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Policy on Special Revenue Spending Authorities

1. Effective Date

This policy takes effect on July 1, 2000 and replaces the version dated October 1, 1994.

2. Preface

This outlines the policy for net voting and revolving funds, two special revenue respending authorities from Parliament that allow departments to use certain of their revenues to finance their directly related expenditures. While both of these authorities reduce dependence on appropriations from general revenues, they differ significantly in purpose and in application.

Revolving funds are generally appropriate for large, distinct, self-sustaining activities that provide client-oriented services. Materiality is an important criterion when considering the establishment of a new revolving fund because of the significant costs associated with setting up and managing it. Revolving funds provide a multi-year focus for revenues and expenditures. While surpluses or deficits may occur from year-to-year, these are expected to balance out over a business cycle. Revolving funds are funded through non-lapsing appropriations, providing the flexibility needed to deal with changes in level and timing of receipts, expenditures, and net income and to manage substantial investments in inventory and capital. In light of the importance of non-cash transactions in these investments, a full accrual basis of accounting is used to prepare financial statements.

Net voted operations may or may not be self-sustaining and usually the scale of operations is less significant than is the case for revolving funds. Under this mechanism, there is normally a well-established core level of activity funded through appropriations. The net-voting authority is provided to fund fluctuating special demands from user groups which, while consistent with program objectives, would otherwise jeopardize the relatively stable "core" budget of the department. Net voting is not meant to enable unfettered growth. Any variances from the recoverable expenditures forecast in the Estimates must be reviewed with Treasury Board Secretariat.

Revolving fund and net voting authorities may be appropriate for activities having a stable mandate, identifiable client groups, and operations financed in whole or in part from user fees or from other sources of revenue internal or external to the government. Revenues and expenditures must be closely related. This means that if demands are unexpectedly high, higher service levels and expenditures will be financed through increased revenues. The reverse is also true: a decline in demand is expected to reduce expenditures and revenues. Accordingly, these two authorities should not be viewed as a means to secure spending rights or to supplement available resources that would not otherwise be forthcoming.

There are two fundamental differences between these mechanisms:

  • The revolving fund is a continuing or non-lapsing authorization while net voting is an authorization that lapses at the end of the fiscal year;
  • The aim of a revolving fund is to achieve self-sufficiency over its business cycle, while net voting provides that certain revenues offset related expenditures within a fiscal year.

3. Policy objective

To provide flexibility to departments to meet volume level fluctuations and to conduct business effectively using the non-tax revenue received from the conduct of such operations to fund the activities.

4. Policy Statement

It is government policy to provide special revenue spending authority when appropriate, through the establishment and periodic renewal of net-voting and revolving fund authority.

5. Application

This policy applies to all organizations considered to be departments within the meaning of Section 2 of the Financial Administration Act.

6. Policy Requirements

1. Departments seeking a special revenue spending authority must ensure that:

  1. The operations of the unit responsible for the mechanism support the approved program objectives of the department.
  2. The expenses incurred to produce goods and services are directly related to the revenue produced through the sale of these goods and services. Revenues are spent on intended uses and there is no cross-subsidization.
  3. The authority sought to respend revenues previously deposited to the Consolidated Revenue Fund will correspondingly reduce the A-base of the department so that there is no net increase in the draw on the CRF.
  4. The objectives and activities of the unit, the conditions, as well as the commitments of the department governing the use of the mechanism are clearly described.
  5. Appropriations for net voting and revolving funds are classified as budgetary.

Additional Requirements for Net Voting

2. Departments with a special revenue respending authority for net voting must establish policies and procedures to ensure that:

  1. There is a control mechanism in place to ensure that the net dollar amount (expenditures-revenues) approved by Parliament is not exceeded.
  2. Only the revenues associated with costs incurred within net-voted activities are applied towards these costs. The revenues which are not associated with costs incurred are recorded as non-tax revenue.

