Revenue Annual Report for the fiscal year ended March 31, 2004 - Part 3

---

Please note that the Financial Information section is available in pdf format only.

If you would prefer to download this annual report as a pdf file, click here.

Table of Contents

Part 3:  Results Analysis

• Core Businesses and Goals

• Financial Highlights

• Report of the Auditor General on the Results of Applying Specified Auditing Procedures to Performance Information

Financial Information (available as pdf files only)

Alphabetical List of Entities' Financial Information in Ministry Annual Reports

Go to Part 1: Preface

Go to Part 2:  Overview

Results Analysis

Core Businesses and Goals

Financial Highlights

Change from Budget

Revenue $167 million above budget (2%)

Expenses $19.5 million below budget (10%)

To the Members of the Legislative Assembly:

In connection with the Ministry of Revenue's key and supplemental performance measures included in the 2003-2004 Annual Report of the Ministry of Revenue for the year ended March 31, 2004, I have:

1. Agreed information from an external organization to reports from the organization.

 

2. Agreed information from reports that originated from organizations included in the consolidated financial statements of the Ministry to source reports. In addition, I tested the procedures used to compile the underlying data into source reports.

 

3. Checked that the presentation of results is consistent with the stated methodology.

 

4. Checked that the results presented are comparable to stated targets, and information presented in prior years.

 

5. Checked that the key performance measures, as well as targets, agree to and include results for all of the measures presented in Budget 2003.

Supplemental Performance Measures

 

6. Agreed the information to source reports. In addition, I checked that the supporting narrative is consistent with the information.

As a result of applying the above procedures, I found no exceptions. However, these procedures do not constitute an audit, and therefore I express no opinion on the key and supplemental performance measures included in the 2003-2004 Annual Report of the Ministry of Revenue.

[original signed]

Fred J. Dunn, FCA
Auditor General

Edmonton, Alberta 
August 27, 2004

Performance Measures, Targets and Results

Core Business #1 - Manage tax and revenue programs

Consistently low taxes have become one of the defining features of living and doing business in Alberta, and will continue to be a key feature of the new fiscal framework, which was adopted in 2003-04. Albertans enjoy the advantages of an innovative single-rate personal tax system, continued corporate tax reductions, the lowest fuel tax in Canada, and no general sales tax, payroll tax, or corporate capital tax.

Alberta's low rate, broad-based approach to taxes is fairer and simpler for all taxpayers. It is part of the solid foundation for a dynamic and vibrant provincial economy, and means more opportunities, greater rewards for work and investment, and more wealth to support public services and quality of life.

A revenue management framework was identified as a strategic priority in the Ministry 2003-06 business plan. In 2003-04, Revenue worked with other ministries with significant revenues to develop recommendations for a revenue management framework.

Goals
1.1 A revenue structure that meets Alberta's needs and is consistent with Albertans' values
1.2 Fair and competitive provincial tax and revenue systems
1.3 Tax and revenue programs that are administered fairly and efficiently

The variance resulted from less than anticipated statutory payments for interest payments on corporate tax refunds and valuation adjustments and reduced spending in Revenue Collection and Rebates and Policy and Strategic Planning related to staff vacancies and unused contingency funds. The variance did not impact the department’s preformance on its targets.

Alberta continues to have the lowest provincial tax load for a family of four (see chart). Alberta's single-rate personal tax system has two key components that advance fairness and competitiveness. First, the largest personal and spousal exemptions in the country promote fairness by allowing Albertans to earn more tax-free income. Provincial non-refundable credits are indexed to inflation so their value is not eroded over time. Second, the 10 per cent single rate is the lowest top marginal tax rate in Canada. This promotes competitiveness and encourages people to live, work and invest in Alberta.

In addition, Alberta's personal tax load was the lowest in Canada at 52.4 per cent of the provincial average, far ahead of its nearest competitor British Columbia, which is at 94.5 per cent of the provincial average.

