Guide on Financial Arrangements and Funding Options

Print-friendly XML

Foreword

This guide is designed to assist program managers, financial officers and other interested parties in selecting the appropriate financial arrangement and funding option in support of program delivery. Through the use of a conceptual model, the guide provides an overview of the decision-making process and examines some key attributes of the more commonly selected financial arrangements and funding options. This guide originated because departments expressed a need for a comprehensive source of information on financial arrangements and funding options. The guide supports the Treasury Board publication Framework for Alternative Program Delivery.

The various sections contained in this guide are stand-alone units which may be read in conjunction with various Treasury Board policies identified in the reference section.

The publication of this guide is timely. Today's environment demands fiscal responsibility, improved service delivery for clients and increased efficiency in government operations and program delivery. This guide should assist you in achieving these objectives.

For further information, direction and advice on this guide, please contact:

Financial Management Policy Division
Financial and Contract Management Sector
Financial and Information Management Branch
Treasury Board Secretariat
L'Esplanade Laurier
8th Floor West Tower
300 Laurier Avenue West
Ottawa (Ontario)
KlA OR5
Fax: (613) 952-9613
Phone: (613) 957-7233

Introduction

The conceptual model displayed in Figure 1 outlines a top down approach to determining an appropriate program delivery alternative. Figure 1 is included for illustrative purposes only; the Framework for Alternative Program Delivery should be the basis for selecting a program delivery alternative.

Along a continuum, there is a range of program delivery alternatives. For the purpose of this illustration the alternatives identified are: in-house government delivery when there is high government involvement; delivery by parties outside government when an intermediary or third party is used to further government objectives; delivery when partnerships are the selected mode; and exclusive private sector delivery when there is little to no government involvement. The conceptual model displayed in the second part of Figure 1 outlines a top down approach to determining the appropriate financial arrangement and funding option.

The objective of this guide is to assist you in selecting a cost-effective financial arrangement and funding option, to support your mandate and program delivery.

The framework encourages the program manager, finance officer or other interested parties to begin by asking the following key questions.

  • What are my mandate and lines of business?
  • Who are my clients?
  • What do I want to accomplish?
  • What are the expected results or outcomes?

The answers to these questions facilitate the task of selecting the most appropriate delivery alternative, financial arrangement and then funding option in support of program objectives.

Your choice of financial arrangement and funding option must be able to withstand the test of public scrutiny and achieve the best value for the dollars spent. The following guiding principles influence your selection: parliamentary control, authority, risk management, accountability, fiscal environment, cost benefit analysis and disclosure. The section entitled "Principles Influencing the Choice of Financial Arrangements" briefly examines each principle.

Conceptual model of delivery alternatives

Steps in the selection process

Once you identify the appropriate program delivery alternative, the next steps in the selection process are determining the appropriate financial arrangement and funding option.

A financial arrangement is any arrangement between the government and outside parties that results in an actual or potential outlay of resources. A financial arrangement may include eligibility criteria, an agreement stipulating the obligations of each party, and terms and conditions outlining the minimum requirements to be incorporated into an agreement. For the purpose of this guide we will review two different categories of financial arrangements. The first category examines transfer payments including grants, contributions, repayable contributions, Alternative Funding Arrangements, Flexible Transfer Payments and Other Transfer Payments that involve cash outlays. The second category describes loans, loan guarantees and loan insurance. Only loans represent cash outlays; loan guarantees and loan insurance represent potential outlays.

Funding options are the alternative sources of funds used to finance different delivery options. Funding options finance all financial arrangements. You can obtain funds through traditional appropriations, special revenue spending authorities (e.g. revolving funds and net voting) or specified purpose accounts established for specific conditions. Parliament grants spending authority by passing Appropriation Acts.

There are many different types of financial arrangements and funding options. This guide only includes those most commonly used. Each of the funding option and financial arrangement categories support distinct lines of government business.

This guide uses a hierarchical approach. The first level in the hierarchy focuses on the selection of an appropriate program delivery alternative (e.g. government itself, partnership). The choice at this level is largely dependent on the type of business in which you are involved. The Framework for Alternative Program Delivery will help you make a good decision. Once you determine the appropriate program delivery alternative, the second level in the hierarchy allows you to identify, through a series of statements, a specific financial arrangement and funding option to support your program delivery needs.

Figure 1: Conceptual Model of Delivery Alternatives
Text version: Figure 1: Conceptual Model of Delivery Alternatives

Figure 1 (continued): Conceptual Model of Delivery Alternatives
Text version: Figure 1 (continued): Conceptual Model of Delivery Alternatives

You can indicate which attributes are relevant to your program delivery objectives by placing a check mark next to those statements. Once you have gone through the list of attributes, the check marks should steer you to an appropriate financial arrangement or funding option. Some characteristics will be common to more than one arrangement or funding option. The purpose of the matrix is to briefly describe how a specific attribute applies to the specific arrangement or funding option in that particular category.

We encourage program and financial officers to consult with their Treasury Board program analyst throughout the selection phase. Continuous and open communication helps avoid common pitfalls, reduces frustration and ultimately saves time.

We have included an appendix to help you do additional research on specific financial arrangements and funding options.

Principles influencing the choice of financial arrangements

Some basic principles underlie the selection of all financial arrangements and funding options. These principles influence the decision-making process and identify the boundaries within which decisions are made. For the purpose of this document, we have identified seven basic principles.

1. Parliamentary control

Parliamentary control influences the government management framework. Parliament is the supreme legislative body and authorizes all payments out of the Consolidated Revenue Fund (CRF) through special Acts or through the passage of Appropriation Acts. The Appropriation Act specifies the amounts and defines the purpose for which funds may be used. Unless otherwise provided in the vote wording, in Appropriation Acts or other legislation, appropriations lapse at year-end. As well, all revenues and other public moneys must be deposited in the CRF.

The cornerstone for financial management and accounting for the government entity is the Financial Administration Act (FAA).

2. Authority

Legislation determines the authority vested in departments and agencies to carry out their programs and activities. Either departmental Acts set out the responsibilities of a particular minister or department, or specific legislation permits the establishment of a particular program to meet a specified need or service.

General Acts such as section 19 of the FAA provide other legislative means by which authority can be obtained.

Contracting authorities and policies emanating from the Treasury Board Secretariat provide non-legislative means by which departments and agencies receive authority.

If a department wants to charge for a service, a product, a right, a privilege or the use of departmental facilities and to spend the revenues received, specific authority for both must be obtained.

3. Risk management

Risk management involves determining the probability, impact, and materiality of an event happening. The objective of the risk management is to limit or minimize the damage to and liability of the Crown.

The risk management analysis and assessment process includes the identification of potential perils, factors and types of risks, including financial risks, to which departmental assets, program activities and interests are exposed. Departments must analyze and assess the risks identified, select safe options, and design and implement cost-effective prevention and control measures.

4. Accountability

Accountability is the obligation to answer for the exercise of one's responsibilities. Accountability to Parliament, program clients and ultimately the Canadian taxpayer is an essential ingredient of the government's management framework. It means accounting to Parliament on the efficient and effective use of appropriated resources to achieve program objectives. The aim is to ensure parliamentarians and the public see that the taxpayers' dollars have been spent with due regard for probity and prudence and that the intended objectives have been achieved.

5. Fiscal environment

The fiscal environment is another equally important principle influencing the decision-making process. Scarcity of resources has forced departments and agencies to continually re-evaluate their alternatives for program delivery and funding options to ensure that both are cost-effective. For example, it would not be cost-efficient to establish a revolving fund if the cost for administration, costing and accounting systems exceed the revenues raised through user fees.

6. Cost benefit analysis

Sound cost and qualitative information is critical for decision-making in the current fiscal situation. To maximize value for money, you can use the Framework for Alternative Program Delivery to determine the most cost-effective means of achieving program objectives. Make or Buy? and Making the Organization More Efficient, from the Stretching the Tax Dollar series, and Guide to the Costing of Outputs in the Government of Canada are three other management tools developed by the Treasury Board Secretariat to assist program and financial officers in achieving greater efficiency and effectiveness in program delivery (see the General section in the Appendix for complete references).