Additional Requirements for Revolving Funds

3. Departments seeking a special revenue spending authority for a revolving fund must:

  1. Identify the source of funds to support the operations of the revolving fund, including the amount of the drawdown authority sought when the revolving fund is created.
  2. Agree to provide forecasts of expected drawdowns under the established authority, and to operate within that forecast unless otherwise authorized by the Treasury Board.
  3. Recognize that any write-off of accumulated deficits, requires the identification of a source of funds.
  4. Obtain Treasury Board approval of the roles and responsibilities of the Deputy Head and the revolving fund management.

4. Departments with a special revenue spending authority for a revolving fund must establish policies and procedures to ensure that:

  1. The dollar amount of the non-lapsing authority approved by Parliament is not exceeded.
  2. Activities financed by the fund are maintained separately from the activities financed by appropriations. Costs unrelated to the business of the revolving fund must not be charged to it.
  3. Initiatives that have no identifiable user group from which to recover costs are not funded from the revolving fund.
  4. Financial statements are prepared annually in accordance with Treasury Board Secretariat accounting policies based on Generally Accepted Accounting Principles.
  5. The revolving fund's financial statements are audited to assess compliance with the Treasury Board Secretariat accounting policies.
  6. Appropriated funds are not carried over from one fiscal year to the next by transferring them to revolving funds or by pre-paying for goods and services from revolving funds.

5. Departments with a special revenue spending authority for a revolving fund must:

  1. Review the mandate and viability of the revolving fund every 3-5 years. The review should include:
    • a review of the agreement outlining the respective roles and responsibilities of the Deputy Head and the revolving fund management to ensure that it continues to be appropriate;
    • a comparison of financial and operational performance in relation to the business plan; and
    • if self-sufficiency has not yet been achieved, a plan to demonstrate that the revolving fund will become self-sufficient in the next review period or a plan for winding-up the revolving fund.
  2. Annually submit to Treasury Board with the ARLU, a multi-year business plan for each revolving fund in a form approved by the Treasury Board Secretariat. The business plan must include:
    • the planned use of the drawdown authority, if any. Any increase over that forecast annual drawdown will require the advance approval of the Treasury Board;

    Note:

    The Treasury Board Secretariat will establish a frozen allotment for the drawdown authority in excess of the approved ARLU forecast]

    • a long-term capital plan, if applicable;
    • the rates or the basis for the rates to be charged in the next fiscal year.
  3. Delete an ongoing accumulated surplus of the revolving fund according to the following formula:
    • if there is an accumulation of surpluses beyond three years, of half of the amount;
    • if there is an accumulation of surplus beyond five years, of the full amount that is more than five years old;
    • except to the extent that the Treasury Board has approved the carry-forward of such accumulated surpluses or part thereof.
  4. Prior Treasury Board approval for any drawdown in excess of the annual forecast is not required if the same is to be funded through an offsetting reduction in the department's existing resources.
  5. Treasury Board approval is required for any write-off of accumulated deficits.

7. Monitoring

  1. Departments should conduct periodic reviews and audits of their compliance with this policy.
  2. Treasury Board Secretariat will monitor the effectiveness of this policy by reviewing departmental internal audit reports.
  3. Performance indicators should relate primarily to:
    • the relationship between service levels and revenues
    • the impact of the business cycle on revenues and related expenditures.

8. References

8.1 Authority

The legal basis of this policy is section 7 (c) and section 29.1 of the Financial Administration Act.

8.2 Treasury Board Secretariat publications

  • Treasury Board Cost Recovery and Charging Policy.
  • Treasury Board Common Services Policy.
  • The Guide on Revolving Funds prepared jointly by Public Works and Government Services Canada and the Treasury Board Secretariat.

