Quarterly Financial Report (QFR) for the Quarter Ended June 30, 2023

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 June 30, 2023, 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 $32.9 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities increased from $26,472.5 million in 2022–23 to $26,505.3 million in 2023–24. Major reasons for the changes are outlined below.

*A positive variance indicates an increase in authorities available for use in Q1 2023–24 compared to Q1 2022–23 and a negative variance indicates a decrease in authorities available for use in Q1 2023–24 compared to Q1 2022–23.

Note: Numbers may not add up due to rounding.

The year-to-date net increase in authorities of $32.9 million over the first quarter in 2023–24 can be explained by variances in funding for a number of initiatives.

• Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (increase of $490.9 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.

• Budget 2021 initiatives (increase of $130.3 million)

  Funding for initiatives that were announced in Budget 2021 pertaining to:

  • North American Aerospace Defense Command (NORAD) Modernization Initiative
  • Funding to Support the North Warning System
  • Modernizing the department’s information management and information technology systems
  • The North Atlantic Treaty Organization (NATO) Readiness Initiative and the NATO Contribution programs
  • Sustaining health services for the CAF
  • Addressing sexual misconduct and gender-based violence in the military

• Implementation of SSE (increase of $121.2 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 CAF and civilian support and for capital investments.

• Miscellaneous departmental requirements (increase of $53.6 million)

  The net increase is due to miscellaneous funding variances. The net increase in statutory authorities is mainly due to an increase in contributions to employee benefit plans for military and civilians.

• Budget 2022 Initiatives (increase of $51.0 million)

  Funding for initiatives that were announced in the Budget 2022 pertaining to:

  • Women and Diversity Healthcare
  • Funding to support Culture Change in the CAF
  • Military Justice Modernization
  • Funding for the Implementation of the United Nations Declaration on the Rights of Indigenous Peoples Act

• Heyder-Beattie Class Action Final Settlement Agreement (decrease of $314.1 million)

  The Heyder and Beattie class actions sought damages related to gender-based discrimination, sexual assault and sexual harassment. The funding has been used to continue to fulfil obligations and payments under the final agreement, including compensating claimants, the administration of claims, and the implementation of the restorative engagement program. The decrease is largely related to the timing of expected payments to claimants.

• Contributions to the Ukraine Operation (decrease of $500 million)

  The decrease is due to the timing of funding requirements. In 2022-23, funding to support Ukraine in its efforts to defend its sovereignty was received in the first quarter of 2022-23. It is anticipated that funding will be requested later in the 2023-24 fiscal year.

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 decreased by $269.2 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures decreased from $5,080.1 million in 2022–23 to $4,810.9 million in 2023–24.

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

Note: Numbers may not add up due to rounding.

Year-to-date net decrease of $269.2 million is attributable mainly to the following:

• Personnel (increase of $148.3 million)

  The increase in spending is primarily due to rate increases for employer CPP (Canada Pension Plan) and EI (Employment Insurance) contributions. In addition, there have been increases in some allowances due to more personnel being deployed during the first quarter of this fiscal year, as well as collective agreements/increases in pay scales for both civilian and CAF employees.

• Other subsidies and payments (decrease of $174.8 million)

  The decrease in expenditures is primarily due to the timing of scheduled payments for settlement agreements.

• Professional and special services (decrease of $112.4 million)

  The decrease in spending is primarily due to the F-35 JSF (Joint Strike Fighter) Program MOU payment timing which has not yet occurred this fiscal year.

• Transfer payment (decrease of $66.9 million)

  The decrease in spending is primarily due to timing variances for the budget and expenditures related to Ukraine.

• Utilities, materials and supplies (decrease of $46.8 million)

  The decrease in spending is primarily due to lower fuel prices and reduced flying hours compared to the same quarter last year.

• Acquisition of machinery and equipment (decrease of $37.5 million)

  The decrease in spending was primarily due to project milestone differences, most significantly payment timing for Medium Support Vehicle System (MSVS).

3. Risks and uncertainties

The department’s financial transactions are exposed to a broad range of external financial and economic risks such as inflation, foreign exchange commodity price fluctuations and global supply chain. Currently we are seeing economic risks give rise to increases in costs of goods and services, labour shortages, and supply chain delays. Depending on how these risks unfold, they could lead to significant fluctuations in anticipated spending.

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 the control of the department.

The department continues to address the financial risks associated with Phoenix pay issues through the implementation of new controls as required and the strengthening of existing ones. The Civilian Quality Assurance program continues to leverage the use of robotic process automation to analyze the current pay environment and lead to more timely corrective actions with the help of compensation agents.  Initiatives such as the centralized data entry capability continue to ensure sustained payment accuracy.

The department’s capital acquisition program includes a number of large multi-year acquisition projects, mainly comprising of advanced fighter aircrafts, naval ships and armored vehicles. 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.

The COVID pandemic has exacerbated the CAF’s ability to grow its Force. As a result, the CAF is applying reconstitution measures at the tactical, operational, and strategic levels to restore units to an acceptable level of readiness to excel as a modern and combat-ready military force. This is intended to enable the CAF to adapt quickly to action when called for significant unexpected operational demands, which can occur at any time anywhere around the globe.

Additionally, significant unforecasted operational demands can occur at any time, requiring the department to respond anywhere in the world. 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

Since February 2022, Canada has made significant contributions of military support to Ukraine, which includes procurement of military equipment, artillery, combat support vehicles, satellite communication services, uniforms/gear, and training for Ukrainian troops.

Furthermore, the CAF has reallocated their current forces to continue to support Ukraine, maintain its NATO commitments, increase its presence in the Indo-Pacific, and reduce its presence in the Middle East. These movements will incur additional impacts on transportation, relocation, and overall military salary expenditures.

To address the shortfall and increase the recruitment pool of military personnel, the federal government announced policy changes in December 2022 that will allow permanent residents to join the CAF. A Temporary Recruitment Incentive has also been granted to unskilled members in 33 occupations, after successful completion of Basic Military Qualification.

On July 26, 2023, Prime Minister Justin Trudeau announced the appointment of Bill Blair as the new Minister of National Defence. In addition, the Honourable Ginette Petitpas Taylor was named as Minister of Veterans Affairs and Associate Minister of National Defence.

Approved by:

5. Financial tables

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