7. Disclosure

Financial disclosure is an essential principle that is achieved through the tabling of Part III of the Estimates and the Public Accounts. Disclosure ensures that the objectives set by Parliament and the government are being realized. Ministers use Part III of the Estimates to report to Parliament on: their proposed expenditure plans for the upcoming fiscal year, how resources of the current fiscal year are expected to be used in carrying out the department's mandate, and how resources of the past fiscal year were used. The Public Accounts of Canada, on the other hand, displays actual expenditures incurred under each appropriation, including specific information about contribution and grant arrangements.

Financial arrangements with parties outside the government

Financial arrangements with third parties have been divided into two categories. The first category examines transfer payments and the second category addresses the other types of arrangements.

Transfer payment arrangements

Transfer payments are transfers of money from the federal government to individuals, organizations or other levels of government, to further government policy or program delivery. The federal government does not:

  • directly receive any goods or services, as in a purchase or sale transaction;
  • expect to be repaid in the future, as with a loan; or
  • expect a financial return, as in an investment made by the private sector.[1]

This category also includes repayable contributions that are repayable only if certain conditions are met and contributions that are repayable according to a fixed schedule, but without interest.

Types of transfer payments

Types of government transfers include contributions, repayable contributions, Flexible Transfer Payments (FTPs), Alternative Funding Arrangements (AFAs),[2] grants and Other Transfer Payments (OTPs). When transfer payments are issued, the government does not receive goods or services and it does not expect to be repaid, except if certain conditions are met for repayable contributions or if there is a fixed schedule of repayments without interest. For operating and capital expenditures the government must pay 100 per cent, fair market value, to obtain goods and services. With transfer payments, the government normally provides less than 100-per-cent financial assistance to recipients. Funding to a recipient is generally structured to promote some degree of self-reliance.

Government transfers to recipients are seen as contributions to a public good thus furthering government objectives. Departments and agencies must ensure that recipients manage government transfers in a way that supports defined program objectives and respects responsible financial management practices.

The various arrangements discussed in this chapter are presented along a continuum to demonstrate the range of flexibility which exists in this category. Arrangements that require little monitoring and have low administrative costs are at the high end of the scale. Arrangements exhibiting high flexibility generally require the recipient to meet minimal conditions or eligibility criteria. Financial arrangements at the low end of the scale require detailed terms and conditions and close monitoring of actual expenditures.

Figure 2: Range of flexibility chart
Text version: Figure 2: Range of flexibility chart

Other Transfer Payment

An Other Transfer Payment is a transfer payment based on legislation or an arrangement that normally includes a formula or schedule as one element used to determine the expenditure amount. However, once a payment is made, the recipient may redistribute the funds among several categories of expenditure in the arrangement. Examples of OTPs are transfers to other levels of government such as Established Program Financing and transfers to the territorial governments.

Grant

A grant or a class of grants is an unconditional transfer payment where the government chooses to further policy or program delivery by issuing payments to individuals or organizations. Eligibility criteria and applications received in advance of payment provide sufficient assurance that the objectives of payment will be met, therefore specific conditional agreements with the recipient are not required (e.g. containing audit clauses or requiring financial claim documentation). The government must list a grant or a class of grants in the Estimates but may withhold the grant(s) if eligibility criteria are not met.

Contribution

Unlike OTPs and grants, a contribution is a conditional transfer made when there is or may be a need to ensure that payments have been used in accordance with legislative or program requirements. More specifically, contributions are based on reimbursing a recipient for specific expenditures according to the terms and conditions set out in the contribution agreement and signed by the respective parties. Terms and conditions include key elements such as identification of recipient(s), explanation of how the proposed contribution furthers program objectives, maximum amount payable, basis and timing of payment, who has authority to approve, sign and make payment, audit arrangements, and evaluation criteria to assess the effectiveness of the contribution program relative to its objectives.

A repayable contribution is a unique type of contribution. Repayable contributions are contributions all or part of which are repayable if terms and conditions requiring repayment are met or if a fixed schedule of repayments without interest is attached. All contributions to business are repayable subject to certain exemptions. The exemptions as well as the repayment provisions are outlined in the Repayable Contributions Policy.

Repayable contributions are based on three underlying principles. First, repayable contributions are expenses. Second, if a business receives a direct benefit from the government that allows it to earn profits or increase the value of the business, it should return the investment to the government. Third, when the government provides direct financial support to high-risk business ventures, the government should share in the benefits proportional to its share of the risks.

Alternative Funding Arrangements and Flexible Transfer Payments

Alternative Funding Arrangements (AFAs) and Flexible Transfer Payments (FTPs) possess characteristics similar to OTPs and contributions. AFAs and FTPs are like OTPs in that they are based on a formula or fixed costs and as such, the question of unexpended funds does not arise. The exception is that funds provided for capital purposes must be spent as such, including funds not spent at the end of the term of the agreement. Furthermore, AFAs, like OTPs, allow for program redesign to meet the recipient's needs. That is, once payment is made the recipient may redistribute the funds among several categories of expenditure in the arrangement. FTPs, on the other hand, do not allow for program modification.

AFAs and FTPs are like contributions in that there is a written agreement setting out the obligations of both parties including provision for audit. AFA agreements are based on negotiations between the parties and contain minimum program requirements which are stated more generally than FTP program terms and conditions. Another feature of the AFA is that agreements are funded on a multi-year basis and any unexpended balance at the end of each fiscal year, as well as at the end of the agreement, is not a debt due to the Crown. Although AFAs are negotiated on a multi-year basis, funding is subject to approval by Parliament on an annual basis.

FTPs are conditional transfer payments for a specified purpose for which unexpended balances may be retained by the recipient, provided that the program terms and conditions have been fulfilled. Any deficit is the responsibility of the recipient. Through performance reports, and through audited statements where it may be considered necessary, the recipient must demonstrate that the results have been achieved as specified in the funding arrangement. FTPs emphasize the program results, not the reimbursement of actual expenditures.

Use of transfer payment arrangements

Government transfer payment arrangements are appropriate when one or more of the following conditions are met:

  1. the departmental mandate allows for the proposed program or activity and the appropriate authorities are in place to support program objectives (i.e. grant or contribution authorities);
  2. the government determines that it would benefit the public in general and government objectives would be furthered by providing financial assistance. Normally the government provides less than 100 per cent to support the activities or projects which benefit third parties;
  3. the government decides that an outside party (i.e. recipients of financial assistance - non-profit, volunteer or non-governmental organization) is better equipped than the government to assist in the delivery of a specific service or to handle a particular task;
  4. the government would not receive goods or services as a result of proposed expenditures;
  5. specific Acts of Parliament, program legislation, or other government policies and regulations require the delivery of programs;
  6. the government supports business assistance programs to promote economic development rather than subsidies to the private sector;
  7. it is the most effective and efficient means of supporting specific program objectives;
  8. systems and procedures are in place to properly account for the use of resources (i.e. performance evaluation links dollars spent to program results and evaluation criteria support the program approval) and disclose meaningful information to Parliament; or
  9. reasonable assurance can be given that the proposed transfer would not result in duplicate financing or "stacking" (i.e. financing of similar activities by more than one federal government department, other level of government sources, or other sources external to the government).

If one or more of the above criteria apply, one of the financial arrangements discussed in Table 1 or 2 may be suitable to achieve results in relation to specific program objectives.

Attributes of government transfer payment arrangements

The following section presents a list of attributes associated with government transfer payment arrangements. The matrix is divided into two sections. Table 1 examines grants, contributions and repayable contributions and Table 2 examines AFAs, FTPs and OTPs. By identifying those attributes which are applicable to your circumstances, keeping in mind your mandate, program objectives and clientele, you should be able to zero in on a suitable delivery arrangement from several identified options. The matrix describes how an attribute relates to a specific financial arrangement. If you require further information on government transfers, please see the Appendix for a list of references.