In 2003-04, Alberta's provincial tax load on business was the third lowest in Canada following Prince Edward Island and British Columbia. The outcome of this measure depends on how the business income is structured. A province where the economy is struggling will appear to have a low tax burden, since money-losing corporations do not pay income tax. Also, provinces dominated by small business will appear to have a low tax burden, since the small business rate is much lower than the general rate in all provinces. 

Corporate tax regimes vary significantly across provinces, and comparisons are therefore difficult to make since an effective tax rate varies depending on special tax rates and incentives provided. Alberta Revenue and Alberta Finance are attempting to identify a measure to better reflect the comparative tax burden that would apply to various types of corporations that operate in Alberta.

Alberta's general corporate tax rate and small business rate, at 12.5% and 4.0% respectively, are the second lowest among all the provinces. Alberta does not have any capital taxes. Low overall taxes in Alberta encourage entrepreneurs to start new businesses in Alberta, or move them here from other provinces.

The government continued its plan of corporate income tax reductions in 2003-04. 

Effective March 1, 2004, the 1.5 cents per litre Alberta aviation fuel tax was eliminated on eligible international passenger and cargo flights, including those to the United States of America. Effective April 1, 2003, the general corporate tax rate was reduced to 12.5%, the small business rate was reduced to 4.0%, and the small business threshold was increased to $400,000. The tax cuts continued in 2004.

PERFORMANCE MEASURE: Percentage of tax accounts with no monies owing.
Target: 96%

For 2003-04, the target was set at 96 percent. The actual percentage of accounts with no overdue amounts owing as at March 31, 2004 was 95.74 percent, up from 95.62 percent in 2002-03. This consistently high performance demonstrates that Alberta's tax collection efforts are successful.

Source: Alberta Revenue, TRA Oracle database.

PERFORMANCE MEASURE: Client satisfaction with tax administration.
Target: 85% satisfied or better

Clients' overall satisfaction with tax administration (88.7 percent) exceeded the minimum 85 percent performance target. In comparison to the 2002-03 results, the clients' overall satisfaction with tax administration has remained at 88.7 percent.

Source: Alberta Revenue.

PERFORMANCE MEASURE: Ratio of amounts added to net revenue to costs of administration.
Target: Determined after the benchmark year 2002-03

The calculation is based on the total additional revenue obtained through TRA's efforts, shown as a ratio of the total costs of TRA's operating budget. TRA, through the revision of returns and claims, and the collection of overdue accounts, recovers revenues that may otherwise be lost. An increasing value-added ratio can indicate that the relative degree of self-compliance is decreasing, and that more effort is required to detect and address non-compliance.

The total amount added to net revenue for 2003-04 was $282.3 million, and the associated costs were $20.1 million, so the value added ratio is 14 to 1 - that is, recoveries of $14.04 for every $1 spent. This was up from the 12.3 to 1 results in 2002-03. The 2002-03 result established the benchmark, and the target was set for 12 to 1 in 2004-05. Plans are in place to expand audit coverage, which should result in progress toward better self-compliance..

The Investment Management Division's primary objective is to maximize long-term financial returns. Meeting this objective means managing the balance between risk and return. The strategic priority and strategies outlined in the Ministry's Business Plan support this objective by using a prudent mix of internal investment resources and external investment management firms, and by developing and implementing new products to meet client needs.

Goals
2.1 A savings policy for Alberta that balances present and future needs and contributes to a stable fiscal environment
2.2 An effective investment management organization
2.3 Superior investment returns subject to client-defined objectives and policies
2.4 Quality client service

The variance can be attributed to: 

• reduced draws from the Alberta Heritage Medical Research Fund amounting to $20 million due to delays in the building of health research facilities in Edmonton and Calgary;

• reduction in the funding request from the Alberta Heritage Foundation for Science and Engineering Research Fund amounting to $3.6 million for research grants and awards;

• the department’s Investment Management Division lapsed funds in the amount of $2.6 million due to delays in recruiting skilled employees. This did not impact the department’s performance on its targets;

• reduced management fees charged to Alberta Heritage Savings and Trust fund amounting to $0.5 million;

• the Alberta Heritage Scholarship Fund increased their draws by $1 million, as there is an increase in the number of students eligible to receive awards.