9. Enquiries

Inquiries concerning this policy should be directed to your departmental headquarters. For interpretation of this policy, departmental headquarters should contact:

Financial Management and Accounting Policy Division
Comptrollership Branch
Treasury Board Secretariat
Ottawa, Ontario
K1A 0R5
Telephone: (613) 957-7233
Facsimile: (613) 952-9613

Appendix A - Procedural Requirements: Net Voting

Establishment of authority

The information required in a submission to Treasury Board seeking approval to establish and use net voting will vary according to the nature of the operation. Generally, the following information will be submitted:

  • A summary of the proposal, including a brief description of the purpose and the nature of the operations to be financed, the dollar amounts of the authority requested (in terms of gross expenditures, revenues, net cash requirements, limit on revenues available for spending) and the proposed vote wording;
  • A description of all operations to be performed, benefits to be obtained, major sources of revenue and major expenditures anticipated;
  • Anticipated short and long-term demand for goods and services;
  • Principles to be followed in rate setting and the proposed rate structure. In particular, the bases or processes for allocating indirect overhead costs shall be specified;
  • Analysis of alternative sources of supply for services or goods to be provided by net voting and justification of a decision to "make" or "buy", if the services or goods could reasonably be subject to commercial competition;
  • Plans and performance indicators;
  • Any other information considered pertinent.

Treasury Board shall determine the extent to which revenue and expenses shall be equalized, i.e. the degree to which operations will be subsidized through appropriations. Treasury Board shall specify the maximum amount of revenue that may be spent.

Vote wording

Authority to operate net voting must be obtained from Parliament on an annual basis. This authority may be obtained by requesting Treasury Board approval to include additional wording within the appropriate vote of an Appropriation Act. The vote wording should reflect the following:

Vote No., Name of organization, Program expenditures and, pursuant to Section 29.1(2)(a) of the Financial Administration Act, authority to expend revenues received to offset related expenditures incurred in the fiscal year arising from the provision of services.

Rates for pricing purposes

Rates should be set in accordance with TB policies on cost recovery and charging.

Rate review

Treasury Board shall approve annually, as part of the annual reference level update, the rates or the basis for setting the rates to be charged in the next fiscal year.

Accounting for Net Voting

General

The internal accounting system must be designed to meet the requirements and needs of managers, the Treasury Board, the Receiver General and Parliament.

Expenditure and revenue accounting for net voting must comply with Treasury Board policy on the classification of financial transactions including the annual amendment to the Chart of Accounts.

Relationship to the Accounts of Canada

Amounts expended from the Consolidated Revenue Fund for operational expenditures shall 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 (net annual amount expended) shall be presented in the Public Accounts in a manner similar to expenditures of other lapsing appropriations. Year-end procedures in the Accounts of Canada shall be the same as for all other budgetary appropriations, except that accrued revenues are not credited to the vote until actually received.

Estimates and Public Accounts

The Expenditure Operations and Estimates Division of the Treasury Board Secretariat annually issues instructions as to how net voting shall be presented in the Estimates. Presentation in the Public Accounts shall comply with the directives issued by the Receiver General for Canada.

Appendix B - Procedural Requirements: Revolving Funds

Approval Process

Authorizations to create or to use a new revolving fund, to amend the aims and limits of the fund's authority, to write-off accumulated deficits, or to terminate operations, may be obtained through an annual Appropriation Act. Authorizations may also be obtained under a special act or be incorporated in a departmental act. The authority to charge a fee to users is approved separately and should be approved prior to the request to establish a revolving fund.

Establishment of authority

The information required in a submission to Treasury Board seeking approval to establish and operate a revolving fund will vary according to the nature of the operation. In addition to the specific items set out in the policy requirements, the following general requirements are to be submitted:

  • A summary of the proposal, including a brief description of the purpose and the nature of the operations to be financed, the dollar amount of the authority requested, the proposed vote wording and the proposed source of funding;
  • A description of all operations to be performed, benefits to be obtained, major sources of revenue and major expenditures anticipated;
  • A business plan which covers the financial and business line objectives for a three to five year period;
  • A forecast of the utilization of the fund to determine the amount of continuing authority required. Pro Forma Balance Sheets and Statements of Operations on such periodic bases as suitably reflect the cyclical operations of the fund would normally disclose this information. A Statement of Changes in Financial Position disclosing resources acquired and obligations assumed by the fund, fluctuations in inventories, accounts receivable, and accounts payable; changes in capital; and expected surpluses or deficits should also be included. The number of years for which forecasts will be made will vary with the nature of the fund;
  • Anticipated short and long-term demand for goods and services, sources of revenue and analysis of revenue by business line;
  • Principles to be followed in rate setting and the proposed rate structure. In particular, the bases or processes for allocating indirect overhead costs shall be specified;
  • Analysis of alternative sources of supply for services or goods to be provided by the fund and justification of a decision to "make" or "buy", if the services or goods could reasonably be subject to commercial competition;
  • Plans and performance indicators;
  • Description of any existing capital assets to be taken over and an estimate of their present value and remaining useful life;
  • Identification of new capital facilities required, with estimates of their costs for the first and such subsequent years as may be directed by the Treasury Board;
  • A proposed schedule of rates of depreciation, by category or class of capital assets, to be used to determine the charge to operations as depreciation expense and as a provision for depreciation;
  • Resources (other than capital) to be acquired and/or obligations to be assumed by the revolving fund;
  • Any other information considered pertinent.