Transfer payment arrangements - Table 1

Key attributes

X

Grants

Contributions

Repayable contributions

Parliament restricts payment amount, recipient or class of recipient and sometimes the purpose of the payment. The payment cannot be increased or redirected to other recipients.

 

YES - Because of legislative character, grants cannot be increased or redirected without the authority of Parliament. If eligibility criteria are not met, a grant may be withheld.

NO - Within the purpose, dollar limits and restrictions prescribed by Parliament in the vote wording, Treasury Board can authorize new contributions and changes in amount paid without further parliamentary approval.

NO - Same as contributions.

Payment is unconditional and not subject to being accounted for or audited.

 

YES - Payments must simply meet eligibility criteria.

NO - Audit required and conditions for payment required to ensure funds have been used in accordance with legislative or program requirements.

NO - Requires an audit and conditions laying out repayment.

Specified eligibility criteria and applications received in advance of payment are sufficient to assure that the objectives of the payment are met.

 

YES

NO - Terms and conditions laying out the obligations of the respective parties to the agreement are required.

NO - Terms and conditions laying out the obligations of the respective parties as well as the condition or trigger for repayment are required.

Written agreement between recipient and the donor is required identifying the terms and conditions governing the payment.

 

NO - Generally an application from the recipient is sufficient. Where there is a class of recipients, terms and conditions are required to determine eligibility.

YES - Terms and conditions required for all contributions.

YES - Terms and conditions required for all repayable contributions.

Level of risk associated with payment will determine the level of control. A number of conditions should be included in the agreement.

 

NO - Payments are unconditional. Grants may have eligibility or entitlement criteria and may be restricted to specified purposes or objectives. However, no control may be exercised over the types of expenditures for which the grant is used.

YES - The greater the need for control over funds, the more detailed the terms and conditions.

YES - Terms and conditions lay out specific guidelines for repayment terms. There is some flexibility to negotiate specific terms of repayment.

Payment is a reimbursement of prescribed costs (i.e. expenditures incurred and normally paid).

 

NO - Payment is unconditional.

YES - Only eligible expenditures agreed to are reimbursed.

YES - Same as contributions.

Written terms and conditions required for audit of eligibility and performance.

 

NO - Payment not dependent upon performance.

YES - Terms and conditions required to ensure payments used for intended purposes.

YES - Same as contributions.

Treatment of unexpended balance a potential issue.

 

NO - Since payment is not dependent on performance, there is no potential unexpended balance.

YES - Overpayments, unexpended balances and disallowed expenditures must be repaid.

YES - Overpayments and payments to a disqualified recipient must be repaid immediately.

Objective is to invest in economic development by contributing financial assistance to a business enterprise.

 

NO - Generally, the objective is to further government policy or program delivery by issuing payment to certain individuals and organizations where eligibility criteria provide sufficient assurance that the objectives of the payment will be met.

NO - Objective is to further government policy or program delivery by issuing payment to certain individuals, companies, limited partnerships, and not-for-profit organizations.

YES - Objective is to orient government business assistance to economic development investment programs. All contributions to business are repayable, except for those specifically exempted.

Financial assistance to a business enterprise will result in earned profits and an increase in the value of its assets in the pursuit of profits. Direct causal linkage must exist.

 

NO

NO - Except if there is a purchase of capital assets that will increase the value of assets.

YES - If there is a direct link between profits earned and increased value of the business as a result of the payment, the investment should be returned to the government. There are some exemptions.

Recovery of all or part of funds is necessary according to specified conditions.

 

NO - Payment is unconditional.

NO - Except if there has been an overpayment or breach of the terms and conditions of a contribution or ineligible expenditures.

(Treasury Board's Guide on Financial Administration for Departments and Agencies of the Government of Canada, Chapter 9.4.6)

YES - Payments to business must be repaid according to the Repayable Contributions Policy. A copy may be obtained from a Treasury Board analyst.

Transfer payment arrangements - Table 2

Key attributes

X

AFAs

FTPs

OTPs

Entitlement to payment is based on formula.

 

YES - Formula is negotiated.

NO - Entitlement is based on program's results and not on formula.

YES - Formula-based, where the applicant must meet pre-established conditions or specified eligibility criteria. Payment is subject to continuing eligibility.

Written agreement between recipient and the donor identifying the terms and conditions governing the payment is required.

 

YES - Funds may be reallocated between program areas and programs may be redesigned providing the recipient meets minimum program requirements.

YES - Conditional transfer payment requiring the recipient to account through performance reports that the agreed results have been achieved (i.e. minimum terms and conditions). Focus is on program results, not on accounting for actual expenditures.

NO - Only where there is a class of recipients are terms and conditions required to determine eligibility.

Degree of flexibility built into an arrangement is a function of the level of potential risk associated with the third party's ability to deliver government's objective.

 

YES - More flexible than FTPs but not as flexible as OTPs. Under AFAs, the recipient is the "program manager" with decision-making authority, responsibility and accountability. Appropriate when the level of risk is judged to be low.

YES - More flexible than contribution arrangements but not as flexible as AFAs or OTPs. Programs may not be redesigned. Appropriate when the level of risk is judged to be medium.

YES - Most flexible of all. Entitlement to receive payment is regulated by legislation, regulations or arrangements. Providing eligibility criteria are met, there is no restriction on how the recipient reallocates the funds once the payment is made. Eligibility criteria provide sufficient assurance that objectives of the payment will be met.

Recipient of funds may redesign programs and reallocate funds.

 

YES - Objective is to allow the recipient to manage, not just administer, by providing authority to redesign programs in accordance with their community priorities.

NO - Specific program criteria identify the specific program objective.

YES - Once payment is made, recipient may reallocate the funds.

Transfer of funds is conditional. The recipient must provide an accounting on how the funds were used.

 

YES - Emphasis is on designing programs in accordance with community priorities keeping in mind minimum program requirements. Annual management report as well as audited financial statements are required.

YES - Emphasis is on specific outputs for a fixed amount of dollars. The recipient must account through performance reports that the results have been achieved.

NO - Emphasis is on meeting pre-established conditions (where there is a class of recipients) or eligibility criteria. Payment is based on continuing eligibility. No additional control may be exercised over the types of expenditures for which payment is used.

Agreement with recipient is multi-year. Funding, however, is provided on availability of annual appropriations.

 

YES - Possible to have agreements up to five years, subject to annual appropriation availability.

NO - Funding is for a single year.

YES - Payments may be under statutory authorities with funding disclosed annually by Parliament.

Surplus funds can be spent at the discretion of the recipient.

 

YES - Formula-based. Recipient can redesign programs and reallocate funds between programs based on their priorities. Surpluses can be retained. The only restriction is that capital surplus must be spent for capital purposes.

YES - Emphasis is on program results (i.e. meeting specific performance targets) not accounting for actual expenditures. Any surplus or deficit is the responsibility of the recipient.

N/A - Formula-based. Issue of surplus funds does not arise.

Audited financial statements a requirement.

 

YES - An annual audit is required.

YES - Provision for audit must be part of the agreement although it might not always be requested.

NO - Not subject to audit. However, verification of eligibility may be undertaken after payment has been made.

Other arrangements

Departments and agencies may decide to support or become involved in large private sector undertakings. The federal input or support may take the form of loan financing arrangements, loan guarantees, and loan insurance. While these private sector initiatives fall within departmental objectives, departments may not be directly involved in the procurement of goods and services or in the operation of the facility or organization that is being supported.

The types of arrangements mentioned above may involve other levels of government, other departments or the private sector in the delivery of government services. For example, Canada Mortgage and Housing Corporation provides insurance for loans made by financial institutions to Indian bands. In all circumstances, a written agreement specifies the respective roles and responsibilities for each party.

Types of other arrangements

We begin this section with a brief description of different types of arrangements such as cost-sharing arrangements, joint projects, joint ventures and megaprojects.

Cost-sharing arrangements are defined as arrangements whereby the parties involved agree to share specified costs. The federal government will provide financing for a specific outcome without participating in any other way (e.g. Canadian Business Centres).