In 1997, the Alberta government adopted a new investment strategy for the Alberta Heritage Savings Trust Fund (Heritage Fund). This new strategy focuses on earning the greatest long-term returns for Albertans, within an acceptable level of risk. 

SUPPLEMENTAL MEASURES

PERFORMANCE MEASURE: Straight Through Processing (STP) System implemented by June 2005.

Alberta Investment Management met 2003-04 targets established in its multi-year straight through processing (STP) plan to establish processes capable of settling trades on a same day or next day basis. The implementation of a trade order management system was completed. Implementation of a data hub began during the year. This implementation will assist Alberta Investment Management with consolidating investment data sources. After an extensive vendor selection process, a risk management system was selected. This system will be implemented in the 2004-05 fiscal year.

Source: Alberta Revenue, Omega One.

PERFORMANCE MEASURE: Straight Through Processing (STP) of investment transactions.
Target: 80%

The investment operation achieved an internal STP rate of 87.4 percent for the 2003-04 fiscal year against its target rate of 80 percent. 

Source: Alberta Revenue.

PERFORMANCE MEASURE: Client satisfaction with services provided.
Target: 80%

In January of each year, a client satisfaction survey is sent to clients of the Investment Management Division. Respondents include board members representing client funds as well as other service recipients of the Investment Management Division.

Clients are asked to answer a series of questions aimed at determining their level of satisfaction with service received. They respond on a five-point scale that is translated by Statistics into a percentage satisfaction and aggregated with other clients into a composite client satisfaction level.

In the fiscal year 2003-04, client satisfaction with services provided was 69 percent, which is a 3 percent improvement over the fiscal year 2002-03, but below the 80 percent target. The improved client rating results come mainly from increased satisfaction with the overall quality of IMD's investment strategies, the value added performance of individual products, IMD's understanding of client funds' investment objectives and the value added by IMD relative to the fund benchmark. The largest decreases in client rating are recorded in the following areas: the clarity of IMD's information on performance, the overall quality of IMD's communications and understanding of IMD's investment strategies. 

Source: Alberta Revenue and Alberta Finance, Statistics.

Other Highlights

Other key strategic highlights for the year include ongoing business continuity preparation, e.g., participation in one of Alberta Investment Management's major software vendors disaster recovery test and a comprehensive scenario test of Alberta Investment Management's business continuity site.

The main strategy for the Risk Management Division is to control the cost of risk. Through the Risk Management Fund, coverage is provided to ministries and appropriate insurance services are purchased to protect some of the Fund's financial responsibilities. Recent natural and economic events have had a serious impact on the insurance industry, significantly increasing costs and reducing the availability of purchased insurance.

Goals
3.1 Proactively managed risk
3.2 Stable Risk Management Fund
3.3 Corporate risk identified and prioritized

A recent actuarial review was conducted requiring that the allowances for IBNR (incurred but not reported) losses be increased by $6.2 million. Of the $3.3 million balance of the variance, $300,000 stems from insurance premiums higher than budgeted, $1 million from a major fire loss claim and $2 million due to general liability claims being higher than budgeted. 

Risk Management and Insurance strives to keep Fund participants’ costs at a minimum. Therefore, the Fund is managed such that the net asset value does not exceed $1 million. The net liability for the year ending March 31, 2004 was $6.2 million.

This target was not met because of the increased cost of insurance plus higher reserves for new claims and the IBNR claims. 

PERFORMANCE MEASURE: Cost of Claims (insurance premiums plus self-insured losses)
Target: $6.5 million

Due to significant reduction of available coverage, even at an increased cost, insurance was purchased with additional exclusions at a cost of $2.3 million, $300,000 more than budgeted. The actual cost of claims in 2003-04 was $15.8 million, which exceeded the $6.5 million target. 

Source: Alberta Revenue.