Departments should be guided by the following criteria:

  • Organization has a stable mandate which supports the established program objectives of the department;
  • Department has the legal authority to charge fees;
  • Goods and services are provided primarily for the benefit of specific individuals or groups who pay the full cost of the goods or services provided;
  • Revenues and expenses of the organization are closely related;
  • There are mechanisms in place for controlling costs, e.g. performance indicators, price and volume variance analysis;
  • Revenues and resource requirements are large enough to warrant the administrative and accounting costs of such an operation.

Vote wording

Authority to establish and operate a Revolving Fund must be obtained from Parliament. This authority may be obtained through a special Act of Parliament or by including a specific vote within an Appropriation Act. When authority to establish a Revolving Fund is provided through a special Act of Parliament, that portion of the Act dealing with the Revolving Fund should contain a provision to allow amendments to the Revolving Fund authority to be included in an Appropriation Act. In the situation whereby an authority is obtained through an Appropriation Act the vote wording should include, as a minimum, the following:

Vote no., Name of Revolving Fund, pursuant to Section 29.1(2)(b) of the Financial Administration Act, to authorize the Minister of (Ministry) to make expenditures out of the Consolidated Revenue Fund, in accordance with terms and conditions approved by the Treasury Board, for the purpose of (short description of the purpose of the Revolving Fund) including: authority for the Minister to spend for the purposes of the fund any revenues received in respect of those purposes; and, the aggregate of expenditures made for the purposes of the fund shall not at any time exceed by more than (the amount of statutory drawdown authority) the revenues received in respect of the purposes of the fund.

Amendment of the Financial Authority

Submissions to Treasury Board requesting changes in financial authority shall justify, by appropriate statements, the need for the changed funding requirement. Generally, a quarterly statement of operations and of the change in the financial situation for the past two years and a projection for the next three years will provide the required information. The vote wording should be consistent with the following:

Vote No., Name of Revolving Fund, to increase from $ (previous drawdown authority) to $ (new drawdown authority) the amount by which the aggregate of expenditures made for the purposes of the (Name of Revolving Fund), established by Vote xx, Appropriation Act No. x, 20xx-xy, may exceed the revenues,

or

Vote No., Name of Revolving Fund, in accordance with Section 12 of the Revolving Funds Act R.S.C. c R-8, to increase from $ (previous drawdown authority) to $ (new drawdown authority) the aggregate of expenditures made for the purpose of the fund by which the revenues referred to may be exceeded.

Other changes to Revolving Fund authorities, such as changing the scope of operations or purposes of a Revolving Fund, may be accomplished in the same manner. The appropriate Program Sector of the Treasury Board Secretariat should be consulted concerning information on specific proposals in this area.

Adjustment of revolving fund accounts

Vote No., Name of the Revolving Fund, to authorize the Minister to delete from the accounts of the (Name of Revolving Fund) an amount of up to $xxxx representing (short description of amount to be deleted or adjusted).

Termination of Authority

When the authority to operate a Revolving Fund has been obtained from Parliament pursuant to the Revolving Funds Act, an Appropriation Act or other legislation, authority to discontinue operations of the fund may be obtained through an Appropriation Act in the first two cases and a similar authority should be included in the separate legislation when the fund is established.

If a decision is made to discontinue operations, departments shall first seek the approval of the Treasury Board to do so. A submission to Treasury Board shall disclose:

  • The alternatives available and a recommendation for the continuation of the services provided, if appropriate; and,
  • Information and recommendations necessary for the orderly closing out of the fund and, in particular, for the disposition of the assets of the fund.

The required vote wording to terminate a revolving fund should reflect the following:

Vote No., Name of Revolving Fund, to terminate the operations of the (Name of Revolving Fund) and to repeal (Name of Ministry) Vote No. xx, Appropriation Act No. x, fiscal year as at March 31, 20xx,

or

Vote No., Name of Revolving Fund, in accordance with Section 12 of the Revolving Funds Act, 1985 R.S. c. R-8, to repeal Section x of the said Act, as of March 31, 20xx.

Operations of a Revolving Fund

Rates for pricing purposes

Rates should be set in accordance with TB policies on cost recovery and charging.

Fees and rates submitted for approval to Treasury Board shall take into consideration the accumulated deficit or surplus at the beginning of the fiscal year as well as the estimated surplus or deficit for the entire fiscal year. In certain cases, the estimated surpluses or deficits for a longer period will be considered. In situations where the setting of specific fees and rates is not practical, the revolving fund will propose for Treasury Board approval, the method by which costs will be recovered.

Operating surplus and deficit

If a revolving fund expects to incur deficits that might prevent it from continuing operations within the dollar amount of its non-lapsing authorization, then either an increase in the dollar amount of the non-lapsing authorization would be required, or the deletion of all or part of the fund's accumulated deficit would need to be sought through Main or Supplementary Estimates. Such an action would require the identification of a source of funds.

If authority is granted to delete all or part of the accumulated deficit of the revolving fund, there shall be a corresponding reduction in the Accumulated Net Charge Against the Fund's Authority (the offsetting entry to the deletion is a debit to this account). Any submission to delete a deficit in the accounts of the fund should include the amount to be deleted and the reason for the deletion. Any additional funding required as a result of write-off of a deficit would also require the identification of a source of funds.

Treasury Board may direct that any operating or contributed surpluses that are not expected to be offset by future deficits be deleted from the accounts of the fund. Such deletion of a surplus would increase the Accumulated Net Charge Against the Fund's Authority (the offsetting entry to the deletion is a credit to this account) and thereby reduce the extent to which the revolving fund would be able to make new expenditures.

Any major change in the forecast operating surplus or deficit during the fiscal year should be reported to the appropriate program Sector of the Treasury Board Secretariat, as early as possible.

Accounting for Revolving Funds

As a minimum, the accounting system must provide for:

  • the preparation and submission of both periodic and year-end data to the Receiver General in accordance with Receiver General directives to meet all requirements for keeping accounts as a budgetary appropriation; and
  • the preparation of both periodic and year-end statements on an accrual basis of accounting in accordance with Treasury Board accounting policies based on Generally Accepted Accounting Principles as defined by the Canadian Institute of Chartered Accountants Public Sector Accounting Board (PSAB) Handbook. Subject to modifications or interpretations by the Treasury Board, the PSAB handbook will be the authoritative reference manual. In situations where a specific item is not covered in the PSAB Handbook, the Canadian Institute of Chartered Accountants Handbook will be used.

The display and disclosure of assets and liabilities in financial statements, as well as the methods used to calculate the depreciation, shall conform to Generally Accepted Accounting Principles as modified by Treasury Board Accounting Policies and shall be consistent from year to year.

Departments and agencies shall account for the fund's operations separately, determine the cost of each product or service and establish a system of accounting and management that provides the information required by Treasury Board and Parliament so that the statements of operations and the financial situation accurately reflect the use made of the approved authority.

The internal accounts of the revolving fund shall include any surplus or deficit arising from the operation of the fund. Accumulated deficits shall remain in the accounts of the fund until disposition is approved by Treasury Board and by Parliament through an Appropriation Act.