Joint project agreements, on the other hand, are arrangements whereby the parties involved agree to participate jointly in carrying out a project. The federal government would share financing of specified outcomes and participate in other ways such as sharing resources, purchasing goods or services, and hiring personnel.

Although similar to joint projects, joint ventures differ in that they are arrangements whereby, in addition to sharing the control and contribution of the resources, participants also share the profits or losses. In such a case, all parties are liable for all obligations incurred in carrying out the joint venture. Legislation must authorize joint ventures in government.

In this document, a megaproject describes projects such as the Hibernia energy project. "Mega" refers to the magnitude of the project. These types of projects are important in scope (e.g. large dollar value, implication of various sectors, high risk factor). These projects fall under the Treasury Board policy entitled Management of Government Interests in Private Sector Initiatives. This policy applies to all departmental involvement in private sector or other outside initiatives that are unique, important and not undertaken within the context of an ongoing program. The objective of the policy is to ensure that the interests of the federal government are managed within a framework approved by the sponsoring minister and, where required, by the Treasury Board. A management framework must be in place before any binding commitments with financial implications are entered into on behalf of the federal government. Accordingly, these types of initiatives are to be managed:

  • in relation to clearly articulated objectives;
  • under a well-defined accountability framework for achieving objectives;
  • in a manner sensitive to risk complexity and economical use of resources; and
  • under explicit performance monitoring and evaluation requirements.[3]

These types of initiatives and the specific management framework accompanying them should not be confused with major Crown projects (MCPs). In the case of MCPs the federal government has direct management responsibility and ownership.

Other policy frameworks, such as Treasury Board contracting authorities and the policy on grants and contributions, are used to manage and deliver other types of arrangements. Legislative authorities, the FAA and departmental authorities apply to loans, loan guarantees and loan insurance. Since we discuss grants and contributions in other sections of this guide, this section focuses on loans, loan guarantees and loan insurance.

Loans represent financial claims by the government resulting from payments out of the Consolidated Revenue Fund (CRF) which are unconditionally repayable, normally with interest, according to a predetermined repayment schedule, and usually long-term. A loan is an asset and a repayable contribution is an expenditure.

A loan guarantee is a guarantee provided by the government to a lender, a bank, a credit union or others providing credit or funding to a borrower. If the borrower defaults, the government assumes the responsibility for the loan subject to the terms and conditions of an agreement. The government may seize the assets from the borrower and sell them to effect recovery if its claim for securities was registered. Seizing and selling the assets requires special legislation. Government is responsible for the administration costs relating to seizure and sale of assets it holds as securities. Because the government guarantee reduces the lender's risk, the borrower is generally able to obtain funds at a lower interest rate or negotiate a loan that might not otherwise be obtainable.

When government administers a loan insurance program (e.g. Canada Mortgage and Housing Corporation programs), premiums are collected and deposited to the CRF (e.g. two per cent of the amount of the loan equals a premium). When the loan is in default and a payment must be made to a lender, the payment in satisfaction of the claim is issued out of a statutory vote. In the case of loan insurance, the lender must liquidate the assets and only where the net proceeds do not cover the loss may it claim the balance from government.

Use of other arrangements

One of the other arrangements may be appropriate when one or more of the following conditions are met:

  1. the departmental mandate allows for these types of activities and the appropriate program and statutory authorities are in place to support these activities;
  2. federal support for a project is essential for it to proceed and would generate major economic benefits and opportunities for the public good (i.e. longer-term industrial and regional development);
  3. the size and complexity of the project is such that neither the public nor the private sector has the resources or the expertise to undertake the project alone;
  4. the project, although economically viable, is high cost, capital intensive and return on investment may be minimal and realized only over the long term;
  5. the private sector, including the banking community, is willing to share an acceptable percentage of the risk;
  6. a sound financial business plan and economic analysis clearly demonstrate that the project's expected cash flow will cover repayment of the debt, interest and operating costs, and yield a satisfactory rate of return;
  7. the government's interests are preserved and the approved project objectives are met if high risk, visible projects are managed within a special regime;
  8. when entering into ongoing business dealings with other jurisdictions or the private sector that involve significant degrees of risk (e.g. joint ventures or private sector undertakings within or in conjunction with a federally owned facility) and when the private sector equity sponsors are supplying a substantial portion of the funds required from their own resources;
  9. significant acquisitions of financial assets are made to further a government program objective (e.g. taking an equity position in an otherwise privately owned company to foster the exploitation of a natural resource);
  10. it is the most effective and efficient means of supporting the specific program objectives identified; and
  11. the appropriate systems and processes are in place to ensure accountability for the specific results against stated objectives (i.e. performance measurement and evaluation where the criteria for evaluation are clearly defined).

Attributes of other arrangements

You can use most financial arrangements discussed in this guide to deliver "other"-type agreements. However, since we covered grants, contributions and repayable contributions in the previous chapter, we will not reiterate them here. The matrix in this section deals only with loans and loan guarantees. The loan insurance arrangement has been left out of this matrix as it is similar to the loan guarantees except for the conditions under which the securities are liquidated.

Other arrangements - Table 3

Key attributes

X

Loans

Loan guarantees

The transaction will result in an immediate cash outflow.

 

YES - The transaction results in a cash outflow.

NO - This transaction represents a potential liability and cash outflow for the government.

The transaction will result in a financial claim by the government against an outside third party.

 

YES - The loan is repayable generally with interest according to a predetermined schedule.

NO - A payment will be made to the lender only in the case of a default by the borrower and a claim by the lender. This will result in the government's setting up a claim to the borrower.

Private sector lenders are willing to share in the risk.

 

NO - Risk is generally the responsibility of the government as it is the lender.

YES - Objective is to ensure lenders bear some of the loss associated with default. The government's negotiated agreement should call for lenders to bear at least 15 per cent of the net loss.

The proposed transaction is unconditionally repayable according to an agreed to payment schedule.

 

YES - A loan is always considered recoverable. Generally, loan repayments should carry market rates of interest.

NO - The government, as the guarantor of the loan, has an obligation to pay the lenders only in cases of default. Terms and conditions of the loan guarantee agreement apply.

The transaction will result in a government payment to a lender in the event of default by the borrower of a loan guaranteed by government.

 

NO - The loan is made directly to a recipient who is judged to be reasonably self-sufficient and where certainty of repayment is high.

YES - The federal government gives assurance to private lenders that it will assume responsibility for the loan in the event of default. Terms and conditions of the loan guarantee agreement apply.

To allow for potential defaults, a fixed charge to the departmental budget is set at 25 per cent, or other appropriate rate depending on the risk assessment.

 

YES - Risk assessment is made to determine the percentage.

YES - A non-refundable sum equal to 25 per cent of the amount guaranteed is charged to the department for all ad hoc loan guarantees.

The objective is to confer a benefit to a recipient.

 

NO - Partly. A benefit is conferred to the recipient but the loan is expected to be repaid in full, including interest.

YES - Under a loan guarantee, the recipient benefits from a lower interest rate because the government acts as guarantor in case of default and thus reduces the lender's risk.

Specific parliamentary authority required.

 

YES - Loans can only be made under authority of departmental legislation or under the authority of a loan vote.

YES - Parliamentary authority is required to guarantee a loan, generally obtained through separate program legislation. According to section 29.(2) of the FAA, specific loan guarantees may be authorized through an Appropriation Act when such guarantees can be listed in the Estimates.

Sponsoring ministers must seek, with the concurrence of the Minister of Finance, a Cabinet mandate to negotiate any loan or loan guarantee prior to making any commitments.

 

YES - Prior concurrence must be obtained before entering into negotiations.

YES - Same as loan.

Detailed terms and conditions have been approved by the Minister of Finance.

 

YES - Mandatory

YES - Mandatory.

Transaction has an impact on the government's financial position (i.e. surplus or deficit).