PERFORMANCE MEASURE: Satisfaction with the services provided by the division
Target: 80%

Clients' overall satisfaction with Risk Management and Insurance exceeded the 80% minimum performance target. Overall, 84% of respondents were either satisfied or very satisfied with the services provided by RMI and there was a 17% increase in the number of responses received compared to the 2001 survey. 

Source: Alberta Finance, Statistics..

Alberta Revenue identified securities regulation as a strategic priority and recognizes that effective securities regulation is vitally important to investor protection and efficient, vibrant and competitive local and national capital markets. Since early 2003, provincial and territorial ministers responsible for securities regulation have been working together to identify practical and timely improvements that will provide significant reforms to Canada's securities regulatory framework. The Alberta Minister of Revenue chairs this initiative.

The Alberta Securities Commission (ASC) is responsible for maintaining the efficiency and integrity of the capital market in Alberta through the administration of the Alberta Securities Act.

Goals
4.1 A regulatory environment that promotes confidence in the Alberta capital market
4.2 An effective national securities regulatory system
4.3 Foster further development and growth of the Alberta capital market.

The variance can be attributed to an unused budget contingency.

An on-line survey was conducted by the ASC in January 2004 to assess the extent to which stakeholders were satisfied with the service they had received from the ASC in response to enquiries regarding ASC operations and policy matters. Out of the 67 respondents, 87% either agreed or strongly agreed with the statement that they were satisfied with the quality of service they received. Ratings exceeded 80% in all categories dealing with promptness, accuracy and clarity of information provided, and professionalism of staff. The February 16, 2004 survey results will be assessed by the ASC to maintain and/or improve stakeholder satisfaction.

PERFORMANCE MEASURE: Investor education program.
Target: minimum of four education seminars

Educated investors are more likely to make wise investment decisions, which is, in turn, beneficial for Alberta's capital markets. During the 2003-04 fiscal year, the ASC implemented a comprehensive investor education program. ASC staff made presentations to four regional teachers' conventions in Alberta, 18 high school classes and nine other groups (seniors, women's groups and post-secondary students). As part of the 2003-04 programs, ASC participated in several education initiatives, including an event during Investor Education Month (April 2003) to alert the public to the risks of investment fraud. 

In addition to these activities aimed at the general public, the ASC also organized and/or played a key role in a number of educational workshops and seminars for industry professionals (e.g. lawyers, accountants and other advisors). Topics included new oil and gas reserve reporting standards, continuous disclosure obligations and new accounting standards.

Source: ASC.

PERFORMANCE MEASURE: Number of annual examinations.
Target: 40% subject to examination

Examinations are conducted on selected mutual fund dealers, portfolio managers and scholarship plan dealers each fiscal year to ensure compliance with the Alberta Securities Act. In 2003-04, out of an overall 400 registrants, 35 were examined and 135 were subject to review, exceeding the goal of 40%.

Source: ASC.

PERFORMANCE MEASURE: Legislation for a Uniform Securities Act.
Target: June 30, 2004 

Staff from the ASC are heavily involved in projects at a national level through the Canadian Securities Administrators (CSA), the organization under which Canada's 13 securities regulators work towards a harmonized system of securities regulation. The Chair of the ASC is also the current chair of the CSA.

Work at a national level allows securities regulators to leverage their individual strengths to form a consistent and strong cross-Canada regulatory presence. The most significant and ambitious harmonization initiative is the development of a draft Uniform Securities Act and Model Securities Administration Act. Consultation drafts of these Acts were published in December 2003 and public comments were requested by May 2004. Due to the length of the consultation process, the target date of June 30, 2004 was not met. A new target date is currently under review.

Source: Draft Uniform Securities Act and Model Securities Administration Act.

Taxation load for a family of four (shared performance measure with Ministry of Finance)

Calculations are based on the following assumptions:

• Business is assumed to bear between 25 percent and 60 percent of the provincial sales tax, depending upon the provincial tax regime. 

