing programs.

3. Revenues

(a) Air Travellers Security Charge

All domestic and foreign air carriers offering a qualifying air transportation service must register with the CRA and charge and collect the ATSC from air travellers. Air carriers are expected to understand the applicable laws, to comply with them and to self-declare amounts charged in respect of the ATSC. Air carriers are required to file a prescribed return and remit amounts charged in respect of the ATSC during a particular month to the CRA by the end of the following month. The processing of an ATSC return occurs shortly after it is received by the CRA.

Refunds of the ATSC, where applicable, are generally provided to travellers by the air carrier. Air carriers report these refunds as credits on their prescribed returns. In rare circumstances, such as non-refundable tickets, ATSC refunds are issued by the CRA directly to travellers. No significant refunds were issued directly by the CRA in fiscal year 2002-03.

CRA is responsible for the design, implementation, and operation of enforcement activities to ensure the complete and accurate reporting of ATSC amounts by air carriers. These enforcement activities may result in changes to amounts previously reported by air carriers on ATSC returns, or in the filing of new ATSC returns. These changes (reassessments) and new filings are included in revenues in the period processed. Such enforcement activities cannot be expected to identify all cases of unreported revenue or all cases of non-compliance with the applicable laws.

(b) Goods and Services Tax/Harmonized Sales Tax

The GST or the federal portion of the HST applies to domestic air travel within Canada and to transborder air travel to the continental United States that is acquired in Canada. The GST/HST does not apply to transborder air travel that is acquired outside Canada or to other international air travel, regardless of where it is acquired.

The ATSC was designed to recognize the application of GST/HST, such that where the GST/HST applies, the ATSC is reduced in order that the amount the federal government collects is constant. For one-way domestic air travel within Canada, the ATSC was levied at a rate of $11.22 plus 7% GST/HST for a total of $12.00 between April 1, 2002 and February 28, 2003. From March 1, 2003 to March 31, 2004 it was levied at a rate of $6.54 plus 7% GST/HST for a total of $7.00.

For transborder air travel that is acquired in Canada, the ATSC applied at a rate of $11.22 plus 7% GST/HST for a total of $12.00 between April 1, 2002 and March 31, 2004. For transborder air travel that is acquired outside of Canada, the GST/HST does not apply and the ATSC was levied at a rate of $12.00 from April 1, 2002 to March 31, 2004. The GST/HST does not apply to other international air travel regardless of where it is acquired. From April 1, 2002 to March 31, 2004 the charge applied at a rate of $24.00.

The GST/HST amounts that form part of the ATSC revenue stream are not recorded on air carriers’ ATSC returns filed with CRA, but rather are included as part of the total calculation of GST/HST when air travel is purchased. Accordingly, for the purposes of this statement, GST/HST revenues pertaining to the ATSC have been estimated by Finance Canada using ATSC revenue data provided by the CRA and air passenger data provided by Transport Canada.

(c) Interest Revenues

Interest revenues come from interest applied on late remittances by air carriers and interest earned by CATSA.

4. Operating Expenses

Operating expenses represent mainly salary, overhead and professional services, and are recorded as services are provided or goods are received.

5. Grants and Contributions

Grants and contributions represent payments to air carriers and airports in respect of the delivery of certain security initiatives, including policing, pre-board screening, explosives detection systems and aircraft security modifications.

6. Services Provided without Charge

Costs incurred by the CRA to administer the ATSC are not funded by the charge and are not included in the Statement of Expenses. The costs incurred by the CRA to administer the ATSC for the year 2002-03 were funded by the Treasury Board and amounted to $5.3 million. Any costs incurred prior to April 1, 2002 were not identified separately and were funded by the CRA. Consistent with the Public Accounts of Canada, costs of revenue administration are not charged against revenues but are included as part of the operating costs of the CRA.

7. Subsequent Events

As of April 1, 2004:

• for domestic air travel, the charge is levied at a rate of $5.61 – for a total of $6.00 including 7% GST/HST;

• for transborder air travel that is acquired in Canada, the ATSC is levied at a rate of $9.35 – for a total of $10.00 including 7% GST/HST;

• for transborder air travel that is acquired outside of Canada, the GST/HST does not apply and the ATSC is levied at a rate of $10; and,

• for international air travel, the GST/HST does not apply and the charge is levied at a rate of $20.00.

8. Cash Collected and Disbursements

The federal budget of February 18, 2003 announced that, beginning with the fiscal year ended March 31, 2003, the Government of Canada would adopt Canadian GAAP – note 2 explains Canadian GAAP as applied to revenues and expenses relevant to the statements.

As indicated in Note 1, the ATSC was initially set at a level to recover the planned expenditures for the enhanced air travel security system on a cash basis, in accordance with the system of accounting then being used by the Government of Canada.

On a cash basis of accounting, revenues are accounted for in the period in which they are received and refunds are recorded in the period in which they are paid. Also on a cash basis of accounting, expenditures are accounted for in the period in which they are paid.

For completeness and greater transparency, the following tables show cash collected for the ATSC for the fiscal year ended March 31, 2003 and provide a reconciliation of total expenses as per Canadian GAAP and cash disbursements for the seven-month period ended March 31, 2002 and the fiscal year ended March 31, 2003.

9. Additional Information

The Public Accounts of Canada for 2003 indicate that for the fiscal year 2002-03, the ATSC generated revenues of 421 million dollars on a full accrual basis. That figure was based on the best information available at the time of preparation of the Public Accounts.