 

MAYBE - Through an annual evaluation of the loans and anticipated losses on these, the surplus or deficit will be affected

MAYBE - Through an annual evaluation of the loan guarantees and anticipated default losses on these, the surplus or deficit will be affected.

If your mandate and business activities lead you to this category, the following list of attributes will help you to differentiate between loans and loan guarantees. The objective is to identify those attributes that best suit your program objectives. To find out more details on these types of arrangements, please see the Appendix for a list of references. It is essential to involve your Treasury Board analyst as early as possible in the discussion of any proposed financial arrangement.

Funding Options

This section of the guide reviews the different funding options available to support program delivery alternatives. These funding options include traditional appropriations, special spending authorities (e.g. revolving funds and net voting), and specified purpose accounts.

The first part of this section includes a discussion of traditional appropriations with special emphasis on operating budgets, major capital and separately controlled budgets; and reviews administrative arrangements such as other government departments' (OGDs) suspense accounts, carry forwards, frozen allotments, the disposal of surplus Crown assets and bartering (i.e. exchange of non-monetary assets). The second part establishes the main characteristics of revolving funds and of net voting types of authority. The third part briefly explains when it is appropriate to receive and deposit money in a specified purpose account and then pay it out of the Consolidated Revenue Fund.

Traditional appropriations

Traditional appropriations are the most common funding mechanism used to support program delivery. Traditional appropriations may be used when the service is being delivered by the government itself, through financial arrangements to third parties or in partnership agreements (e.g. transfer payments). All departments and agencies receive either complete or partial funding through appropriations.

Traditional appropriations are used for activities that have large fixed costs or fixed and variable costs with predictable demand. Appropriation Acts reflect the principle that Parliament provides funding for specific purposes; therefore, these funds cannot be used for any other purpose nor can they be transferred between votes without parliamentary approval.

Budgetary framework

Operating and Capital Budgets

Operating and capital budgets consist of personnel, other operating and maintenance (O&M) and capital resources. These types of resources are required when the federal government directly delivers programs (e.g. the Coast Guard, the federal court system, the operation of health facilities for Aboriginal people and veterans). Operating and capital expenditures normally support non-discretionary activities such as public policy-making, other activities that are viewed as a "pure" public good (e.g. national defence), and discretionary government management activities required to support program objectives (e.g. corporate activities such as finance, personnel, administration and informatics).

The key difference between operating and capital and government transfers lies in the type or nature of the expenditure being incurred. Operating and capital expenditures generally involve the acquisition of goods or services at fair market value for use in government programs. The government must pay 100 per cent of their value to obtain the goods or services. More specifically, "operating expenditures" (i.e. operating and maintenance and salaries) is a category of expenditure identifying mainly the activities of government for which the benefits are short-term or immediate. "Major capital" means durable, tangible or intangible assets that have a useful or economic life of more than one year.

With government transfers, the government financially supports the activities of outside organizations. The government directly benefits from the results of the expenditures. These transfers have no profit motive.

Operating budgets are designed to provide managers with more flexibility to achieve intended results by creating one budget which includes salaries and wages, other operating expenditures and minor capital. The flexibility arises by allowing managers to determine the best mix of inputs (e.g. salaries, O&M and minor capital). A 20-per-cent transfer price recognizes and compensates the additional personnel costs (i.e. employee benefits) that result from the transfer of a non-salary allocation to a salary allocation. The transfer of a salary allocation to a non-salary allocation results in a 20-per-cent premium.

"Separately controlled" refers to specific components of operating resources that are excluded from the operating budget framework because of their non-discretionary nature, volatility, and exceptional size (e.g. a quasi-statutory program such as non-insured health services).

Finally, "controlled capital" refers to expenditures that are for major program infrastructure that provides benefits for many years. Departmental capital budgets equal to or greater than $5 million require the use of a separate parliamentary capital vote.

Use of budgetary framework components

Operating and capital resources are generally appropriate when one or more of the following conditions are met:

  1. the departmental mandate allows for the proposed activities and those activities support established program objectives;
  2. the program is of a mandatory nature (i.e. provides a "pure" public good such as national defence) and is delivered directly by the federal government. These programs may consist of non-discretionary (e.g. policy-making) or discretionary activities;
  3. the proposed expenditures will result in the department or agency being the direct recipient of goods or services required to support established program objectives;
  4. work is performed in-house because it is the most cost-effective means of program delivery (i.e. the knowledge, expertise, resources or facilities required are already available);
  5. work is contracted out to an agent of the Crown because it is the more cost-effective means of program delivery (i.e. the knowledge, expertise or facilities are not available in-house);
  6. the purpose of the expenditures is to support corporate services such as personnel, finance, informatics, administration and communication; and
  7. the objective is to acquire major capital assets such as lands, buildings and engineering structures and works as well as minor capital assets required to support established program objectives (e.g. office furniture, computers).
Attributes of budgetary framework components

The following section presents a list of attributes associated with operating and capital resources. Not all of the statements listed in this section will be applicable to your circumstances. The matrix briefly describes how the different attributes apply to the specific budgetary components. Additional information on operating and capital resources can be found in the Appendix.

Operating and capital budgetary components - Table 4

Key attributes

X

Operating budget

Separately controlled

Controlled capital

Objective is to acquire goods and services in support of program objectives.

 

YES - Goods and services are obtained for fair market value for immediate consumption. The government must pay 100 per cent. This will include a profit element.

YES - Same as operating budget.

YES - Objective is to acquire durable tangible or intangible assets that preserve over the long term the infrastructure of the government. The government must pay 100 per cent. This will include a profit element.

Objective is to attain the most efficient mix of inputs (e.g. salaries, other operating and minor capital) to achieve planned results.

 

YES - Rationale behind operating budgets is to gain efficiencies by allowing managers to determine the best mix of inputs (e.g. salaries, O&M, minor capital).

NO - Objective of using separately controlled allotment is to protect funds which are material and non-discretionary in nature. For this reason, unauthorized reallocations to accommodate changing priorities would not be appropriate.

NO - Major capital investment is managed separately so as to preserve government infrastructure. The segregation of controlled capital reflects a deliberate decision to limit the reallocation of capital dollars to other purposes.

Purpose of minor capital expenditures is to obtain furnishings, machinery and equipment that are generally low in value, required to carry out day-to-day operations but do not need to be controlled separately.

 

YES - Except for those departments where minor capital resides in a capital vote. In such cases, these acquisitions are to be charged to the separate notional sub-allotment for minor capital.

NO - Separately controlled resources should not be reallocated to the operating budget for minor capital acquisitions. These resources must be used for their intended purpose.

NO - Generally, controlled capital is devoted to the acquisition of major program infrastructure. Minor capital should be identified in a separate notional sub-allotment when major and minor capital are in the same vote.

Resources can be reallocated on an ongoing basis.

 

YES - Components of the operating budget can be reallocated to other components within the operating budget to achieve program objectives.

NO - Resources have been earmarked for specific purposes and are not interchangeable. This is outside of the operating budget. Treasury Board approval is required for changes.

NO - Resources have been earmarked for infrastructure purposes and are not interchangeable. This is outside of the operating budget. Parliamentary approval is required to change the purpose.

Transfers between the components of an operating budget are subject to a transfer price (i.e. premium or cost). This is to recognize and compensate for personnel costs that are not allocated within a manager's budget (i.e. employee benefits, such as those set out in the Public Service Superannuation Act).

 

YES - Managers are responsible for determining the best mix of inputs. To purchase salary dollars a premium of 20 per cent will be added.

NO - Transfer price is not applicable because separately controlled budgets are outside the operating budget regime (i.e. funds not interchangeable).

NO - Transfer price is not applicable because controlled capital budgets are outside the operating budget regime (i.e. funds not interchangeable).

Objective is to invest in program infrastructure by acquiring lands, buildings, engineering structures and works to support program objectives.

 

NO - Operating budget funds can be used to acquire minor capital assets only where authority exists to do so (i.e. no separate capital vote exists).

NO - These funds are non-discretionary and cannot be used for other purposes.