• In provinces that impose payroll taxes, 75 percent is assumed to be borne by employees and 25 percent by employers. The same 75/25 split is assumed for health care insurance premiums. 

• Fuel tax is based on estimated consumption of 3,000 litres per year for one income families and 4,500 litres for two income families. 

• Tobacco tax is based on estimated consumption of 100 packs per adult per year. 

• RRSP/RPP contributions of $1,000, $7,800 and $13,500 are included in the calculation of personal income tax for the $30,000, $60,000 and $100,000 families, respectively. 

• For two income families, income and RRSP/RPP contributions are split 60/40 between the two spouses. 

• The children in each family are assumed to be 6 and 12 years old.

Provincial tax load, or tax effort, compares actual tax revenues generated within a province to the revenue that the province would generate if it taxed at national-average tax rates. Business taxes examined include business income taxes, capital taxes and insurance corporation taxes.

Each year, the provinces report their tax revenues by these categories to the federal government as part of the reporting requirements for the Equalization Program. The steps to calculate provincial tax loads are:

1. National-average tax rates are calculated by dividing total national tax revenues by the national tax base. The tax base for business income taxes, for example, is corporate profits. 

2. The revenue that the province would generate if it taxed at national rates is equal to the national average tax rate multiplied by the provincial tax base for each of the tax categories. 

3. Provincial tax load is equal to the ratio of actual provincial revenues divided by the results of the previous calculation multiplied by 100..

The latest available data are used in these calculations:

• February 2004 Fifth Estimate for 2002-03, except for Alberta corporate income tax, which has been adjusted from budget to actual. 

• February 2004 Third Estimate for 2003-04 

As a result, the 2002-03 business tax load is restated from what was reported in the Alberta Revenue Annual Report for 2002-03.

The performance measurement system employed by Investment Management Division (IMD) calculates a total return for each of the investment funds, including both endowment and other client funds.
Investment clients select indices for various asset classes making up their fund policy benchmark composition. IMD aggregates published returns for these indices into a policy benchmark composite return for each client fund.

A comparison between the four year annualized total rate of return of the fund and its benchmark is made. This comparison is calculated by subtracting the difference of the time-weighted return of the fund versus the time-weighted return of the policy benchmark.

Fund returns are calculated within the Persys module of FMC by the Valuations Group of the Investment Administration Division.

Benchmark returns are calculated using policy benchmark weights provided by client statement of policy and goals. Return series of indices used to calculate the policy benchmark are sourced from IMD's custodian and benchmark providers.

The actual cost of premiums and claims in 2003-04 was $15.8 million, which exceeded the $6.5 million target. This resulted from an increased cost of insurance plus higher reserves for new claims and Incurred But Not Reported (IBNR) claims. The substantial increase in IBNR, since the prior actuarial report of March 31, 2001, resulted from major changes with respect to both legislation and court awards that affect claims. To avoid future large adjustments actuarial reports are now completed on an annual basis as compared to bi-annually as in the past.

The Alberta Securities Commission (ASC) conducted an on-line survey in January 2004 to assess the extent to which stakeholders were satisfied with the service they had received from the ASC in response to enquiries regarding ASC operations and policy matters.

The survey was distributed electronically to stakeholders who had contacted one of three ASC departments (Legal Services and Policy Development, Capital Markets or Public Information) with information requests during the previous 12 months. 

Surveys were distributed to 602 stakeholders. This produced a total of 67 responses. Stakeholders were asked to respond to 9 questions about various aspects of the ASC's services. Results were compiled by staff at the ASC and is being used to identify potential areas of improvement and to develop initiatives to enhance overall service levels.

Go to: Financial Information (available as pdf files only)

¹ The Crop Reinsurance Fund of Alberta was merged into the Agriculture Financial Services Corporation effective April 1, 2003..

² Dissolved August 1, 2003.

³ Ministry includes only the department so separate financial statements are not necessary.

ENTITIES NOT INCLUDED IN THE CONSOLIDATED GOVERNMENT REPORTING ENTITY