Relationship to the Accounts of Canada

Amounts expended from the Consolidated Revenue Fund for working capital, capital expenditures and temporary financing of deficits shall be recorded in a manner prescribed by the Receiver General for Canada and Government of Canada Accounting Policy. Amounts received shall be recorded as recoveries of budgetary expenditures and credited to the continuing authorization in the fiscal year in which they are received. The difference (net annual amount expended or received) will be reported as net use of the non-lapsing authorization in the Accounts of Canada on an annual basis. Year-end procedures in the Accounts of Canada shall be the same as for all other budgetary appropriations.

Estimates and Public Accounts

The Expenditure Operations and Estimates Division of the Treasury Board Secretariat annually issues instructions as to how revolving funds shall be presented in the Estimates. Accounting for revolving funds, presentation and disclosure in the Public Accounts shall comply with the directives issued by the Receiver General for Canada. Funds shall comply with all requirements concerning the display of authorities, programs, activities, standard objects of expenditure, the disclosure of full time equivalents and of capital expenditures.

Appendix C - Nature of Net Voting

Net voting is an alternative means of funding selected programs or activities wherein Parliament authorizes a department to apply revenues towards costs incurred and votes the net financial requirements (estimated total expenditures minus estimated revenues). Although Parliament votes only net cash requirements in a net-voting situation, total expenditures and estimated revenues are still disclosed to Parliament. Specific items of expenditures for which net voting will apply and limits on revenue respending will be approved by Treasury Board. It should be noted that net voting privileges are not extended to revenues generated by rights and privileges.

All resource allocation decisions must focus on an activity's net dependence on appropriations. Net voting explicitly links the revenue and expenditure sides of the ledgers in such a way that program managers must manage not only their expenditure budget but also the related revenues. With net voting, they cannot spend the monies they do not receive; thus it encourages management to take a more business-like approach.

Net voting formalizes the degree of self-sufficiency that program managers are expected to plan for and carry out and for which they will be held accountable to Parliament. Any residual dependence on appropriations is clearly set out and managers are held to it.

Net voting may, therefore, be appropriate when all or part of the cost of a program is to be financed from user fees or other source of revenue whether internal or external to the government.

Net voting permits the provision of services to fluctuate with demand. From a financial control perspective, the implication is that the level of service and the associated program expenditures will be expected to adjust to demand (and hence to revenues) so that the degree of self-sufficiency is preserved. It is recognized, however, that because of lags and inevitable delays, some bridge financing may be appropriate in some circumstances.

Appendix D - Nature of Revolving Funds

A revolving fund is a continuing or non-lapsing authorization by Parliament to make payments out of the Consolidated Revenue Fund for working capital, capital acquisitions and temporary financing of accumulated operating deficits. It is an authorization to draw on the Consolidated Revenue Fund, not a segregation of cash. A revolving fund is a means by which Parliament provides continuing authorization for an operation that is funded completely by users, or partly by users and partly by subsidization.

The purpose of a revolving fund is to be fully identified in the fund's charter document. Treasury Board establishes the minimum necessary requirements it deems appropriate for the orderly operation of the fund at the time of its approval and during susequent reviews.

Nature of continuing or non-lapsing authority

Within the accounts of a revolving fund, departments maintain an account entitled "Accumulated Net Charge Against the Fund's Authority". This is a control account used to record the amount of its non-lapsing authority that the fund has used. At no time may the balance in this account exceed the amount of the non-lapsing authorization by Parliament for the fund. The account is used to record:

  • accumulated net expenditures charged to the Consolidated Revenue Fund by the operation of a revolving fund since its establishment;
  • accumulated amounts representing the value of assets placed at the disposal of the fund less amounts of obligations assumed by the fund; and
  • amounts of deficits or surpluses that have been authorized to be deleted from the fund.

A separate account is to be used to record accumulated operating deficits or surpluses to the extent that authorization has not been obtained to delete them. Accumulated operating deficits will be charged to the Accumulated Net Charge Against the Fund's Authority account only after Treasury Board approval and parliamentary authority have been obtained to delete them.

Accumulated operating surpluses are to be credited to the Accumulated Net Charge Against the Fund's Authority account only after Treasury Board approval to delete them has been obtained. (It is not necessary to obtain parliamentary authority to delete accumulated surpluses because no increase in spending authority is created by such deletions.)