YES - If investment in capital infrastructure leads to achievement of program objectives. Funds for infrastructure are generally held in a separately controlled capital vote.

Major alterations, modifications or renovations to capital assets are required to support program objectives. Changes must be beyond the limits established for the department and extend the useful life or change the performance or capability of the above-mentioned assets.

 

NO - Operating budget funds can be used to acquire minor capital assets only where authority exists to do so (i.e. no separate capital vote exists).

NO - Funds are earmarked for specific purposes. Treasury Board approval is required to use these funds.

YES - Providing expenditure activities fall within the approved mandate of the department and agency.

Activities are of a non-discretionary nature, volatile or exceptional in size and variability in expenditure profile, requiring special treatment (e.g. quasi-statutory programs).

 

NO - Resources included as part of the operating budget are generally discretionary and managers have the flexibility to determine the best mix of inputs.

YES - Resources are earmarked separately because of their non-discretionary nature.

YES - Infrastructure resources are non-discretionary and are to be used for their intended purposes.

Administrative arrangements

Administrative arrangements are available to facilitate the handling of miscellaneous transactions within the Government of Canada. We include this section to inform departments, agencies and others of the different ways to handle unique situations. The more common administrative arrangements included here are: other government departments' suspense accounts, disposal of surplus Crown assets, carry forwards, frozen allotments and non-monetary transactions (i.e. bartering).

Types of administrative arrangements

Other government departments' (OGDs) suspense accounts

An OGD suspense account is maintained by the administering department as well as by the home department. The home department uses the account to account for advances it provided to the administering department. The administering department will undertake expenditures, and will then account for the advance to the home department. The home department will report the charges to its appropriation vote. Section 3 of every Appropriation Act requires that amounts to be paid or applied be in accordance with the terms and conditions of the vote. The administering department must bring the balance of its OGD suspense account to zero at year end.

Disposal of surplus Crown assets

The implementation of amendments to the Surplus Crown Assets Act approved by Treasury Board on February 24, 1993 revised the treatment of surplus Crown assets. These amendments streamline the process for returning receipts to departments by providing statutory authority for departments to spend an amount equal to the proceeds from the sale of surplus Crown assets subject to the terms and conditions approved by Treasury Board. Amounts obtained from the sale may be applied towards disposal expenses, operating and capital expenditures only and may not be used for transfer payments. The objective of the process is to allow departments, using traditional appropriations and revenue spending authorities, to receive additional funds to replace their assets.

Carry forwards

Carry forward policies allow departments to carry forward funds to the following fiscal year. The most common carry forwards are the capital carry forward and the operating budget carry forward. The capital carry forward is generally based on five per cent of the Main Estimates capital budget (i.e. major capital) to a maximum of $75 million. The operating budget carry forward is five per cent of the Main Estimates operating budget. This sets the upper limit amount. The computation starts with the actual lapse that appears in the Public Accounts adjusted to exclude items such as lapses directed by the Treasury Board and lapses associated with the transfer price.

Frozen allotment

An allotment is a division of an appropriation. Treasury Board has the authority, under the Financial Administration Act, to divide appropriations into categories for control purposes. Funds in a frozen allotment are not available for expenditures and must lapse unless otherwise directed by Treasury Board. Frozen allotments can be used in a variety of situations. For example, transfers from O&M to salaries requires the creation of this type of allotment within a department to capture the 20 per cent required to cover employee benefits. Other examples:

  • the Treasury Board may include resources in the Estimates for a specific purpose, subject to the fulfilment of stated conditions. Until the conditions are satisfied, funds are allocated to a separate frozen allotment; and
  • the Treasury Board may transfer specific program funds to a frozen allotment as a result of specified expenditure reductions or in order to provide funding for a special purpose in another program, including Supplementary Estimates authority for another organization.
Non-monetary transactions (bartering)

Bartering or non-monetary transactions are exchanges of non-monetary assets, liabilities or services for other non-monetary assets, liabilities or services. A non-monetary transaction can also occur as part of a larger transaction containing both monetary and non-monetary considerations.

Bartering can be a viable way of obtaining goods and services. The key points to consider when contemplating a non-monetary transaction include:

  • assurance that the transaction is economically justifiable. The government as a whole should never be worse off as a result of choosing a non-monetary transaction over its monetary equivalent;
  • assurance that you have the required authority. The authority required for a non-monetary transaction is the same as would be required for a monetary transaction of similar value and risk; and
  • assurance that you are adhering to other government policies. For example, the disposal policy governs the sale of surplus Crown assets.

The Policy on Accounting for Non-Monetary Transactions requires that departments record the fair value of a transaction, that is the value of the non-monetary assets, liabilities or services being exchanged, as if it were a monetary transaction, if it exceeds a threshold of $100,000. This means that the value received from a non-monetary transaction is generally recorded as an expenditure against the appropriation and the value given up is credited to the CRF as non-tax revenue (i.e. cannot be spent by the department). Departments, therefore, must ensure that there is a sufficient amount of appropriation against which such a transaction can be charged.

Use of administrative arrangements

Administrative arrangements are generally used when the following conditions or circumstances exist:

  1. departmental mandate allows for the proposed activities and those activities support the established objectives of the program;
  2. Treasury Board requires that departments or agencies set aside (i.e. freeze) a fixed amount of their budget to meet specified obligations;
  3. one department is administering another department's program;
  4. departments or agencies wish to obtain from the Treasury Board Secretariat approvals for carry forward of funds;
  5. departments and agencies decide to sell surplus Crown assets; and
  6. it is the most effective and efficient way of supporting program objectives.
Attributes of administrative arrangements

The following matrix is divided into two sections and examines the key differences among the different administrative arrangements with the exception of non-monetary assets. Table 5 examines other government departments (OGDs) and surplus Crown assets while Table 6 reviews carry forwards and frozen allotments. If additional information is required, please see the Appendix.

Administrative arrangements - Table 5

Key attributes

X

Other government departments' suspense account

Surplus Crown assets

Purpose of the account is to administer funds that fall under the mandate of another government department.

 

YES - An OGD suspense account must be used if you are delivering another department's program. The department administering the program has been transferred funds up to the agreed amount.

NO - The purpose of a surplus Crown asset account is to provide departments statutory authority to spend an amount equivalent to the proceeds from the sale of surplus Crown assets.

Proposed activity falls outside your department or agency's mandate and therefore, expenditures cannot be charged against your departmental vote.

 

YES - The department with the mandate will be charged the expenditures through the suspense account.

NO - Operating and capital expenditures are charged to an account set up for departments by Public Works and Government Services Canada.

The administering department must bring the suspense account to zero at year-end. The unexpended balance will be returned to the home department.

 

YES - The administering department must advise the home department (i.e. department with the mandate for the program) of unexpended funds as soon as possible so that appropriate action can be taken to decommit the funds and reallocate them to other priorities.

NO - In principle, departments should use their spending authority in the fiscal year in which the revenues were generated. If there is an unused portion of these revenues, it may be carried forward and used in the subsequent fiscal year only subject to the terms and conditions laid out by the Treasury Board Secretariat.

Funds in the account create a financial obligation or liability for the government.

 

NO - Funds received in an OGD account create an obligation on the administering department to fulfil its part of the agreement.

NO - No financial liability is created. Funds from disposal are treated as non-tax revenue and deposited in an account called Proceeds from Disposal. Expenditures are recorded against a non-lapsing authority budgetary account.

 

Administrative arrangements - Table 6

Key attributes

X

Carry forward

Frozen allotment

Departments and agencies are authorized to carry forward to the following year eligible lapsing funds from the operating budget.

 

YES - To promote efficient use of resources departments have authority to carry forward up to five per cent of unspent operating budget funds. This encourages managers to purchase goods and services "just in time," that is, when they are needed.

N/A

Capital and contribution resources relating to specific projects that remain unspent at year end for reasons that are beyond the control of managers can also be carried forward.

 

YES - Subject to criteria laid out by Treasury Board, departments may request Treasury Board authority to carry forward capital or contribution funds.

