Interest and Administrative Charges Regulations - TB Circular 1996-03

Circular No.: 1996-03

Date: April 29, 1996

To: Senior Full-time Financial Officers (SFFOs)

CC: Senior Financial Officers (SFOs) and Departmental Legal Services Units (DLSUs)

Subject: Interest and Administrative Charges Regulations

Introduction

On March 28, 1996, the Treasury Board approved the "Interest and Administrative Charges Regulations".  These regulations prescribe the rates and the general conditions under which departments (a) must charge interest on overdue non-tax receivables; and (b) charge administrative fees where any instrument payable to the Crown is dishonoured.  These regulations have been officially published in Part II of the Canada Gazette on April 17, 1996 [SOR/96-188].  They have already been posted to the Secretariat's Internet site at Universal Resource Location (URL):

http://www.tbs-sct.gc.ca/

and on Publiservice on GENet at URL:

http://publiservice.tbs-sct.gc.ca/

The purpose of this circular is to provide guidance on applying and implementing the regulations and to give policy direction on related matters.  Accordingly, it should be read in conjunction with the actual regulations, as well as subsection 155.1(1) of the Financial Administration Act (FAA).

The regulations came into effect on April 1, 1996.  Thus, the first monthly interest would be calculated at the end of April, 1996.  However, before imposing interest charges for the first time, departments must ensure that their debtors receive advance notice of at least one monthly billing or statement cycle.  (Where this results in not charging accrued interest for the month of April, 1996, subsection 9(2) of the regulations provides authority for a waiver.)

Thereafter, departments must include payment terms, noting the charging of interest, in all applications that quote a fee; lists or schedules of applicable fees and rates; and bills, invoices and statements.  Also, monthly statements must be sent to all clients, if not, at least to those whose accounts are in arrears, showing as a minimum:

• previous balance;
• current charges, payments received and interest;
• total now owing; and
• amount overdue/in arrears.

Departments may consider waiving the first month's charges only under subsection 9(2) of the regulations where a debtor makes an acceptable case that he or she did not get sufficient notice to be able to pay the amount on time and avoid interest charges.

Although the regulations are not retroactive, they may have a retrospective effect.  For example, they would apply, from April 1, 1996 only, to any amounts that are in arrears on April 30, 1996, regardless of when the debt was incurred.  They apply as well to any payment instruments that are dishonoured on or after April 1, 1996.

Where an amount became overdue prior to April 30, 1996 but was paid in full during April, departments might consider waiving interest under paragraphs 8(b) or 9(1)(a) or subsection 9(2), as applicable to the situation.

Background

On March 31, 1995, non-tax receivables over 30 days totalled $3.3 billion.  Before these regulations came into effect, departments could charge interest on overdue accounts only if specific legislation, contracts, or agreements provided for charging interest.  As this has rarely been the case, most non-tax receivables have not attracted interest.  The result has been that debtors have had no incentive to pay the government promptly and the taxpayer has paid the cost of financing the receivables.

With these regulations in place, debtors have an incentive to pay their accounts on time and any costs the government incurs to finance the receivables will shift from general taxpayers to the delinquent debtors.  The regulations also permit the government to charge administrative fees when dishonoured payment instruments are received.

Application

These regulations apply to all departments and agencies of the federal government. They do not apply to receivables of Crown corporations or to interdepartmental receivables.  However, they do apply to amounts owing to departments by Crown corporations and provincial and foreign governments.

Part I of the regulations, concerning the charging of interest, does not apply to:

• amounts owed as taxes or duties;
• except for concessionary loans as described in subsection 7(1), amounts owed under interest-bearing loans, capital market transactions or mortgages; and
• amounts covered under other Acts, regulations, orders, contracts or arrangements that provide for charging interest on those amounts.

Precedence of other Acts, Orders and Regulations

In accordance with section 155.1 of the FAA, other Acts, Orders (Ministerial or Governor-in-Council) and Regulations take precedence over these regulations.  Thus, if any one of these prescribes or sets the interest to be paid on overdue accounts or explicitly states that no interest is payable, then Part I of these regulations do not apply.

General Description

The main features of the regulations are:

• where an account is overdue or a payment is late, departments must charge interest compounded monthly at the average bank rate plus three per cent from the due date to the date that payment is received;  (this is the same rate the government will be paying its suppliers on its own late payments.)
• where the government makes overpayments or erroneous payments as a result of fraud, falsification, wilful misrepresentation or any other offence, these payments will incur interest charges from the date on which the overpayment or erroneous payment is made;
• in other cases where the government makes an overpayment or erroneous payment, arrangements will be made for repayment and departments must charge interest only in respect of late payments;
• departments must not charge interest on small amounts for which an invoice or other demand for payment would normally not be issued.  However, if there are several small amounts that add up to more than the cut-off limit, or the total outstanding exceeds that limit, departments must charge interest.  Each department will set these limits, so they may vary among departments and between programs within a department;
• ministers may waive or reduce charges under certain circumstances; for example, where:
  1. charges will be recovered from subsequent entitlements,
  2. the government makes an error in processing a payment or in calculating the amount due, or
  3. there are other circumstances beyond the control of the debtor, such as a breakdown in the electronic systems used to transfer funds and process payments;
• an administrative charge of $25 must be levied for dishonoured items where a financial institution has processed an item and the department has to requisition and issue an RG payment instrument to reimburse the financial institution.  Where the financial institution recovers the amount by another means, the administrative charge is $15;
• departments may also arrange with a financial institution to monitor the account of a debtor who has tendered a dishonoured item and, once the account contains sufficient funds, to certify the item, return it to the department or clear the item directly.  The department may charge the debtor for fees it pays to a financial institution to monitor his or her account; and
• subject to any legislation or regulations governing programs or departments, departments have complete flexibility in negotiating and setting repayment terms.  When doing so, departments must consider whether they should charge interest on the total amount outstanding and not just on missed or late payments.  This is particularly appropriate where the debt involves an overpayment by the government that was not the result of an error on its part.  To do this, departments must include an interest provision in the repayment agreement, as contemplated by subsection 6(3) of the regulations.

Special Considerations

Accountable Advances

While the regulations contemplate charging interest on specific purpose and standing advances that are not settled within the time period specified in the Accountable Advances Regulations*, that is not to be taken as an authority to recover repayment over time.

*10 working days after fulfilment of the purpose for which the advance was made in the case of a trip or other specific purpose advance; or, in the case of a standing advance, 30 days from when a demand for repayment is received and 30 days at the end of the fiscal year, whichever is first.

A person who has received an accountable advance should either have receipts for expenditures incurred (where receipts are required) or the cash.  If he or she does not, it's prima facie evidence that the person has applied the advance to some other purpose.  By strict definition, this would be a form of "misappropriation."

The "10-day rule" applies only to the initial accounting and repayment.  It is satisfied when the claim and amount owing (if any) is submitted, not when it is approved or audited.  If a travel claim is audited and adjusted, and the advance holder owes an additional amount, this becomes a normal debt due the Crown.  The standard 30-day collection period would apply, unless the department specifies otherwise in its notice to the advance holder.

Interest under the regulations is payable only on the amount owing the government, not on the total advance outstanding.  If the advance holder does not file a claim, however, the amount owing the government is the amount of the advance.

When advance holders are late in filing their claims, departments should notify them promptly that interest is accruing.  For practical purposes, it may be necessary to wait until the claim is actually filed before billing and recording interest unless a claim has not been filed within 30 days of the required filing date.

Where extenuating circumstances prevented the advance holder from filing his or her claim on time, or the interest is a small amount, departments may consider a waiver under paragraphs 8(1)(b) or 9(1)(a) or subsection 9(2) of the regulations.

There is currently no authority under either collective agreements or the Travel Policy and its associated Administrative Guidelines for the government to pay interest on amounts it owes the advance holder. 

Concessionary Loans

A concessionary loan is a loan made at no interest or at rates significantly below "market."  A developing country is usually the borrower, although some loans to employees, and native and other housing loans may fall into this category as well.

Where a repayment of a concessionary loan is in default, the "concession" is rescinded with respect to the amount of the arrears.  Interest would apply on those arrears at the difference between the concessionary rate and the "going" rate applicable under the regulations.  For example, if the concessionary rate is three per cent and the current "going" rate is seven, then an additional four per cent over and above the initial three would be payable on any arrears.  However, this does not apply to loans to developing nations that are the subject of multilateral debt-relief agreements, like the "Paris club" arrangements.  Nor, in accordance with subsection 155.1(1) of the FAA, does it apply to agreements that already provide for interest on the arrears.

Errors by the Government

In accordance with paragraph 8(1)(a) and section 11 of the regulations, a department must not apply interest or administrative charges where it makes an error that results in interest or administrative charges otherwise being applicable; for example, if it doesn't credit the right account, doesn't deposit or record the payment promptly, attempts to deposit a post-dated cheque early, or holds a cheque until it becomes stale-dated.

Goods and Services Tax (GST)

Revenue Canada has advised that the GST does not apply to interest and administrative fees imposed under these regulations.

Payment Receipt Date

Payment is considered to have been received on the day it is made at a financial institution or when it first arrives in the department.  Hence departments must date-stamp or batch all incoming payments by date received and use that date in calculating any interest due.

Recoveries from Contractors and Suppliers

If the government has overpaid a contractor or supplier and has demanded repayment, interest would apply if the contractor or supplier does not repay as specified in the demand.

Social Benefits

The recovery of overpayments of social benefits such as Canada Pension Plan, Old Age Security, unemployment insurance and veterans' allowances are special cases.  Specifically:

• within the constraints of their program or departmental legislation or regulations, departments have total flexibility in setting repayment or recovery terms;
• for "non-fraud" cases, interest would apply only if the debtor does not adhere to the repayment schedule;
• departments can waive interest entirely where recovery is to be made from a subsequent benefit payment;
• departments may seek a class remission order under section 23 of the Financial Administration Act; and
• departments or programs may put their own interest provisions in their program legislation or regulations, thereby removing them entirely from the scope of Part I of the regulations.

"NSF" Charges

For the most part, departments use Receiver General concentrator accounts for deposits and financial institutions obtain reimbursement for dishonoured items through charge-back.  In these cases, no Receiver General payment is issued and the NSF charge would be $15.  However, where a payment or settlement must be issued, either because the department is not using a concentrator account or chargeback cannot occur for any other reason, then section 10(2) of the regulations applies and the NSF charge becomes $25.

Individual versus Class Waivers

Waivers under subsections 9(1) and 12(1) can be either on an individual or a class basis; those under 9(2) and 12(2) must be on an individual basis.

Penalty Waivers

A waiver under paragraph 9(1)(d) does not require that the penalty match exactly the interest that would have been charged.  However, if the penalty is significantly less, perhaps the waiver should not be used.  Both interest and penalty could be imposed, as Revenue Canada does for tax fraud or evasion.

Effect of Waiver

In accordance with subsections 155.1(3) and (4) of the FAA, where departments have waived or reduced interest or administrative charges, no amount - or the reduced amount - is payable.  In these cases, there would be nothing to write off.  If something has been recorded in the accounts, an adjusting entry must be made to reverse or reduce it.

Debt Write-off

When departments write off a debt as uncollectible, they will have to write off the accrued or accumulated interest too  However, if the department ever resumes collection action, interest would be reinstated to the date of the write-off unless it were "forgiven" through remission.

Revolving Fund Concessions

Over the years, certain revolving funds have negotiated concessions, whereby, they deduct receivables over 30 days before calculating interest on their use of their drawdown authority.  To the extent that they will now be able to charge interest, this concession is no longer needed and, in fact, represents a "double credit."

The Treasury Board decision rescinded the concessions, except for receivables from other departments.

Consequently, as of April 1, 1996, revolving funds that had these concessions may deduct only Other Government Departments (OGD) receivables over 30 days.  This shall be deemed to be an official change to the previously approved terms and conditions for the revolving fund.

Spending of Interest Revenue

In most cases, departments do not currently pay interest on their use of capital.  The Department of Finance absorbs these costs as part of the public debt and does not charge them back to departments' programs.

Since departments are not incurring the interest expense for the use of capital, they must not treat revenue from interest charges on overdue receivables as additional funds to spend.  Rather,  they must account for such interest revenue as general, non-tax revenue to "offset" the Department of Finance's cost of financing the receivables.

However, if a department does incur costs by paying interest on its use of capital, as do some revolving funds and departments with net-voting, the interest charged on receivables may be offset against those costs.

Similarly, revolving funds and departments with appropriate net-voting authority may use the administrative charges to offset the handling costs incurred where a payment instrument is dishonoured.

Recording Interest Revenue and "NSF" Charges

Two separate revenue objects have been established within standard objects 13 and 14 for this purpose; one for interest and another for the "NSF" administrative charges.  These are: 3595, 3596, 4595, and 4596, respectively.

Year-end Reporting

Within 30 days of the end of the fiscal year, departments must file a report with the Financial and Contract Management Sector, Financial and Information Management Branch, Treasury Board Secretariat, indicating the amount of interest or administrative fees waived that year under each of the categories in sections 9 and 12 of the regulations.  In addition, the format for reporting debt write-offs in the Public Accounts will be changed for fiscal year 96-97 to show principal and interest separately.

Implementation Delays

Technically, interest will begin accruing under the regulations as of April 1, 1996, whether or not a department has the financial systems in place to assess, bill and collect it.  Once the systems are in place, departments have the option of collecting the interest retroactively or of applying to the Treasury Board and the Governor in Council for a time-limited, temporary class remission order under section 23 of the FAA.  (In this regard, see the comments on pages 27:21-27:22 of the Minutes of Proceedings and Evidence of the Standing Joint Committee for the Scrutiny of Regulations about the Canada Business Corporations Regulations where the Committee insisted that a remission order be obtained where fees imposed by regulation were not being collected.)

However, departments that elect to go the remission route must be prepared to:

1. justify the delay and be fully accountable for it to the Auditor General (AG) (the November 1995 AG report criticized the practice of not charging interest on overdue accounts) and before any relevant parliamentary committee;
2. defend against possible complaints and accusations from debtors that charging some and not others who have an overdue account is discriminatory; and
3. possibly make up the lost revenue either by increased revenues from other sources or further cuts in expenditures over and above current targets.

Furthermore, departments not ready to calculate, charge and collect interest under the regulations must send a letter to the Assistant Secretary, Financial and Contract Management Sector, Financial and Information Management Branch, explaining why they need more time and indicating when they expect to start charging interest and NSF fees.  Thereafter, they must send quarterly status reports on implementation to the Assistant Secretary, Financial and Contract Management Sector.

Repeal of Separate Authorities

A debtor should, in general, be faced with the same terms and conditions for charging administrative fees and interest on non-tax receivables, regardless of which department or program he or she is dealing with.  Thus, departments with their own separate authorities must revoke or repeal them at the first available opportunity.  Departments are, therefore, asked to provide to the Assistant Secretary, Financial and Contract Management Sector, a list of such authorities along with an estimate of when they will be repealed.

In some cases, the entire paragraph, subsection or section might be repealed or revoked.  In others cases, rather than repealing the section entirely, the more appropriate solution might be to retain an interest clause by referring to the regulations under the FAA (e.g.,"... interest in accordance with any regulations made pursuant to section 155.1(6) of the Financial Administration Act" or "... interest in accordance with any regulations made pursuant to section 155.1(6) of the Financial Administration Act on the amount owing from the date that it became owing").  This may be appropriate particularly where the intent is to charge interest on the whole amount, not just overdue amounts, and/or to use a different "start" date such as the date that a payment was originally made, the date that a debtor was notified of an overpayment or the date that a contribution became repayable.

Note:  This requirement for repeal and standardization does not apply to:

1. loans, investments, and non-budgetary advances;
2. recoveries of socio-economic benefits; and
3. interest on superannuation "buy-backs", etc.,

which may continue to have their own specific provisions tailored to their particular program needs.

Likewise, contribution agreements entered into effective April 1, 1996, or thereafter, should contain the following as a standard provision:

"Interest on any amount due to Her Majesty in right of Canada pursuant to this agreement will be payable to the Receiver General for Canada or may be waived by the Minister [or the Department of XXX] in the same terms and conditions as prescribed in the 'Interest and Administrative Charges Regulations' [SOR/96-188], except that interest will accrue:

1. from the due date in the case of overdue amounts and other arrears;
2. from the date that an overpayment is made in the case of overpayments; and
3. in the case of a repayable contribution, from the date that an amount becomes repayable whether or not that amount is due, in whole or in part, at one or more different dates."

Obtaining Information on Current Interest Rates

The Bank of Canada has a recorded message at (613) 782-7506 that gives current rates and other statistics.  However, since the rate to be charged on accounts receivable is the same as that to be paid under the Payment on Due Date Policy (PODD), the PODD rate can be used for receivables, too.  The Bank of Canada rate is the average rate based on the number of days that each bank rate is in effect, plus 3 per cent.  For example, if there were 3 different bank rates in effect during the month for 10, 15, and 6 days, respectively,  the rate for charging interest would be 10 times the first, plus 15 times the second, plus 6 times the third, all divided by 31, plus 3 per cent.  The rate is available from PWGSC on its Internet web site at Universal Resource Locator (URL):

http://www.pwgsc.gc.ca/text/podd-e.html.

On-line Copy of this Circular

A copy of this circular is available on-line on GENet at URL:

http://publiservice.tbs-sct.gc.ca/

Enquiries

For more information or clarification about this circular contact:

Financial and Contract Management Sector
Financial and Information Management Branch
Treasury Board Secretariat
Tel:  957-7233
Fax:  952-9613

R.J. Neville
Assistant Secretary and Assistant Comptroller General
Financial and Contract Management Sector
Financial and Information Management Branch

Appendix A

Interest Rate Calculation Examples

The interest rate used to calculate the interest payable on overdue accounts is the same as the rate used under the Payment on Due Date Policy.  This rate is available from PWGSC on its Internet web site a URL:

http://www.pwgsc.gc.ca/text/podd-e.html

The rate can also be calculated by adding 3 per cent to the average bank rate for the month preceding the month in respect of which interest is being calculated.  The Bank of Canada has a recorded message at (613) 782-7506 which gives current bank rates. 

In the following example assume the bank rates were as follows:

February 22--5.5%

March 21--5.25%

The average bank rate for March would be based on 20 days (March 1 to 20 inclusive) at 5.5% and 11 days (March 21 to 31 inclusive) at 5.25%:

(20 days  Multiply by 5.5% + 11 days Multiply by 5.25%) Divide by 31 days = 5.41%

Therefore, the interest rate used during the month of April to calculate interest on overdue accounts would be:

5.41 + 3 = 8.41%

Interest Calculation Examples

In the following examples assume that the interest rate for May is 8.55% and the rate for June is 8.45%, the initial amount owing is $5,000, and the due date is April 30. 

1. if payment is made in full on April 30, no interest is payable.
   
   
2. if payment is made in full on May 14 then interest is payable on $5,000 for 14 days (April 30 to May 13 inclusive) and on zero dollars for 1 day (May 14);  note that interest is charged on the outstanding balance on each day, from the due date to the payment date inclusive:
   
   14 days/365 Multiply by .0855 Multiply by 5,000 = $16.40
   1 day/365 Multiply by .0855 Multiply by zero  = 0
   
   
3. if partial payment of $3,000 is made on May 14 and another partial payment of $600 on May 24, then the amount owing on June 1st would be the interest on $5,000 for 14 days (April 30 to May 13 inclusive) plus interest on $2,000 for 10 days (May 14 to 23 inclusive) plus interest on $1,400 for 8 days (May 24 to 31 inclusive) plus the outstanding principal amount of $1,400:
   
   14 days/365 Multiply by .0855 Multiply by 5,000 = $16.40
   10 days/365 Multiply by .0855 Multiply by 2,000 = $4.68
   8 days/365 Multiply by .0855 Multiply by 1,400 = $2.62
   Outstanding principal amount = $1,400
   Total owing as of June 1^st = $1,423.70
   
   
4. if another partial payment of $400 is made on June 25, then the amount owing on July 1st would be the interest on the amount owing as of June 1st ($1,423.70) for 24 days (June 1 to 24 inclusive; note that the interest is compounded monthly; that is, added to the total amount outstanding once a month, on the statement date) plus interest on $1,023.70 for 6 days (June 25 to 30 inclusive; again, note that the interest is compounded) plus the outstanding principal amount of $1,022.64:
   
   24 days/365 Multiply by .0845 Multiply by  1,423.70 = $7.91
   6 days/365 Multiply by .0845 Multiply by 1,023.70 = $1.42 
   Outstanding principal amount = $1,023.70
   Total owing as of July 1 = $1,033.03