YES - Subject to criteria laid out by Treasury Board, departments may request Treasury Board authority to carry forward capital or contribution funds.

Treasury Board directs that resources be set aside in the current year for use by another government department or agency, to meet budget reductions of government, or other centrally driven direction.

 

N/A

YES - Funds must be set aside in a departmental frozen allotment. These funds will allow the distribution of supplementary funds to other departments or government agencies.

Funds are approved in the Main Estimates but cannot be spent until certain conditions are fulfilled.

 

N/A

YES - These funds are set up in a frozen Treasury Board allotment. These will not be released until the specified conditions are satisfied.

In unique situations where non-tax revenue is credited to the Consolidated Revenue Fund and no authority to spend the revenues exists, departments may negotiate special arrangements for Treasury Board to release some earmarked resources.

 

N/A

YES - Under certain circumstances, Treasury Board may agree to set up funds in a frozen allotment and release them when they receive from the department a confirmation in writing that the equivalent amount of non-tax revenue has been deposited to the Consolidated Revenue Fund.

Revenue spending authorities

Revenue spending authorities[4] are appropriate for activities designed to break even and activities that are partially but not completely self-supporting. Revolving funds and net voting fall into this category.

Revenue spending mechanisms are appropriate for activities having a stable mandate, identifiable client groups, and operations financed in whole or in part from user fees or other sources of revenue internal or external to the government. When used appropriately, these types of financial arrangements encourage increased cost effectiveness, optimal resource utilization, responsiveness to clients' needs and good business practices.

Authority to charge fees does not authorize the spending of the resulting revenues. All revenues must be deposited into the Consolidated Revenue Fund. Those departments wishing to spend their revenues must have specific authority from Parliament to do so.

Types of revenue spending authorities

Revolving Funds

A revolving fund is a continuous authorization by Parliament to make payments out of the CRF to sustain operations. Users fund this type of operation almost completely and it is considered self-sufficient, for the most part. Parliament must give authority to establish and operate a revolving fund through a special act of Parliament or an Appropriation Act.

Net Voting

Net voting is an alternative means of funding selected programs or activities wherein Parliament authorizes a department to apply revenues towards costs directly incurred for specific activities and votes the net financial requirements for a fiscal year at a time (i.e. estimated total expenditures minus estimated revenues). Under net voting, users finance only part of the cost of a program while other sources of government revenue finance the remainder. Consequently, a net voting operation is normally only partly self-sufficient.[5] An Appropriation Act, under a special Act or included in a departmental Act, provides net voting authority. The authority for a net voting operation must be approved each year through the vote wording in an Appropriation Act.

Use of revenue spending authorities

You should consider revenue spending mechanisms when the following general criteria apply:

  1. the departmental mandate allows for these activities and the implementation and maintenance of a revenue generating or spending type of arrangement would support the established objectives of the program;
  2. government goods and services are being provided primarily for the benefit of specific user groups (i.e. rights and privileges are excluded because neither a revolving fund nor net voting is appropriate as there is generally no direct relationship between costs and revenues);
  3. charging appropriate user fees is the most equitable approach. It does not undermine competition nor does it impose undue hardship on users relative to other similar groups. External user charges introduce supply and demand discipline on the specific users, generally resulting in more efficient program delivery;
  4. the department or agency has the legal authority to charge and the legal authority to spend the revenues collected;
  5. there is an identifiable user group willing to pay for the services (i.e. there is a market for the goods and services);
  6. a link can be drawn between expenditures incurred to produce goods and services and revenue produced through the sale of these goods and services. This will ensure that revenues are spent on intended activities and that there is no cross-subsidization of other activities;
  7. charging user fees would not compromise regulatory objectives, broader public policy objectives or core functions in a department or agency;
  8. systems and procedures are in place to properly account for and disclose meaningful performance information (i.e. evaluating and measuring results);
  9. the size of the operation is large enough to warrant the investment in this type of operation (i.e. materiality); and
  10. it is the most effective and efficient means of supporting the specific program objectives of the department or agency.

If your business activities meet all or most of these criteria, please read on to determine if your product lines are best suited to a revolving fund or a net voting type of funding mechanism.

Attributes of revenue spending authorities

Table 7 presents a list of key attributes. Review the list of attributes and identify those which are or may be applicable to your circumstances. This process should help you to select the appropriate mechanism to meet your program objectives as articulated in your mandate. The matrix will describe briefly how each attribute relates to the different funding mechanisms in this category. To find out more details on either revolving funds or net voting, please see the Appendix for a list of additional references. Involve your Treasury Board program analyst as early as possible if you are contemplating using a revenue spending type of funding mechanism.

Revenue spending arrangements - Table 7

Key attributes

X

Revolving fund

Net voting

Authority to charge fees is required.

 

YES - Obtained through departmental legislation, program legislation, section 19 of the FAA or ministerial authority to contract.

YES - Same as revolving fund.

Authority to spend revenues is required.

 

YES - Authority established under departmental or program legislation, section 29.1(2)(b) of the FAA, the Revolving Fund Act or through an Appropriation Act. Generally retain all revenues but might have to turn over excessive profits to Consolidated Revenue Fund.

YES - Currently can generally spend up to 125 per cent of estimated revenues; additional revenues go into a frozen allotment that the organization can apply to have released. Revenues are applied against directly related expenditures made in the fiscal year.

Authority to spend revenues is in effect until it is amended or cancelled.

 

YES - It represents a non-lapsing authority.

NO - It represents a lapsing authority.

Large, devolved branch of a host department providing client-oriented services often of a commercial and optional nature.

 

YES - Operation must be sufficiently large to warrant the cost of setting up a revolving fund. Operations must be distinct.

NO - Scale of operation is less important than is the case for revolving funds. Operations must be distinct.

Objective is to fund fluctuating demands from user groups for goods and services where demand is highly variable.

 

YES - Demand for services is extremely variable.

NO - Departments can respond to small and moderate fluctuation in demand.

Goal is self-sufficiency or near self-sufficiency.

 

YES - Completely or almost completely

NO - Partly. Expected to operate within its net voted authority.

Fixed level of activity.

 

NO - Operation is expected to be self-sufficient and break even over time, usually five years.

YES - Normally a well established core of activity funded through appropriations.

Multi-year focus for matching revenue with related expenditures (i.e. flexibility is required to deal with changes in level and timing of receipts, expenditures and to recover the cost of high dollar value capital assets).

 

YES - Because demand for services is extremely variable, expenditures do not necessarily fall in the same fiscal year as revenues.

NO - Amounts expended for operational expenditures should be recorded as budgetary expenditures in the fiscal year in which they occur. Amounts received in respect of a net-voted service are credited to the appropriation in the year of receipt to offset related expenditures for that year. The difference is the net annual amount expended.

Goal is to obtain sufficient revenues in a fiscal year to offset all operating expenditures from directly related activities during that fiscal year.

 

NO - Goal is to cover all expenditures (e.g. operating, capital and investment) and break even within three to five years.

YES - Objective is to match revenues and expenditures in a fiscal year. 

All costs of operation, including overhead and all non-cash items such as depreciation for capital items can be fully recovered from external and internal clients.

 

YES - Generally up to full cost recovery.

YES - Internal and external clients are generally charged full cost or appropriate fee. An internal client is charged the incremental costs only for a one- time comprehensive project.

Charging external users appropriate rates.

 

YES - Usually full cost for goods and services. Generally, rights and privileges are excluded as there is no direct link between costs and revenues.

YES - Same as revolving fund.

Accrual and cost accounting systems are in place to cost and record the transactions.

 

YES - Accrual accounting, including capitalization of assets, is required. Must reconcile with modified cash accounting for reporting purposes. Cost accounting system is required.

NO - Modified cash accounting. Cost accounting system is required.

Interest charge applied to the use of government funds.

 

YES - The authority essentially represents a line of credit against the CRF. When expenditures exceed revenues collected, a monthly interest charge is levied on the fund.

NO

Specified purpose accounts

Departments and agencies receive, for various reasons, moneys that must be separately accounted for in the Accounts of Canada. In some cases, the enabling legislation requires that revenues be earmarked, and that related payments and expenditures be charged against such revenues. In other cases, departments and agencies receive money for a specific purpose that is recorded as a liability of the Government of Canada because it constitutes a financial obligation of the government.

Given the special nature of these funds, accounts are opened in the general ledger to ensure that they are used only for the purpose for which they were received. These accounts, entitled specified purpose accounts, allow managers to better control and manage these funds. Whatever the source of special purpose moneys, such moneys are public funds.

The following reasons require the establishment of a specified purpose account.

  • Trust Accounts are established for funds administered by the Government of Canada.
  • The Government of Canada receives funds in advance from external entities involved in cost-sharing, joint project and partnership arrangements.
  • The Government of Canada receives funds as conditional contributions, gifts, bequests and donations. Where the object of expenditure is clear and specific, the government must only use or spend these funds for the stated purpose.
  • The Government of Canada receives funds when it administers a program or a portion of one on behalf of a province.
  • The Government of Canada receives funds as an award made to the Crown and the court has stipulated that the moneys must be used for specific purposes.

All requests to open a specified purpose account must be submitted to and satisfy the requirements of the Receiver General. Unless specifically provided by statute, the Minister of Finance must approve the payment of interest on funds held in a specified purpose account.

The crediting of interest to the account, when applicable, must comply with legislative provisions and with instructions set by the Department of Finance. Unless specifically provided by statute, interest is not paid on gifts, bequests and donations to the Crown, contributions received towards joint undertaking or cost sharing agreements, or funds that have been earmarked for a specific purpose.

When authorized by the enabling authority (e.g. legislation, contract, agreement), administration costs may be charged to specified purpose funds. If this is not covered in the enabling authority, costs incurred for the administration of the funds must be charged to the annual operating budget of the program manager.

Because of the special nature of insurance, pension and death benefits programs, the related specified purpose accounts will only be established following legislation.

Due to the rules governing specified purpose accounts, under no circumstances may a specified purpose account be used to:

  • record advance payments from appropriations or other departments and agencies within the same entity;
  • carry forward the unused or undisbursed balance of an appropriation; and
  • carry forward "unused" vote-netting or other spending authority in respect of goods and services that have been provided.

Specified purpose accounts must be established and operated within the scope of the departmental authorities and in accordance with the Treasury Board Policy on Specified Purpose Accounts and with the related Receiver General directive.


Appendix - References

Transfer payments

Accounting and Control of Expenditures, Chapter 9 (Grants and Contributions, section 4), Treasury Board Guide on Financial Administration for Departments and Agencies of the Government of Canada (to be published as Chapter 2-12, "Comptrollership" volume, Treasury Board Manual).

Public Sector Accounting Statement - No. 7, Accounting for Government Transfers, Public Sector Accounting and Auditing Committee, Canadian Institute of Chartered Accountants, November 1990.

Policy on the Application of the Goods and Services Tax in the Departments and Agencies of the Government of Canada, Chapter 5-8, "Comptrollership" volume, Treasury Board Manual.

Repayable Contributions Policy (to be published as part of the Policy on Transfer Payments, Chapter 2-12, "Comptrollership" volume, Treasury Board Manual).

Alternative Funding Arrangements - Standard Agreement, Department of Indian and Northern Affairs, January 1994.

Williams, A. "Public Sector Forum: New transfer payment mechanisms," CMA Magazine, June 1991.

Managing Funding Arrangements - DIAND's Accountability Framework, Department of Indian and Northern Affairs, 1993.

Transfer Payments - Financial Control of Expenditures - Departmental Directives, Department of Indian and Northern Affairs, 1992.

Other arrangements

Policy on Recording Receipts and Accounts Receivable, Chapter 3-2, "Comptrollership" volume, Treasury Board Manual.

Accounting and Control of Revenue and Accounts Receivable, Chapter 10 (Loans and Advances section 8), Treasury Board Guide on Financial Administration for Departments and Agencies of the Government of Canada (to be published as Policy on Loans, Chapter 4-2, and Policy on Advances, Chapter 4-3, "Comptrollership" volume, Treasury Board Manual).

Policy on Allowances for Valuation of Assets and Liabilities, Chapter 4-6, "Comptrollership" volume, Treasury Board Manual.

Treatment of Loan Guarantees in the Expenditure Management System, letter issued by the Minister of Finance, December 1985.

"New requirements for the 1992-1993 Public Accounts following change of the Accounting Policy for Loan Guarantees, Treasury Board of Canada", letter issued by the Deputy Comptroller General, Accounting and Costing Policy Branch Treasury Board of Canada, Secretariat, April 29, 1993.

Department of Finance, Loan Guarantees - Chapter 13, Department of Energy, Mines and Resources, Energy Megaprojects - Chapter 14, Department of National Defence (DND), Major Capital Projects Industrial Development Initiatives - Chapter 16, Major Capital Projects, Project Initiation and Implementation within DND - Chapter 17, Report of the Auditor General of Canada, 1992.

Traditional appropriations

A Manager's Guide to Operating Budgets, Treasury Board, 1992.

Technical Parameters - Appendix 2 and Operating Budgets, Questions and Answers - Annex C, 1993-1994 MYOP Technical Instructions, August 1992.

Administrative arrangements

Policy on Specified Purpose Accounts, Chapter 5-7, "Comptrollership" volume, Treasury Board Manual.

Implementation of amendments to the Surplus Crown Assets Act, Treasury Board Secretariat, March 1993.

Policy on Account Verification, Chapter 2-5 and Policy on Payment Requisitioning, Chapter 2-6, "Comptrollership" volume, Treasury Board Manual.

Policy on Accounting for Non-Monetary Transactions, Chapter 5-13, "Comptrollership" volume, Treasury Board Manual.

"Treasury Board Submission Guide" volume, Treasury Board Manual, 1991.

Carry-Forward of Capital Funds, Treasury Board Circular 1987-53, November 1987.

Revenue spending authorities

Policy on Special Revenue Spending Authorities, Chapter 5-6, "Comptrollership" volume, Treasury Board Manual.

Financial Administration Act, Chapter 6-1, "Comptrollership" volume, Treasury Board Manual.

Respending of Revenues - An Incentive for Improved Efficiency, presentation by Bernard Ouellet and Norm Everest at the Treasury Board Issues Review Meeting, February 10, 1993.

Guide to User Fees, Treasury Board, 1992.

Practical Strategies For Implementing User Fees, presentation prepared by the Expenditure Analysis Division, Program Branch, Treasury Board Secretariat, January 1992.

Prescribing User Fees and Charges under the FAA, Treasury Board Secretariat letter, November 1993.

Treasury Board Policy on External User Charges for Goods, Services, Property Rights and Privileges, 1989.

125-per-cent Rule - Section 14(e), Allotment Control Treasury Board Circular No. 1985-13, January 31, 1985.

Accounting and Control of Revenue and Accounts Receivable, Chapter 10 (Cost Recovery, section 4), Treasury Board Guide on Financial Administration for Departments and Agencies of the Government of Canada.

General

The Manager's Deskbook, Treasury Board of Canada, Fourth Edition, March 1995.

Human Resources Management Accountability Framework (discussion draft paper), 1995.

Framework for Alternative Program Delivery, Treasury Board Secretariat, 1995.

"Partnerships," Optimum - Journal for Public Sector Management, volume 24-3, Winter 1993.

Guide to the Costing of Outputs in the Government of Canada, Office of the Comptroller General, 1994.

Make or Buy?, Stretching the Tax Dollar series, Treasury Board Secretariat, 1993.

Making the Organization More Efficient, Stretching the Tax Dollar series, Treasury Board Secretariat, 1993.

The Federal Government as "Partner": Six Steps to Successful Collaboration, Stretching the Tax Dollar Series, Treasury Board Secretariat, 1995

Reference Manual on Cash Management for Departments and Agencies, Treasury Board Secretariat.

Date modified: