Financial statements (Unaudited)
Department of Finance Canada

For the year ended
March 31, 2018

Statement of Management Responsibility including Internal Control over Financial Reporting

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2018, and all information contained in these statements rests with the management of the Department of Finance Canada (the Department). These financial statements have been prepared by management using the Government's accounting policies, which are based on Canadian public sector accounting standards.

Management is responsible for the integrity and objectivity of the information in these financial statements. Some of the information in the financial statements is based on management's best estimates and judgment, and gives due consideration to materiality. To fulfil its accounting and reporting responsibilities, management maintains a set of accounts that provides a centralized record of the Department's financial transactions. Financial information submitted in the preparation of the Public Accounts of Canada, and included in the Department's Departmental Results Report, is consistent with these financial statements.

Management is also responsible for maintaining an effective system of internal control over financial reporting (ICFR) designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Financial Administration Act and other applicable legislation, regulations, authorities and policies.

Management seeks to ensure the objectivity and integrity of data in its financial statements through careful selection, training, and development of qualified staff; through organizational arrangements that provide appropriate divisions of responsibility; through communication programs aimed at ensuring that regulations, policies, standards, and managerial authorities are understood throughout the Department and through conducting an annual risk-based assessment of the effectiveness of the system of ICFR.

The system of ICFR is designed to mitigate risks to a reasonable level based on an ongoing process to identify key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments.

A risk-based assessment of the system of ICFR for the year ended March 31, 2018 was completed in accordance with the Treasury Board Policy on Financial Management and the results and action plans are summarized in the Annex.

The effectiveness and adequacy of the Department's system of internal control is reviewed by the work of internal audit staff, who conduct periodic audits of different areas of the Department's operations, and by the Departmental Audit Committee, which oversees management's responsibilities for maintaining adequate control systems and the quality of financial reporting, and which recommends the financial statements to the Deputy Minister.

The financial statements of the Department have not been audited.

 
 
Paul Rochon, Deputy Minister
Adelle Laniel, Chief Financial Officer

Ottawa, Canada
September 6, 2018

 

Department of Finance Canada
Statement of Financial Position (Unaudited)
As at March 31
$ thousands
  2018 2017
Liabilities    
  Deposit liabilities (note 4) 212,403 214,594
  Accounts payable and accrued liabilities (note 5) 211,684 331,509
  Taxes payable under tax collection agreements (note 6) 7,419,118 2,385,335
  Interest payable (note 7) 4,218,004 4,252,812
  Notes payable to international organizations (note 8) 240,249 36,161
  Matured debt (note 9) 472,399 409,975
  Unmatured debt (note 10) 715,212,620 707,789,516
  Employee future benefits (note 13) 4,372 4,265
 
Total gross liabilities 727,990,849 715,424,167
Liabilities held on behalf of Government (note 14) (240,249) (36,161)
 
Total net liabilities 727,750,600 715,388,006
Financial assets    
  Due from Consolidated Revenue Fund 4,376,868 4,418,061
  Cash held as collateral (note 15) 8,716,111 6,873,299
  Coin inventory 8,880 8,292
  Accounts receivable (note 16) 156,099 116,517
  Taxes receivable under tax collection agreements (note 17)  13,067,558 9,620,407
  Foreign exchange accounts (note 18)  96,937,597  98,797,449
  Crown borrowings (note 19)  55,148,128  51,863,952
  Loans receivable (note 20) 1,466,274 1,394,893
  Investments and capital share subscriptions (note 21) 1,323,339 243,701
 
Total gross financial assets 181,200,854 173,336,571
Financial assets held on behalf of Government (note 14) (4,223,984) (3,334,418)
 
Total net financial assets 176,976,870 170,002,153
 
Departmental net debt 550,773,730 545,385,853
Non-financial assets    
  Tangible capital assets (note 22) 13,130 14,389
  Prepaid expenses 84 240
 
Total non-financial assets 13,214 14,629
 
Departmental net financial position (550,760,516) (545,371,224)

Contractual obligations (note 23)
Contingent liabilities (note 24)
The accompanying notes form an integral part of these financial statements.

 
 
Paul Rochon, Deputy Minister
Adelle Laniel, Chief Financial Officer

Ottawa, Canada
September 6, 2018

 

Department of Finance Canada
Statement of Operations and Departmental Net Financial Position (Unaudited)
For the Year Ended March 31
$ thousands
  2018 Planned Results 2018 2017
Expenses      
  Transfer and taxation payment programs 68,450,530 68,878,518 67,046,165
  Treasury and financial affairs 21,594,000 21,170,610 21,256,751
  Economic and fiscal policy framework 61,639 78,365 68,700
  Internal services 65,851 70,948 67,987
 
Total expenses 90,172,020 90,198,441 88,439,603
Revenues      
  Investment income 1,560,389 2,260,433 2,397,464
  Sale of domestic coinage 110,268 155,573 137,903
  Interest on bank deposits 220,088 418,105 230,741
  Net foreign currency gain  -   -  155,528
  Other income 160,005 164,008 195,381
  Revenues earned on behalf of Government (note 27) (2,050,640) (2,998,119) (3,116,906)
 
Total revenues 110 - 111
 
Net cost of operations before government funding and transfers 90,171,910 90,198,441 88,439,492
Government funding and transfers      
  Net cash provided by Government   84,825,023 78,390,887
  Change in due from the Consolidated Revenue Fund   (41,193) (171,028)
  Services provided without charge by other government
  departments (note 25a)
  25,319 24,861
Net cost of operations after government funding and transfers   5,389,292 10,194,772
Departmental net financial position - beginning of year   (545,371,224) (535,176,452)
   
Departmental net financial position - end of year   (550,760,516) (545,371,224)

Segmented information (note 26)

The accompanying notes form an integral part of these financial statements.

Department of Finance Canada
Statement of Change in Departmental Net Debt (Unaudited)
For the Year Ended March 31
$ thousands
  2018 2017
Net cost of operations after government funding and transfers 5,389,292 10,194,772
Changes due to tangible capital assets    
  Acquisition of tangible capital assets 46 -
  Amortization of tangible capital assets (1,305) (1,320)
  Proceeds from disposal of capital assets - (14)
  Gain on disposal of tangible capital assets - 6
 
Total change due to tangible capital assets (1,259) (1,328)
Change due to prepaid expenses  (156) 164
 
Net increase in departmental net debt 5,387,877 10,193,608
Departmental net debt - beginning of year 545,385,853 535,192,245
 
Departmental net debt - end of year 550,773,730 545,385,853

The accompanying notes form an integral part of these financial statements.

Department of Finance Canada
Statement of Cash Flows (Unaudited)
For the Year Ended March 31
$ thousands
  2018 2017
Operating activities    
  Net cost of operations before government funding and transfers 90,198,441 88,439,492
  Non-cash items:    
    Amortization of tangible capital assets (note 22) (1,305) (1,320)
    Gain on disposal of capital assets - 6
    Amortization of discounts on loans receivable 5,802 5,630
    Amortization of discounts of Crown borrowings 12,160 11,270
    Amortization of discounts/premiums on unmatured debt (1,987,652) (1,922,956)
    Unrealized foreign exchange gains on the Foreign exchange accounts 946,026 61,057
    Unrealized foreign exchange losses on debt (1,023,923) (38,611)
    Services provided without charge by other government departments (note 25a) (25,319) (24,861)
  Variations in Statement of Financial Position:    
    Increase in assets 3,447,583 3,462,481
    Decrease/(increase) in liabilities (4,875,105) 2,028,013
  Change in cash collateral pledged to counterparty 1,840,851 349,401
 
Cash used in operating activities 88,537,559 92,369,602
Capital investing activities    
    Acquisition of tangible capital assets (note 22) 46 -
    Proceeds from disposal of tangible capital assets - (14)
 
Cash (provided)/used in capital investing activities 46 (14)
Investing activities    
    Investments in Foreign exchange accounts 26,394,806 32,145,878
    Repayments from Foreign exchange accounts (28,917,143) (26,757,805)
    Issuance of Crown borrowings 42,722,286 52,001,746
    Repayment of Crown borrowings (39,450,270) (48,345,246)
    Issuance of loans receivable 12,000 147,947
    Repayment of loans receivable (308) (35,863)
 
Cash used in investing activities 761,371 9,156,657
Financing activities    
    Net issuance from cross-currency swaps 708,746 537,463
    Issuance of debt (457,339,824) (528,626,825)
    Repayment of debt 452,157,125 504,954,004
 
Cash (provided) in financing activities (4,473,953) (23,135,358)
 
Net cash provided by Government of Canada 84,825,023 78,390,887

The accompanying notes form an integral part of these financial statements.

Notes to the Financial Statements (Unaudited)

1. Authority and objectives

The Department is established under the Financial Administration Act as a Department of the Government of Canada.

The Department contributes to a strong economy and sound public finances for Canadians. It does so by monitoring developments in Canada and around the world to provide first-rate analysis and advice to the Government of Canada and by developing and implementing fiscal and economic policies that support the economic and social goals of Canada and its people. The Department also plays a central role in ensuring that government spending is focused on results and delivers value for taxpayer dollars. The Department interacts extensively with other federal organizations and acts as an effective conduit for the views of participants in the economy from all parts of Canada.

To achieve its strategic outcome the Department articulates its plans and priorities based on the programs below.

Transfer and taxation payment programs: This Program enables the Government of Canada to meet its transfer and taxation payment commitments. The Program administers transfer and taxation payments to provinces and territories and Aboriginal governments in compliance with legislation and negotiated agreements. The Program also fulfills commitments and agreements with international financial organizations to support the economic advancement of developing countries. The Government of Canada sometimes enters into agreements or enacts legislation to respond to unforeseen pressures. These commitments can result in payments, generally statutory transfer payments, to a variety of recipients, including individuals, organizations and other levels of government.

Treasury and financial affairs: This Program provides analysis, research and advice to ministers and senior government officials on the management of the treasury and the financial affairs of the Government of Canada. The Program ensures that the treasury and financial affairs of the Government of Canada are efficiently managed on behalf of Canadian taxpayers. The Program provides direction for Canada's debt management activities, including the funding of debt and service costs for new borrowings. This Program manages investments in financial assets so that the Government of Canada can meet its liquidity needs. The Program supports the ongoing refinancing of government debt coming to maturity, the execution of the Budget Plan, and other financial operations of the government, including governance of the borrowing activities of major federal government-backed entities, such as Crown corporations. The Program also oversees the system that ensures that Canada has an adequate supply of circulating Canadian currency (banknotes and coins) to meet the needs of the Canadian economy.

Economic and fiscal policy framework: This Program is the main source of advice and recommendations to the Minister of Finance, other ministers and senior government officials on issues, policies and programs of the Government of Canada in the areas of economic, fiscal and social policy; federal-provincial relations; the financial sector; taxation; and international trade and finance. The Program ensures that ministers and senior government officials can make informed decisions on economic, fiscal and financial sector policies, programs and proposals. Ultimately, the Program contributes to building a sound and sustainable fiscal and economic framework that generates sufficient revenues and aligns the management of expenditures with the Budget Plan and the financial operations of the Government of Canada.

Internal services: Internal Services are those groups of related activities and resources that the federal government considers to be services in support of programs and/or required to meet corporate obligations of an organization. Internal Services refers to the activities and resources of the 10 distinct service categories that support Program delivery in the organization, regardless of the Internal Services delivery model in a department. The 10 service categories are: Management and Oversight Services; Communications Services; Legal Services; Human Resources Management Services; Financial Management Services; Information Management Services; Information Technology Services; Real Property Services; Materiel Services; and Acquisition Services.

2. Summary of significant accounting policies

These financial statements have been prepared using the Government's accounting policies stated below, which are based on Canadian public sector accounting standards. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian public sector accounting standards.

Significant accounting policies are as follows:

a) Parliamentary authorities

The Department is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to the Department do not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Statement of Operations and Departmental Net Financial Position and in the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting.

The planned results amounts in the Expenses and Revenues sections of the Statement of Operations and Departmental Net Financial Position are the amounts reported in the Future-oriented Statement of Operations included in the 2017-18 Departmental Plan. Planned results are not presented in the Government funding and transfers section of the Statement of Operations and Departmental Net Financial Position and in the Statement of Change in Departmental Net Debt because these amounts were not included in the 2017-18 Departmental Plan.

b) Net cash provided by Government

The Department operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by the Department is deposited to the CRF, and all cash disbursements made by the Department are paid from the CRF. The net cash provided by Government is the difference between all cash receipts and all cash disbursements including transactions between departments of the Government.

c) Amounts due from the Consolidated Revenue Fund

Amounts due from the CRF are the result of timing differences at year-end between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that the Department is entitled to draw from the CRF without further authorities to discharge its liabilities.

d) Revenues

  • The Department reports revenues on an accrual basis.
  • Investment income is recognized as revenue in accordance with the terms and conditions of underlying agreements or relevant legislation as applicable.
  • Sale of domestic coinage is recognized in the period that the sale took place.
  • Interest on bank deposits is recognized as revenue when earned.
  • Net foreign currency gains are determined by reference to prevailing exchange rates at the time of the transaction and at the year-end date as applicable on foreign currency denominated items.
  • Guarantee fees are recognized when earned and are determined by reference to the terms of the guarantee program or underlying contract.
  • Uncashed Receiver General cheques, warrants and bank account cheques for all departments and agencies are recognized as revenue of the Department if they remain outstanding 10 years after the date of issue.
  • Unclaimed matured bonds are recognized as revenue if they remain unredeemed 15 years after the date of call or maturity, whichever is earlier.
  • Unclaimed bank balances are recognized as revenue when there has been no owner activity in relation to the balance for a period of 40 years for amounts under one thousand, and for 100 years for amounts over one thousand.
  • Other revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenue takes place.
  • Revenues earned on behalf of the Government represent revenues that are non-respendable which are not available to discharge the Department's liabilities. While the Deputy Minister is expected to maintain accounting control, he has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented as a reduction of the entity's gross revenues.

e) Expenses

  • The Department reports expenses on an accrual basis.
  • Transfer payments are recorded as expenses when authorization for the payment exists and the recipient has met the eligibility criteria or the entitlements established for the transfer payment program. In situations where payments do not form part of an existing program, transfer payments are recorded as expenses when enabling legislation or authorization for payment receives parliamentary approval prior to the completion of the financial statements.
  • Interest and other costs are recognized when incurred and include interest, amortization of debt discounts, premiums and commissions, and servicing and issue costs. Amortization of discounts and premiums is performed on a straight line basis.
  • Operating expenses are recognized as incurred.
  • The cost of domestic coinage sold is recognized in the period in which the related sale took place.
  • Net foreign currency losses are determined by reference to prevailing exchange rates at the time of the transaction and at the year-end date as applicable on foreign currency denominated items.
  • Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment.
  • Services provided without charge by other government departments for accommodation, employer contributions to the health and dental insurance plans and legal services are recorded as operating expenses at their estimated cost.

f) Employee future benefits

Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multi-employer pension plan administered by the Government. The Department's contributions to the Plan are charged to expenses in the year incurred and represent the total departmental obligation to the Plan. The Department's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.

Severance benefits: The accumulation of severance benefits for voluntary departures ceased for applicable employee groups. The remaining obligation for employees who did not withdraw benefits is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

g) Coin inventory

Coin inventory is valued at the lower of cost and net realizable value. Cost is determined using the average cost method.

h) Accounts receivable

Accounts receivable are stated at the lower of cost and net recoverable value. A valuation allowance is recorded for accounts receivable where recovery is considered uncertain.

i) Foreign exchange accounts

Short-term deposits, marketable securities, and special drawing rights held in the Foreign exchange accounts are recorded at cost. Marketable securities are adjusted for amortization of purchase discounts and premiums. Purchases and sales of securities are recorded at the settlement date. Write-downs to reflect other than temporary impairment in the fair value of securities, if any, are included in Net foreign currency gain or loss in the Statement of Operations and Departmental Net Financial Position.

Canada's subscriptions, allocation of special drawing rights, notes payable to and loans receivable from the International Monetary Fund are recorded at cost.

j) Foreign currency transactions

Transactions involving foreign currencies are translated into Canadian dollar equivalents using rates of exchange in effect at the time of those transactions. Monetary assets and liabilities denominated in a foreign currency are translated into Canadian dollars using the rate of exchange in effect at year-end. Gains and losses resulting from foreign currency transactions are included in revenues or expenses in Treasury and Financial Affairs, Transfer and Taxation Payment Programs, and Internal Services in the Statement of Operations and Departmental Net Financial Position.

k) Loans receivable

Loans receivable are initially recorded at cost and are adjusted to reflect the concessionary terms of those loans made on a long-term, low interest, or interest-free basis. An allowance for valuation is further used to reduce the carrying value of loans receivable to amounts that approximate their net realizable value. The allowance is determined based on estimated probable losses that exist on the remaining portfolio.

When the terms of a loan are concessionary, such as those provided with a low or no interest clause, they are recorded at their estimated net present value. A portion of the unamortized discount is recorded as revenue each year to reflect the change in the present value of loans outstanding.

l) Investments and capital share subscriptions

Investments and capital share subscriptions are recorded at cost net of allowances. Allowances are determined based on a combination of expected return and likelihood of capital recovery. Given their nature, investments in certain international financial institutions are not expected to generate direct financial returns, and hence cannot be recovered. In those cases, investments are provisioned.

m) Derivative financial instruments

Derivative financial instruments are financial contracts that derive their value from underlying changes in interest rates, foreign exchange rates or other financial measures specified in the underlying contracts. Derivative financial instruments that the Department is currently party to include cross-currency swap agreements and foreign exchange forward contracts.

Cross-currency swap agreements and foreign exchange forward contracts are initially recorded at cost and are translated into Canadian dollars at the exchange rate in effect at the reporting date. The translated values of cross-currency swap agreements are included as part of Unmatured debt reflecting their longer term nature. The translated values of foreign exchange forward contracts are included as part of Accounts payable and accrued liabilities as these have maturities that are short term in nature.

For cross-currency swap agreements where domestic debt has been converted into foreign debt, any exchange gains or losses are offset by the exchange gains or losses on foreign currency investments held by the Exchange Fund Account.

For foreign exchange forward contracts, any exchange gains or losses are offset by the exchange gains or losses on loan balances with the International Monetary Fund.

Interest paid and payable, and interest received and receivable on cross-currency swap agreements are included in Interest on unmatured debt.

n) Tangible capital assets

All tangible capital assets and leasehold improvements having an initial cost of $10 thousand or more are recorded at their acquisition cost. The Department does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on Indian Reserves and museum collections.

Amortization of tangible capital assets is performed on a straight-line basis over the estimated useful life of the asset as follows:

Tangible capital assets
Asset class Amortization Period
Computer hardware Five years
Informatics software Three years
Leasehold improvements Lesser of the remaining term of the lease or useful life of the improvement
Machinery and equipment Five to ten years
Motor vehicles Three years

o) Unmatured debt

When a marketable bond is exchanged or repurchased, and the transaction results in an extinguishment of the debt, the difference between the carrying amount of the debt instrument and the net consideration paid is recognized in the Statement of Operations and Departmental Net Financial Position.

An extinguishment occurs on the repurchase of bonds, or when there is an exchange of bonds with an existing bond holder and the terms of the original debt and the replacement debt are substantially different. Exchanged bonds are considered to have substantially different terms when the discounted present value of the cash flows under the new terms, including any amounts paid on the exchange, and discounted using the average effective interest rate of the original debt, is at least 10 percent different from the discounted present value of the remaining cash flows of the original debt.

If an exchange of bonds with an existing bond holder does not result in an extinguishment, the carrying amount of the debt is adjusted for any amounts paid on the exchange, and the unamortized premiums or discounts relating to the original debt and arising on the exchange transaction are amortized over the remaining term to maturity of the replacement debt on a straight line basis.

p) Cash held as collateral

The Department participates in a two-way collateral program in accordance with Credit Support Annex (CSA) agreements for cross-currency swap agreements. This program is administered by the Bank of Canada, and requires the Department and counterparties to provide collateral, either in the form of securities or cash (CAD or USD), based on the terms and conditions of the agreements, or when the fair value of a contract exceeds a minimum threshold.

Collateral provided by the Government of Canada, in the form of cash, is recorded as an asset on the Statement of Financial Position. Collateral posted by the Government of Canada in the form of securities, if any, are not derecognized.

q) Deposit liabilities

Deposits that are repayable on demand are recorded as liabilities.

Deposit liabilities can also include collateral received in the form of cash in accordance with CSA agreements for cross-currency swap agreements. In the event of a credit default of a counterparty, deposit liabilities related to the collateral received in the form of cash is derecognized. Securities pledged to the Government of Canada, if any, are not recognized as assets.

r) Contingent liabilities

Contingent liabilities are potential liabilities that may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable or an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the financial statements.

Provisions for liabilities arising under the terms of a loan guarantee program are made when it is likely that a payment will be made and an amount can be estimated.

s) Contingent assets

Contingent assets are possible assets which may become actual assets when one or more future events occur or fail to occur. If the future event is likely to occur or fail to occur, the contingent asset is disclosed in the notes to the financial statements.

t) Measurement uncertainty

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant items where estimates are used are contingent liabilities, valuation allowances for loans receivable, valuation allowances for investments and capital share subscriptions, discounts on loans receivable, accruals of taxes receivable and taxes payable under tax collection agreements, the liability for employee future benefits and the useful life of tangible capital assets. Actual results could significantly differ from those estimated. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

u) Liabilities and financial assets held on behalf of Government

Liabilities and financial assets held on behalf of Government are presented in these financial statements as the Deputy Minister must maintain accounting control for these elements.

The classification of financial assets as held on behalf of Government is determined based on the ability to discharge that financial asset or financial assets against the Department's liabilities or to increase the value of those financial assets without further authority from Parliament. The classification of liabilities as held on behalf of Government is determined based on the ability to increase the value of those liabilities without further authorities or within prescribed limits or ceilings.

v) Related party transactions

Related party transactions, other than inter-entity transactions, are recorded at the exchange amount.

Inter-entity transactions are transactions between commonly controlled entities. Inter-entity transactions, other than restructuring transactions, are recorded on a gross basis and are measured at the carrying amount, except for the following:

i) Services provided on a recovery basis are recognized as revenues and expenses on a gross basis and measured at the exchange amount.

ii) Certain services received on a without charge basis are recorded for department financial statement purposes at the carrying amount.

3. Parliamentary authorities

The Department receives most of its funding through annual parliamentary authorities. Items recognized in the Statement of Operations and the Departmental Net Financial Position and the Statement of Financial Position in one year may be funded through parliamentary authorities in prior, current or future years. Accordingly, the Department has different net results of operations for the year on a government funding basis than on an accrual accounting basis. The differences are reconciled in the following tables:

a) Reconciliation of net cost of operations to current year authorities used

Reconciliation of net cost of operations to current year authorities used
$ thousands
  2018 2017
Net cost of operations before government funding and transfers 90,198,441 88,439,492
Adjustments for items affecting net cost of operations but not affecting authorities:    
  Allowance on loans, investments and advances 111,730 2,230
  Inventory charged to program expense 1,842 2,759
  Employee future benefits (107) 1,356
  Amortization of tangible capital assets (1,305) (1,320)
  Services provided without charge by other government departments (25,319) (24,861)
  Concessionary of loans receivable - (26,027)
Other expenses not being charged to authorities:    
  Other (1,045) (238)
 
Total items affecting net cost of operations but not affecting authorities 85,796 (46,101)
Adjustments for items not affecting net cost of operations but affecting authorities:    
  Advances and prepaid expenses 42,751,081 52,023,515
  Acquisitions of tangible capital assets 46 -
  Investment in the Asian Infrastructure Investment Bank 257,200 -
  Other 42,586 27,975
 
Total items not affecting net cost of operations but affecting authorities 43,050,913 52,051,490
 
Current year authorities used 133,335,150 140,444,881

b) Authorities provided and used

Authorities provided and used
$ thousands
  2018 2017
Authorities provided:    
  Vote 1 – Program expenditures 134,957 112,597
  Statutory authorities:    
    Transfer payments 68,939,855 67,016,959
    Interest on unmatured debt 14,228,824 14,138,651
    Other interest costs 6,609,474 7,027,348
    Purchase of domestic coinage 94,083 93,555
    Other 392,134 106,570
 
  Total statutory authorities 90,264,370 88,383,083
 
  Non-budgetary authorities:    
    Crown borrowings 42,740,232 52,014,329
    Other organizations 268,200 9,000
 
  Total non-budgetary authorities 43,008,432 52,023,329
 
Total authorities provided 133,407,759 140,519,009
Less:    
  Authorities available for future years (68,587) (68,588)
  Lapsed authorities:    
    Vote 1 – Program expenditures (4,022) (5,540)
 
Current year authorities used 133,335,150 140,444,881

4. Deposit liabilities

The following table presents details of deposit liabilities:

Deposit liabilities
$ thousands
  2018 2017
  Canada Hibernia Holding Corporation (note 4a) 99,099 98,374
  Canada Eldor Inc. (note 4b) 16,872 21,749
  Collateral deposits (note 4c) 96,432 94,471
 
Total deposit liabilities 212,403 214,594

a) Canada Hibernia Holding Corporation—Abandonment reserve fund

This account is a demand deposit established to record funds that will be used by Canada Hibernia Holding Corporation to defray future abandonment costs that will be incurred at the closure of the Hibernia field.

The interest payable is calculated at a rate equivalent to 90 percent of the weekly three-month Treasury bill tender rate.

b) Canada Eldor Inc.—Holdback—Privatization—CDEV

This account was established pursuant to subsection 129(1) of the Financial Administration Act. This special purpose money is to be used to meet costs incurred on the sale of Crown corporations and demand for payment by purchasers pursuant to the acquisition agreement and costs incurred by the CDEV in connection with their sale.

The interest payable is calculated at a rate equivalent to 90 percent of the weekly three-month Treasury bill tender rate.

c) Collateral deposits

This account was established to record cash received as credit support under collateral agreements with financial institutions for cross-currency swap agreements.

5. Accounts payable and accrued liabilities

The following table presents details of the Department's accounts payable and accrued liabilities:

Accounts payable and accrued liabilities
$ thousands
  2018 2017
Accounts payable - external parties (note 5a) 52,747 137,884
Accounts payable - other government departments and agencies (note 25) 151,025 164,484
Provision for redemption of Canadian pennies (note 5b) 3,724 4,979
Foreign exchange forward contracts (note 5c) (2,009) 19,029
Accrued liabilities 6,197 5,133
 
Total accounts payable and accrued liabilities 211,684 331,509

a) Accounts payable - external parties

The majority of the account is composed of $34.8 million payable to the Province of Québec ($119.9 million in 2017) and $8.4 million for an accrual for salaries ($7.7 million in 2017).

b) Provision for redemption of Canadian pennies

In Canada's Economic Action Plan 2012, the Government announced its intention to cease production of the penny and to start withdrawing it from circulation as of February 4, 2013. As part of this initiative, Canadians have the option of redeeming their pennies at their face value.

This provision reflects the estimated remaining net cost to the Government of this initiative as of March 31, 2018.

c) Foreign exchange forward contracts

This amount represents the net translated notional values of foreign exchange forward contracts outstanding at March 31, 2018. These amounts were settled on May 18, 2018 and are discussed at note 11.

6. Taxes payable under tax collection agreements

Pursuant to various tax collection agreements, the Canada Revenue Agency (CRA) collects and administers personal income taxes, corporate taxes, harmonized sales tax, sales tax, and goods and services tax on behalf of certain provinces, territories and Aboriginal governments. Amounts collectible by the CRA, but not yet remitted to the Department, are described at note 17.

At March 31, the balance in the accounts pertaining to taxes collectible and payable to provinces, territories and Aboriginal governments under tax collection agreements is as follows:

Taxes payable under tax collection agreements
$ thousands
  April 1/2017 Receipts and other credits Payments and other charges March 31/2018
Corporate taxes 6,927,161 20,141,238 22,135,921 4,932,478
Personal income taxes (1,107,991) 70,810,173 64,150,188 5,551,994
Harmonized Sales Tax (3,433,835) 30,494,100 30,125,619 (3,065,354)
First Nations Goods and Services Tax - 16,480 16,480 -
First Nations Sales Tax - 7,703 7,703 -
 
Total taxes payable under tax collection agreements 2,385,335 121,469,694 116,435,911 7,419,118

The Department ultimately transfers these amounts directly to the participating provinces, territories and Aboriginal governments in accordance with established payment schedules.

Given that the Government of Canada reports information on a fiscal year basis while tax information is calculated on a calendar year basis, there can be transactions related to several tax years during any given fiscal year. Taxes payable therefore include amounts assessed, estimates of assessments based upon cash received, adjustments from reassessments, and adjustments relating to previous tax years payable to provincial, territorial and Aboriginal governments.

7. Interest payable

The following table presents details of interest payable:

Interest payable
$ thousands
  2018 2017
Domestic debt 3,581,295 3,515,912
Retail debt 558,722 698,654
Foreign debt 63,064 32,368
International Monetary Fund Balances 14,923 5,878
 
Total interest payable 4,218,004 4,252,812

8. Notes payable to international organizations

Non-interest bearing demand notes are issued in lieu of cash in respect of subscriptions and contributions to international organizations. The notes are presented for encashment according to their terms of agreement.

At March 31, the amount outstanding is as follows:

Notes payable to international organizations
$ thousands
  2018 2017
International Bank for Reconstruction and Development 30,900 31,895
Multilateral Investment Guarantee Agency 4,133 4,266
Asian Infrastructure Investment Bank 205,216 -
 
Total notes payable to international organizations 240,249 36,161

9. Matured debt

Matured debt consists of debt that has matured but has not yet been redeemed.

At March 31, the amount outstanding is as follows:

Matured debt
$ thousands
  2018 2017
Retail debt (matured from 2002 to 2018) 465,886 403,020
Marketable bonds (matured from 2002 to 2018) 6,513 6,955
 
Total matured debt 472,399 409,975

10. Unmatured debt

The Department borrows in both domestic and international markets on behalf of the Government of Canada.

Domestic debt consists of treasury bills, marketable bonds and retail debt.

The treasury bills balance at March 31, 2018, includes $2.3 billion ($6.0 billion in 2017) in odd issue bills, $30.8 billion ($40.1 billion in 2017) in three month bills, $21.9 billion ($27.2 billion in 2017) in six month bills, and $55.7 billion ($63.4 billion in 2017) in 364 day bills.

Marketable bonds consist of outstanding domestic Government of Canada bonds with remaining terms to maturity ranging from 1 to 47 years.

Retail debt includes Canada Savings Bonds which are redeemable on demand by the holder, with accrued interest calculated to the end of the previous month; no interest is paid if redeemed during the first three months following the date of issue.

Foreign debt is issued by the Government of Canada under the government's foreign currency borrowing program. It consists of marketable bonds, Canada bills and medium term notes. Marketable bonds include bonds assumed by Finance Canada on February 5, 2001, on the dissolution of Petro Canada Limited.

Marketable bonds are either issued in US dollars or Euros. They are issued to provide long term foreign funds and have remaining terms to maturity ranging from 1 to 5 years.

Canada bills are short-term certificates of indebtedness issued in the US money market.

Cross-currency revaluation refers to the net notional value of cross-currency swap agreements in place at March 31, 2018 translated into Canadian dollar equivalents using year-end market rates. Cross-currency swap agreements are entered into to effectively convert portions of domestic debt into foreign debt in order to meet foreign funding requirements. Remaining terms to maturity range from 1 to 10 years.

The Government has entered into individual cross-currency swap agreements with various counterparties. Terms and conditions associated with these outstanding agreements are established using International Swaps and Derivatives Association (ISDA) master agreements, which are in place with each counterparty. Cross-currency swap agreements are used primarily to fund foreign-denominated asset levels in the Foreign exchange accounts.

Included in Cross-currency revaluation is $947.2 million ($1,636.4 million in 2017) related to individual cross-currency swap agreements that have a net foreign-exchange asset value to the Government upon revaluation and $8,782.2 million ($9,400.3 million in 2017) relating to individual cross-currency swap agreements that have a net foreign-exchange liability value, resulting in an overall cross-currency swap net liability revaluation of $7,835.0 million ($7,763.9 million in 2017).

Further details are discussed in note 11.

At March 31, unmatured debt is composed of the following:

Unmatured debt
$ thousands
  Face value Unamortized
(discounts)/ premiums
Net book value
2018
Net book value
2017
Domestic debt:        
  Treasury bills 110,700,000 (436,281) 110,263,719 136,463,856
  Marketable bonds 575,796,108 3,925,892 579,722,000 541,434,154
  Retail debt 2,585,645 - 2,585,645 4,533,342
 
Total domestic debt 689,081,753 3,489,611 692,571,364 682,431,352
 
Foreign debt:        
  Marketable bonds 10,926,227 (14,463) 10,911,764 11,499,961
  Canada bills 2,590,690 (6,593) 2,584,097 3,517,260
  Medium term notes 2,556,915 (1,721) 2,555,194 2,604,207
 
Total foreign debt 16,073,832 (22,777) 16,051,055 17,621,428
 
Total domestic and foreign debt 705,155,585 3,466,834 708,622,419 700,052,780
 
   
Less: Government holdings (1,220,000) -
Less: Securities held for the retirement of unmatured foreign debt (24,721) (27,141)
     
Net domestic and foreign debt     707,377,698 700,025,639
     
Cross-currency revaluation:        
  Payables     80,011,503 80,124,560
  Receivables     (72,176,581) (72,360,683)
     
Total cross-currency revaluation     7,834,922 7,763,877
     
Total unmatured debt     715,212,620 707,789,516
     
Domestic debt fair value     715,422,483 733,441,761
     
Foreign debt fair value     16,158,395 17,966,982

Contractual maturities of unmatured debt by currency, at face value, are as follows:

Contractual maturities of unmatured debt
$ thousands
  Canadian dollars1 US dollars2 Euro3 Total
2019 176,532,098 6,798,708 - 183,330,806
2020 117,156,066 1,196,279 3,170,600 121,522,945
2021 75,013,491 740,625 238,000 75,992,116
2022 50,314,481 64,420 - 50,378,901
2023 43,506,022 3,865,200 - 47,371,222
2024 to 2065 226,559,595 - - 226,559,595
 
Total contractual maturities of unmatured debt 689,081,753 12,665,232 3,408,600 705,155,585
1 Includes treasury bills, marketable bonds and retail debt.
2 Includes marketable bonds and medium term notes issued in US dollars and Canada bills.
3 Includes marketable bonds and medium term notes issued in Euros.

The effective average annual interest rates are as follows:

Effective average annual interest rates
%
  2018 2017
Treasury bills 1.16 0.54
Marketable bonds—domestic 2.18 2.26
Retail debt 0.63 0.66
Marketable bonds—foreign 2.30 1.90
Canada bills 1.61 0.77
Medium term notes 1.70 1.06

11. Derivative and fair values of financial instruments

a) Derivative financial instruments

i) Swap agreements

Government debt is issued at both fixed and variable interest rates and is denominated in Canadian dollars, US dollars and Euros. The Government has entered into cross-currency swap agreements to facilitate the management of its debt structure. Using cross-currency swap agreements, Canadian dollar and other foreign currency debt has been converted into US dollars or other foreign currencies with either fixed interest rates or variable interest rates. As a normal practice, the Government's swap positions are held to maturity.

The interest paid or payable and the interest received or receivable on all swap transactions are recorded as part of Interest and other costs. Unrealized gains or losses due to fluctuations in the foreign exchange value of the swaps are presented in the Cross-currency revaluation account and are recognized as part of Net foreign currency gain or loss in the Statement of Operations and Departmental Net Financial Position.

Cross-currency swaps with contractual or notional principal amounts outstanding at March 31, stated in Canadian dollars, are as follows:

Cross-currency swaps with contractual or notional principal amounts
$ thousands
  2018
2019 6,586,869
2020 6,888,994
2021 11,112,599
2022 7,504,937
2023 7,145,228
2024 to 2028 40,772,876
 
Total cross-currency swaps with contractual or notional principal amounts 80,011,503
ii) Foreign exchange forward contracts

The Government funds loans with the International Monetary Fund (IMF) as part of the Foreign exchange accounts, which are denominated in special drawing rights (SDRs), with US dollars. Since the currency value of the SDR is based upon a basket of key international currencies (the US dollar, Euro, Japanese yen, British pound sterling and Chinese Renminbi), a foreign exchange mismatch results, whereby fluctuations in the value of the loan asset are not equally offset by fluctuations in the value of the related funding liability. Therefore, the Government enters into forward contracts to hedge this foreign exchange risk.

Unrealized gains and losses due to fluctuations in the foreign exchange value of these contracts are recorded in Accounts payable and accrued liabilities and are recognized as part of the Net foreign currency gain or loss in the Statement of Operations and Departmental Net Financial Position.

Foreign exchange forward contracts with contractual or notional principal amounts outstanding total $1.3 billion ($1.4 billion in 2017), maturing in 2018-19.

b) Fair value of financial instruments

The following tables present the carrying value and the fair value of certain financial instruments.

Fair values are managements estimates and are generally calculated using market conditions at a specific point in time where a market exists. Fair values of instruments with a short life span or of a non-negotiable nature are assumed to approximate carrying values. Fair values may not reflect future market conditions nor the actual values obtainable should the instrument be exchanged on the market. The calculations are subjective in nature and involve inherent uncertainties due to unpredictability of future events.

Carrying and fair value of financial instruments
$ thousands
  2018 2017
 

  Carrying value Fair value Carrying value Fair value
Assets        
Foreign exchange accounts 96,937,597 96,169,115 98,797,449 99,033,874
Crown borrowings 55,148,128 55,180,073 51,863,952 52,157,521
Liabilities        
Total domestic and foreign debt 708,622,419 731,580,878 700,052,780 751,408,743

Fair values of the Cross-currency revaluation and Foreign exchange forward contracts are the estimated amount that the Government would receive or pay, based on market factors, if the contracts were terminated on March 31, 2018.

They are established by discounting the expected cash flows of the Cross-currency revaluation and Foreign exchange forward contracts, calculated from the contractual or notional principal amounts, using year-end market interest and exchange rates. A positive (negative) fair value indicates that the Government would receive (make) a payment if the agreements were terminated on March 31, 2018.

Notional and fair value of derivative financial instruments
$ thousands
  2018 2017
 

  Notional value Fair value Notional value Fair value
Cross-currency revaluation (net) (7,834,922) (8,390,657) (7,763,877) (6,949,446)
Foreign exchange forward contracts (net) 2,009 (444) (19,029) (18,682)

12. Financial risk

a) Credit risk related to swap and foreign exchange forward contracts

The Department manages its exposure to credit risk by dealing principally with financial institutions having acceptable credit ratings. Credit risk is also managed through collateral provisions in swap and foreign exchange forward contracts. Counterparties must pledge collateral to the Government, which, in the event of default, could be liquidated to mitigate credit losses.

The Government of Canada participates in a two-way collateral program in accordance with Credit Support Annex (CSA) agreements for its cross-currency swap portfolio.

At March 31, collateral pledged and held under two-way CSA agreements is as follows:

Collateral pledged and held under two way CSA agreements for 2018
$ thousands
  Nominal amount Fair value
 

  Posted by Government of Canada Posted by counterparties Posted by Government of Canada Posted by counterparties
Cash 8,716,111 96,432 8,716,111 96,432
Securities - 2,086,246 - 2,456,259
 
Total 8,716,111 2,182,678 8,716,111 2,552,691

The Department does not have a significant concentration of credit risk with any individual institution and does not anticipate any counterparty credit loss with respect to its swap and foreign exchange forward contracts.

The following table presents the contractual or notional principal amounts of the swap and foreign exchange forward contracts organized by credit ratings based on published Standard & Poor's credit ratings and stand-alone credit profiles at year-end:

Notional amounts of swap and foreign exchange forward contracts
$ thousands
  2018 2017
A+ 27,390,294 26,602,283
A 21,627,558 22,009,738
A- 32,284,518 32,810,444
BBB - 66,495
 
Total notional amounts of swap and foreign exchange forward contracts 81,302,370 81,488,960

b) Managing foreign currency and interest rate risk and sensitivity analysis to foreign currency exposures

Foreign currency and interest rate risks are managed using a strategy of matching the duration and the currency of the Exchange Fund Account assets and the related foreign currency borrowings of the Government. As at March 31, 2018, the impact of price changes affecting the Exchange Fund Account assets and the liabilities funding these assets naturally offset each other, resulting in no significant impacts to the Government's net debt. Assets related to the IMF are only partially matched by related foreign currency borrowings, as they are denominated in SDR; however, foreign exchange risks relating to loans to the IMF have been managed through entering into various foreign exchange forward contracts.

The majority of the Exchange Fund Account foreign currency assets and liabilities are held in four currency portfolios: the US dollar, the Euro, British pound sterling and the Japanese yen. At March 31, 2018, a one percent appreciation in the Canadian dollar as compared to the US dollar, the Euro, British pound sterling and the Japanese yen would result in a foreign exchange loss of $2.6 million ($4.9 million in 2017) due to the exposure of the US dollar portfolio, a foreign exchange loss of $1.0 million ($7.7 million in 2017) due to the exposure of the Euro portfolio. There is no significant exposure related to the British pound sterling and Japanese yen portfolio.

13. Employee future benefits

a) Pension benefits

The Department's employees participate in the public service pension plan (the "Plan"), which is sponsored and administered by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of 2 percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plan benefits and they are indexed to inflation.

Both the employees and the Department contribute to the cost of the Plan. Due to the amendment of the Public Service Superannuation Act following the implementation of provisions related to the Economic Action Plan 2012, employee contributors have been divided into two groups - Group 1 relates to existing plan members as of December 31, 2012 and Group 2 relates to members joining the Plan on or after January 1, 2013. Each group has a distinct contribution rate.

The expense amounts to $7.4 million ($7.3 million in 2017). For Group 1 members, the expense represents approximately 1.01 times (1.12 times in 2017) the employee contributions and, for Group 2 members, approximately 1.00 times (1.08 times in 2017) the employee contributions.

The Department's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.

b) Severance benefits

Severance benefits provided to the Department's employees were previously based on an employee's eligibility, years of service and salary at termination of employment. However, since 2011 the accumulation of severance benefits for voluntary departures progressively ceased for substantially all employees. Employees subject to these changes were given the option to be paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits upon departure from the public service. All settlements for immediate cash out are complete. Severance benefits are unfunded and, consequently, the outstanding obligation will be paid from future authorities.

The changes in the obligations during the year were as follows:

Severance benefits
$ thousands
  2018 2017
Accrued benefit obligation, beginning of year 4,265 5,621
Expense for the year 287 (1,121)
Benefits paid during the year (180) (235)
 
Accrued benefit obligation, end of year 4,372 4,265

14. Liabilities and financial assets held on behalf of Government

a) Liabilities held on behalf of Government

Notes payable to international organizations are related to investments made in those entities. Since the Department must obtain separate authorities to make these investments these items are considered liabilities held on behalf of Government.

b) Financial assets held on behalf of Government

A distinction is made between financial assets that are available to discharge the Department's liabilities and those that are not. Financial assets that are not available to discharge the Department's liabilities are considered to be held on behalf of Government and are therefore presented as a reduction of the Department's gross financial assets.

Financial assets held on behalf of Government include amounts related to non-respendable revenues as well as loans receivable and investments and capital share subscriptions which if repaid could not be used to discharge other liabilities.

The following table presents details of the liabilities and financial assets held on behalf of Government:

Liabilities and financial assets held on behalf of Government
$ thousands
  2018 2017
Liabilities held on behalf of Government:    
  Notes payable to international organizations (note 8) 240,249 36,161
 
Total liabilities held on behalf of Government 240,249 36,161
 
Financial assets held on behalf of Government:    
  Accounts receivable (note 16) 156,099 116,517
  Foreign exchange accounts (note 18) 1,712,719 1,996,259
  Loans receivable (note 20) 1,031,827 977,941
  Investments and capital share subscriptions (note 21) 1,323,339 243,701
 
Total financial assets held on behalf of Government 4,223,984 3,334,418

15. Cash held as collateral

This account records cash deposited by the Government as credit support under collateral agreements with financial institutions. Interest is received on the balance.

The Department participates in a two-way collateral program in accordance with Credit Support Annex (CSA) agreements for cross-currency swaps. This program is administered by the Bank of Canada, and requires the Department and counterparties to provide collateral, either in the form of securities or cash (CAD or USD), based on the terms and conditions of agreements, or when the fair value of a contract exceeds a minimum threshold.

16. Accounts receivable

The following table presents details of the Department accounts receivable:

Accounts receivable
$ thousands
  2018 2017
Accrued interest income - Crown borrowings 87,777 68,765
Accrued investment income 62,867 41,220
Receivables - Other government departments and agencies (note 25) 4,354 5,297
Receivables - External parties 1,101 1,235
 
Total accounts receivable 156,099 116,517

17. Taxes receivable under tax collection agreements

Taxes receivable include taxes collected or collectible by the CRA on behalf of provincial, territorial or Aboriginal governments that have not yet been remitted to the Department.

The following table presents details of taxes receivable under tax collection agreements:

Taxes receivable under tax collection agreements
$ thousands
  April 1/2017 Receipts and other credits Settlements with CRA March 31/2018
Corporate taxes 6,904,337 20,141,238 21,561,458 5,484,117
Personal income taxes 6,625,954 70,810,173 66,563,217 10,872,910
Harmonized Sales Tax (3,656,717) 30,494,100 29,866,876 (3,029,493)
First Nations Goods and Services Tax 1,251 16,480 16,009 1,722
First Nations Sales Tax 644 7,703 7,715 632
Provincial benefit programs (255,062) (5,404,269) (5,397,001) (262,330)
 
Total taxes payable under tax collection agreements 9,620,407 116,065,425 112,618,274 13,067,558

The Department ultimately transfers these amounts directly to the participating provincial, territorial or Aboriginal governments in accordance with established payment schedules. Amounts payable are described in note 6.

Provincial benefit programs include benefit amounts paid by CRA directly to recipients on behalf of provincial governments. Transfers to the provincial governments are ultimately reduced by these amounts.

18. Foreign exchange accounts

The foreign exchange accounts represent the largest component of the official international reserves of the Government of Canada and consist of the following:

Foreign exchange accounts
$ thousands
  2018 2017
Investments held in the Exchange Fund Account 103,717,127 104,671,317
Accrued net revenue from the Exchange Fund Account 1,712,719 1,996,259
 
Total investments held in Exchange Fund Account (note 18a) 105,429,846 106,667,576
Subscriptions to the International Monetary Fund (note 18b) 20,646,662 19,892,297
Loans receivable from the International Monetary Fund (note 18c) 775,380 1,125,087
Notes payable to the International Monetary Fund (note 18d) (18,699,215) (18,082,200)
Special drawing rights allocations (note 18e) (11,215,076) (10,805,311)
 
Total foreign exchange accounts 96,937,597 98,797,449
 
Fair value 96,169,115 99,033,874

a) Investments held in Exchange Fund Account

This account records the moneys advanced from the Government to the Exchange Fund Account, in Canadian and other currencies, for the purchase of gold, foreign currencies and securities, and SDRs.

The Exchange Fund Account is operated under the provision of the Currency Act. Total advances are limited to US$150.0 billion.

The following table details international reserves held in and advances to the Exchange Fund Account:

Investments held in Exchange Fund Account
$ thousands
  2018 2017
US dollar cash on deposit 878,077 11,818,493
US dollar short-term deposits - 66,535
US dollar marketable securities 61,337,341 53,722,589
Euro cash on deposit 113,925 2,188,475
Euro marketable securities 20,619,549 17,936,519
British pound sterling cash on deposit 140,178 131,335
British pound sterling marketable securities 10,432,473 9,293,628
Japanese yen cash on deposit 142,521 8,071
Japanese yen marketable securities 1,215,959 1,323,445
Special drawing rights 10,549,823 10,178,486
 
Total investments held in Exchange Fund Account 105,429,846 106,667,576

b) Subscriptions to the International Monetary Fund

This account records the value of Canada's subscription ("quota") to the capital of the IMF. The IMF is an international organization of 189 member countries that operates in accordance with its Articles of Agreement.

The amount by which the sum of Canada's subscriptions plus loans to the IMF under special facilities exceeds the IMF's holdings of Canadian dollars represents the amount of foreign exchange which Canada is entitled to draw from the IMF on demand for balance of payments purposes. The subscription is expressed in terms of SDR, a unit of account defined in terms of a "basket" of five major currencies, the US dollar, Euro, Japanese yen, British pound sterling and Chinese Renminbi.

Canada has accumulated its subscriptions through settlements to the IMF in Canadian dollars, gold and SDRs. Annual maintenance of value payments are made to, or received from, the IMF when the Canadian dollar depreciates or appreciates against the SDR, in order to maintain the SDR-value of the IMF's holdings of Canadian dollars.

In 2018, payments and other charges consisted of an increase of $754.4 million.

c) Loans receivable from the International Monetary Fund

This account records the value of interest-bearing loans made under Canada's multilateral and bilateral lending arrangements with the IMF. The purpose of these arrangements is to provide temporary resources to the IMF which works to promote economic growth and safeguard the stability of the international monetary system.

There are three outstanding lending arrangements with the IMF outside of the quota system: the multilateral New Arrangements to Borrow (NAB), the General Arrangements to Borrow (GAB) and the temporary bilateral borrowing agreement.

Canada's current participation in the NAB is governed by the November 2012 NAB Decision which incorporated technical amendments made as a result of the IMF's 14th General Review of Quotas. The maximum lending by Canada to the IMF under these arrangements is SDR 3,873.7 million. As at March 31, 2018, SDR 414.0 million or $775.4 million (SDR 623.5 million or $1,125.1 million in 2017) in lending has been provided by Canada to the IMF under the NAB. Canada recently renewed its participation in the NAB for another five year period pursuant to the November 2016 NAB Decision (effective November 2017).

Canada also participates in the GAB which was most recently renewed in December 2013. The maximum lending by Canada to the IMF under these arrangements is limited to SDR 892.5 million. As at  March 31, 2018, no lending had been provided to the IMF under the GAB.

In early 2017, Canada extended a temporary bilateral credit line to the IMF in the amount of SDR 8,200.0 million for a maximum period of four years, as part of a collective effort with 34 other nations to foster global economic and financial stability. As at March 31, 2018, no lending had been provided to the IMF under the bilateral credit line.

Collectively, the outstanding loans under multilateral and bilateral arrangements with the IMF cannot exceed SDR 12,966.2 million at any given time. This reflects the maximum commitment under the NAB, GAB and bilateral borrowing agreement.

At March 31, 2018, a total of SDR 414.0 million or $775.4 million was outstanding under these arrangements. Amounts advanced under these arrangements are considered part of the Official International Reserves of Canada.

d) Notes payable to the International Monetary Fund

This account records non-marketable, non-interest bearing notes issued by the Government to the IMF. These notes are payable on demand and are subject to redemption or re-issue, depending on the needs of the IMF for Canadian currency.

Canadian dollar holdings of the IMF include these notes and a small working balance (initially equal to one-quarter of one percent of Canada's subscription) held on deposit at the Bank of Canada.

In 2018, notes payable to the IMF increased by $617.0 million.

e) Special drawing rights allocations

This account records the value of SDRs allocated to Canada by the IMF. The SDR is an international currency created by the IMF, and allocated to countries participating in its Special Drawing Rights Department. It represents a liability of Canada, as circumstances could arise whereby Canada could be called upon to repay these allocations, in part or in total.

As an asset, SDRs represent rights to purchase currencies of other countries participating in the IMF's Special Drawing Rights Department, as well as to make payments to the IMF itself. All SDRs allocated to Canada by the IMF have either been used to settle subscriptions in the IMF, or have been advanced to the Exchange Fund Account.

There was no allocation of SDRs by the IMF to Canada during the year. In 2018, receipts and other credits consisted of an increase of $409.7 million.

19. Crown borrowings

The following table presents details of Crown borrowings issued as at March 31:

Crown borrowings
$ thousands
  Face value Unamortized discounts Net book value 2018 Net book value 2017
Canada Mortgage and Housing Corporation 6,679,973 148 6,679,825 7,374,118
Farm Credit Canada 28,008,500 10,197 27,998,303 25,679,234
Business Development Bank of Canada 20,470,000 - 20,470,000 18,810,600
 
Total Crown borrowings 55,158,473 10,345 55,148,128 51,863,952
 
Fair value     55,180,073 52,157,521

Contractual maturities of outstanding loans with Crown corporations, at face value, are as follows:

Contractual maturities of unmatured loans by Crown corporations
Maturing year
$ thousands
  Canada Mortgage
and Housing Corporation
Farm
Credit
Canada
Business
Development Bank
Total
2019 1,325,738 10,384,000 20,470,000 32,179,738
2020 1,157,402 6,122,000 - 7,279,402
2021 1,458,427 2,570,500 - 4,028,927
2022 727,037 5,968,000 - 6,695,037
2023 418,485 2,524,000 - 2,942,485
2024 and thereafter 1,592,884 440,000 - 2,032,884
 
Total contractual maturities of unmatured loans by Crown corporations 6,679,973 28,008,500 20,470,000 55,158,473

The effective average annual interest rates are as follows:

Effective average annual interest rates
%
  Canada Mortgage
and Housing Corporation
Farm
Credit
Canada
Business
Development Bank
Short Term fixed interest rate 1.21 1.32 -
Long Term fixed interest rate 2.00 1.20 -
Short Term floating interest rate - 1.07 1.08
Long Term floating interest rate - 1.08 -

20. Loans receivable

The following table presents the various components of loans receivable due to the Department.

Loans receivable
$ thousands
  Face value Unamortized discounts /
Valuation allowance
Net book
value
2018
Net book
value
2017
Government business enterprises        
Canada Lands Company Ltd. (note 20a) 419,530 17,213 402,317 385,082
Downsview Park Inc. (note 20b) 48,000 15,871 32,129 31,870
 
Total Government business enterprises 467,530 33,084 434,446 416,952
 
Provincial and territorial governments        
Federal-Provincial fiscal arrangements (note 20c) 433,562 45,680 387,882 409,596
Municipal Development and Loan Board  (note 20d) 315 - 315 315
Winter Capital Projects Fund (note 20e) 2,900 2,900 - -
 
Total Provincial and territorial governments 436,777 48,580 388,197 409,911
 
International and other organizations        
International Monetary Fund - Poverty Reduction and Growth Trust (note 20f) 257,075 10,000 247,075 247,974
International Finance Corporation - Global Agriculture and Food Securities Program (note 20g) - - - -
Global Environment Facility (note 20h) 10,000 10,000 - -
Canadian Commercial Bank (note 20i) 42,202 42,202 - -
         
Total International and other organizations 309,277 62,202 247,075 247,974
 
National governments        
Ukraine (note 20j) 400,000 3,444 396,556 320,056
 
Total National governments 400,000 3,444 396,556 320,056
 
Total loans receivable 1,613,584 147,310 1,466,274 1,394,893

The breakdown of loans receivable by organizational body is outlined as follows:

Loans receivable by enterprise type
$ thousands
  Face value Unamortized discounts /
Valuation allowance
Net book
value
2018
Proportion
Total Government business enterprises 467,530 33,084 434,446 30%
Total Provincial and territorial governments 436,777 48,580 388,197 26%
Total International and other organizations 309,277 62,202 247,075 17%
Total National governments 400,000 3,444 396,556 27%
 
Total Loans receivable by enterprise type 1,613,584 147,310 1,466,274 100%

The amount of loans receivable outstanding in foreign currencies, the Canadian dollar equivalent and the basis of translation is outlined in the table below.

Loans receivable by currency
  Face value CAD Equivalent Exchange Rate 2018 Proportion
 

  $ thousands %
CAD 1,356,509 1,356,509 N/A 84
SDR 137,260 257,075 1.8729 16
   
 
    1,613,584   100

Government business enterprises

a) Canada Lands Company Ltd. (CLC)

Canada Lands Company Limited (originally Public Works Lands Company Limited) was incorporated under the Companies Act in 1956 and was continued under the Canada Business Corporations Act. The Corporation is a Crown corporation named in Part I of Schedule III of the Financial Administration Act and is wholly-owned by the Government of Canada. The Corporation conducts its business through Canada Lands Company CLC Limited (CLC), its principal wholly-owned subsidiary. CLC's objective is to carry out a commercially-oriented and orderly disposal program of certain Government real properties and the management of certain select properties. In undertaking this objective, CLC may manage, develop and dispose of real properties, either in the capacity of owner or as agent of the Government.

CLC has acquired an interest in a number of real properties from the Government in consideration for the issuance of promissory notes, which bear no interest and are repayable from the proceeds of the sale of the properties in respect of which they were issued. The notes were discounted using the Consolidated Revenue Fund lending rate applicable to Crown corporations and recorded at their discounted value.

During the year, new promissory notes were issued for an amount of $12.0 million ($147.9 million in 2017). No amounts were repaid during the year ($22.2 million in 2017). An amount of $5.5 million ($5.1 million in 2017) was amortized to income. The balance in the account represents the balance of the notes receivable net of the corresponding unamortized discount.

b) Downsview Park Inc.

Located in Toronto, Downsview Park is a unique urban recreational green space, a safe and peaceful place developed according to the principles of environmental, economic and social sustainability, for Canadians to enjoy in all seasons.

Downsview Park Inc. issued a promissory note which is non-interest bearing and is repayable in full on July 31, 2050. No amounts were repaid during the year ($10.0 million in 2017). An amount of $0.3 million ($0.5 million in 2017) was amortized to income.

Canada Lands Company Limited is the parent company of CLC and Downsview Park. The promissory notes are discounted using the CRF lending rate applicable to Crown corporations at the time of issuance and are recorded at their discounted value at March 31, 2018.

Provincial and territorial governments

c) Federal-Provincial fiscal arrangements

These amounts represent net overpayments in respect of transfer payments to provinces under the Constitutions Acts 1867 to 1982, the Federal-Provincial Arrangements Act, and other statutory authorities.

The overpayments are non-interest bearing and will be repaid by reducing transfer payments in subsequent years.

d) Municipal Development and Loan Board

Loans have been made to provinces and municipalities to augment or accelerate municipal capital works programs.

The loans bear interest at rates from 5.25 to 5.375 percent per annum and are repayable in annual or semi-annual installments over 15 to 50 years.

e) Winter Capital Projects Fund

Loans have been made to provinces, provincial agencies and municipalities to assist in the creation of employment.

The loans bear interest at rates from 7.4 to 9.5 percent per annum and are repayable either in annual installments over 5 to 20 years, or at maturity.

International and other organizations

f) International Monetary Fund - Poverty Reduction and Growth Trust

This account records the loan to the International Monetary Fund's Poverty Reduction and Growth Trust (formerly the Poverty Reduction and Growth Facility) in order to provide assistance to qualifying low-income countries as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

The total loan authority pursuant to the Bretton Woods and Related Agreements Act was set at $550.0 million or such greater amount as may be fixed by the Governor in Council. The Governor in Council has currently set the limit to SDR 1.7 billion.

As at March 31, 2018, Canada has lent a total of SDR 851.5 million or $1,594.8 million (SDR 851.5 million or $1,536.5 million in 2017) to the Poverty Reduction and Growth Trust. Of this amount, SDR 714.3 million or $1,337.8 million (SDR 708.6 million or $1,278.6 million in 2017) has been repaid.

The outstanding balance of SDR 137.3 million or $257.0 million (SDR 143.0 million or $258.0 million in 2017) was translated into Canadian dollars at the year-end closing rate of exchange of $1.8729 ($1.80447 in 2017) per SDR. During the year, transactions included repayments and an exchange valuation adjustment.

Separately, Canada has also made budgetary contributions towards an interest subsidy amounting to $403.0 million (SDR 215.2 million or $388.3 million in 2017).

g) International Finance Corporation - Global Agriculture and Food Securities Program (IFC-FSI)

In 2010, Canada provided financial support to the IFC for participation in the G8 Food Security Initiative (FSA) as authorized by the Bretton Woods and Related Agreements Act and various appropriation acts.

In accordance to Section 178 (1) of the Budget Implementation Act 2017, No. 2, the Minister of Finance, by order in council, transferred the responsibility for this program to the Minister of Foreign Affairs. As a result, the loan receivable with a face value of $35.6 billion and a valuation allowance of $35.6 billion was transferred to Global Affairs Canada in March 2018.

h) Global Environment Facility (GEF)

This account records the funding of a facility for environmental funding in developing countries in the areas of ozone, climate change biodiversity and international waters as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

Advances to the GEF are made in non-negotiable, non-interest bearing demand notes that are later encashed.

As at March 31, 2018, advances to the GEF amounted to $10.0 million ($10.0 million in 2017).

i) Canadian Commercial Bank

Advances have been made to the Canadian Commercial Bank representing the Government's participation in the support group as authorized by the Canadian Commercial Bank Financial Assistance Act. These funds represent the Government's participation in the loan portfolio that was acquired from the Bank and the purchase of outstanding debentures from existing holders.

National governments

j) Ukraine

Pursuant to section 8.3(1) of the Bretton Woods and Related Agreements Act, the Minister of Finance, by order of the Governor in Council, is authorized to extend certain forms of financial assistance to a foreign state. The provision of such financial assistance is contingent upon that state having an arrangement with the International Monetary Fund and upon the satisfactory participation of other countries with Canada in the provision of financial assistance.

Funding for such transactions is provided by the Minister of Finance out of the CRF. The maximum amount of financial assistance that can be provided under legislation is US$2.5 billion in respect of any particular foreign state and US$5.0 billion in respect of all foreign states.

As at March 31, 2018, the outstanding loan balance to the Ukraine was $400.0 million ($400.0 million for 2017). There were no other balances or transactions in respect to Ukraine or other foreign states during the year.

These loans bear interest at rates ranging between 1.4 and 2.1 percent and have repayment term of 5 years.

21. Investments and capital share subscriptions

The following table presents details of investments and capital share subscriptions that the Department participates in:

Investments and capital share subscriptions
$ thousands
  Face value Unamortized discounts /
Valuation allowance
Net book
value
2018
Net book
value
2017
International Development Association (note 21a) 12,055,788 12,055,788 - -
European Bank for Reconstruction and Development (note 21b) 278,549 278,549 - -
International Bank for Reconstruction and Development (note 21c) 554,666 554,666 - -
International Finance Corporation   (note 21d) 104,801 104,801 - -
International Finance Corporation-Financial Mechanisms
for Climate Change Facility (note 21e)
75,000 - 75,000 243,701
Multilateral Investment Guarantee Agency (note 21f)   13,827 13,827 - -
Asian Infrastructure Investment Bank (note 21g) 257,200 - 257,200 -
Other Investments (note 21h)  991,139 - 991,139 -
 
Total investments and capital share subscriptions 14,330,970 13,007,631 1,323,339 243,701

a) International Development Association (IDA)

This account records Canada's contributions and subscriptions to the IDA, as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts. The contributions and subscriptions to the IDA, which is part of the World Bank Group, are used to lend funds to the poorest developing countries for development purposes, on highly favourable terms (no interest, with a 35 to 40 year maturity and 10 years of grace).

As at March 31, 2018, Canada's total participation in IDA amounted to $12.1 billion ($11.6 billion in 2017).

b) European Bank for Reconstruction and Development

This account records Canada's subscriptions to the capital of the European Bank for Reconstruction and Development (EBRD), as authorized by the European Bank for Reconstruction and Development Agreement Act, and various appropriation acts.

At year-end, Canada has subscribed to 102,049 shares (102,049 shares in 2017) of the EBRD's authorized capital with a face value at EUR 1.0 billion (EUR 1.0 billion in 2017).

Only EUR 212.9 million (EUR 212.9 million in 2017) or about 21 percent (21 percent in 2017) of Canada's share subscription is considered "paid-in". The balance is callable meaning the institution can request the resources in the unlikely event that it requires them to meet its financial obligations to bondholders. Payments for the share subscription are authorized by the Act. Each payment to the EBRD is comprised of cash and a promissory note.

Canada's contingent liability for the callable portion of its shares is EUR $807.6 million (EUR 807.6 million in 2017).

Up to and including March 31, 2018 Canada's total cash contributions into the "paid-in" capital of the EBRD total US$216.2 million (US$216.2 million in 2017).

c) International Bank for Reconstruction and Development (World Bank)

This account records Canada's subscriptions to the capital of the International Bank for Reconstruction and Development (World Bank), as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

As at March 31, 2018, Canada has subscribed to 58,354 shares (58,354 shares in 2017). The total face value of these shares is US$7.04 billion (US$7.04 billion in 2017), of which US$417.8 million (US$417.8 million in 2017) plus $16.4 million ($16.4 million in 2017) has been paid-in. The remaining portion is callable.

The callable portion is subject to call by the World Bank under certain circumstances. Canada's contingent liability for the callable portion of its shares is US$6.6 billion (US$6.6 billion in 2017).

d) International Finance Corporation

This account records Canada's subscription to the capital of the International Finance Corporation, which is part of the World Bank Group, as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

As at March 31, 2018, Canada has subscribed to 81,342 shares (81,342 shares in 2017). These shares have a total face value of US$81.3 million (US$81.3 million in 2017), all of which has been paid-in.

e) International Finance Corporation (IFC) - Financial Mechanisms for Climate Change Facility and Catalyst Fund

Canada provided financial support to the IFC's – Financial Mechanisms for Climate Change (FMCC) facility as authorized by the Bretton Woods and Related Agreements Act and various appropriation acts. The FMCC supports private sector engagement in climate change mitigation and adaptation activities through the provision of concessional financing arrangements. During the year, $8.8 million ($14.0 million in 2017) was recovered from the FMCC trust mechanism based on the terms and conditions of the project funding which is administered by the IFC in accordance with the administration agreement signed between IFC and the Government of Canada.

In accordance to Section 178 (1) of the Budget Implementation Act 2017, No. 2, the Minister of Finance, by order in council, transferred the responsibility for FMCC Facility program to the Minister of Foreign Affairs. As a result, an investment with a face value of $224.4 million and a valuation allowance of $64.5 million was transferred to Global Affairs Canada in March 2018.

The responsibility for the IFC catalyst fund remains with the Minister of Finance. The IFC catalyst fund invests in companies focused on providing capital to renewable energy projects. As at March 31, 2018, the investment has a net book value of $75.0 million.

f) Multilateral Investment Guarantee Agency

This account records Canada's subscriptions to the capital of the Multilateral Investment Guarantee Agency, as authorized by the Bretton Woods and Related Agreements Act, and various appropriation acts.

As at March 31, 2018, Canada has subscribed to 5,225 shares (5,225 shares in 2017). The total value of these shares is US$56.5 million (US$56.5 million in 2017), of which US$10.7 million (US$10.7 million in 2017) is paid-in and the remaining portion is callable.

The callable portion is subject to call by the Multilateral Investment Guarantee Agency under certain circumstances. Canada's contingent liability for the callable portion of its shares is US$45.8 million (US$45.8 million in 2017).

g) Asian Infrastructure Investment Bank (AIIB)

Effective March 19, 2018, Canada became a member to the AIIB pursuant to the Asian Infrastructure Investment Bank Agreement Act. The AIIB commenced operations in January 2016.

As at March 31, 2018, Canada has subscribed to 9,954 shares (nil in 2017). The total value of these shares is US$995.4 million (nil in 2017), of which US$199.1 million (nil in 2017) is paid-in and the remaining portion is callable. The paid-in capital will be paid in five equal installments over five years, with an initial payment of US$39.8 million in March 2018.

Canada's contingent liability for the callable portion of its shares is US$796.3 million (nil in 2017).

h) Other Investments

Following the dissolution of PPP Canada Inc., in 2018, pursuant to Order in Council P.C. 2017-1329, the Department assumed investments held by PPP Canada Inc.

These investments include bankers' acceptance notes, guaranteed investment certificates and obligations of provincial governments, with maturities ranging from 1 to 2 years.

The investments earn interest at rates from 0.78% per cent to 2.15% per cent per annum.

22. Tangible capital assets

Tangible capital assets
$ thousands
  Cost Accumulated amortization Net book value
 


Capital asset class Opening balance Acqui-sitions Adjust-ments Disposals and write-offs Closing balance Opening balance Amorti-zation Adjust-ments Disposals and write-offs Closing balance 2018 2017
Informatics equipment 3,661 27 - - 3,688 1,527 559 - - 2,086 1,602 2,134
Informatics software 44 19 - - 63 44 - - - 44 19 -
Leasehold improvements 11,516 - - - 11,516 1,228 460 - - 1,688 9,828 10,288
Machinery and equipment 2,731 - - - 2,731 764 286 - - 1,050 1,681 1,967
Motor vehicles 55 - - - 55 55 - - - 55 - -
 


Total capital assets 18,007 46 - - 18,053 3,618 1,305 - - 4,923 13,130 14,389

23. Contractual obligations

The nature of the Department's activities can result in some large multi-year contracts and obligations whereby the Department will be obligated to make future payments in order to carry out its transfer payments programs or when the services/goods are received.

Significant contractual obligations that can be reasonably estimated are summarized as follows:

Contractual obligations
$ thousands
  2019 2020 2021 2022 2023 and
thereafter
Total
Transfer payment            
  International Development Association 492,810 489,700 34,090 32,530 837,130 1,886,260
  African Development Fund - - 12,521 18,059 371,128 401,708
 
Total contractual obligations 492,810 489,700 46,611 50,589 1,208,258 2,287,968

24. Contingent liabilities

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. They are grouped into two categories as follows:

a) Callable share capital

The Department has callable share capital in certain international organizations that could require payments to those organizations.

The following table presents details of callable share capital as at March 31:

Callable share capital
$ thousands
  2018 2017
European Bank for Reconstruction and Development 1,280,352 1,145,960
International Bank for Reconstruction and Development 8,511,762 8,785,930
Multilateral Investment Guarantee Agency 59,011 60,913
Asian Infrastructure Investment Bank 1,025,953 -
 
Total callable share capital 10,877,078 9,992,803

b) Loan guarantees

Mortgage or Hypothecary Protection Insurance

The Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA) received Royal Assent on June 26, 2011 and came into force on January 1, 2013.

The PRMHIA authorizes the Minister of Finance to provide protection in respect of certain mortgage or hypothecary insurance contracts written by approved mortgage insurers. Under the PRMHIA, a payment in respect of this guarantee would only be made if a winding-up order were made in respect of an approved mortgage insurer that had written an insurance contract guaranteed under the PRMHIA. In that case, the Minister would honour lender claims for insured mortgages in default, subject to: (1) any proceeds the beneficiary has received from the underlying property or the insurer's liquidation, and (2) a deductible of 10 percent of the original principal amount of the insured mortgage.

As at March 31, 2018, the aggregate outstanding principal amount of loans that are guaranteed under the PRMHIA is estimated at $281.9 billion ($291.2 billion in 2017). Any payment made by the Minister is subject to a deductible equal to 10 percent of the original principal amount of these loans, or $32.3 billion ($32.9 billion in 2017). The principal amount outstanding does not refer to anticipated losses or payments in respect of the guarantee. No provision has been made in these accounts for payments under the guarantee.

As at March 31, 2018, there are two approved mortgage insurers under the PRMHIA: Genworth Financial Mortgage Insurance Company Canada, and Canada Guaranty Mortgage Insurance Company.

International Bank for Reconstruction and Development

In 2017, pursuant to section 8.3(1) of the Bretton Woods and Related Agreements Act, the Minister of Finance, by order of the Governor in Council, authorized a partial loan guarantee in the amount of US$118.0 million to the International Bank for Reconstruction and Development (IBRD) in respect to a US$1,443.8 million loan entered into between the IBRD and the Republic of Iraq.

Under this guarantee, the Department would make payment to the IBRD in the event that the Republic of Iraq is more than six months late in meeting a scheduled interest or principal payment to the IBRD. The Department would only be required to pay a pro-rata share of the loan repayment that is past due, up to a fixed aggregate amount of US$118.0 million.

In the event that any portion of the guarantee is called, Canada would receive a claim from the IBRD against the Republic of Iraq, and would have the option to pursue recovery. As at March 31, 2018, no losses are anticipated with respect to this guarantee and no provision has been made.

25. Related party transactions

The Department is related as a result of common ownership to all government departments, agencies, and Crown corporations. Related parties also include individuals who are members of key management personnel or close family members of those individuals, and entities controlled by, or under shared control of, a member of key management personnel or a close family member of that individual.

The Department enters into transactions with these entities in the normal course of business and on normal trade terms. During the year, the Department received common services which were obtained without charge from other government departments as disclosed below.

a) Common services received without charge from other government departments

During the year, the Department received services without charge from certain common service organizations, related to accommodation, legal services, and the employer's contribution to the health and dental insurance plans. These services received without charge have been recorded in the Department's Statement of Operations and Departmental Net Financial Position as follows:

Services received without charge
$ thousands
  2018 2017
Accommodation 16,081 15,993
Employer's contribution to the health and dental insurance plans 7,379 6,646
Legal services 1,859 2,222
 
Total services received without charge 25,319 24,861

The Government has centralized some of its administrative activities for efficiency, cost-effectiveness purposes and economic delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge. The cost of these services, such as the payroll and cheque issuance services provided by Public Services and Procurement Canada and audit services provided by the Office of the Auditor General, are not included in the Department's Statement of Operations and Departmental Net Financial Position.

b) Other transactions with related parties

Other transactions with related parties
$ thousands
2018 2017
Expenses - Other government departments and agencies 6,554,842 7,026,092
Revenues - Other government departments and agencies 43 134

Expenses disclosed exclude common services provided without charge, which are disclosed in note 25a. These amounts include expenses and revenues pertaining to Assets and liabilities held on behalf of Government as well as Interest on superannuation and other accounts.

26. Segmented Information

Presentation by segment is based on the Department's program alignment architecture. The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in note 2. The following table presents the expenses incurred and revenues generated for the main programs, by major object of expenses and by major type of revenues. The segment results for the period are as follows:

Segmented information
$ thousands
  Transfer and Taxation
Payment Programs
Treasury and
Financial
Affairs
Economic and
Fiscal Policy
Framework
Internal
Services
2018
Total
2017
Total
Expenses        
Transfer payments            
  Provinces and territories (note 26a) 68,477,045 - - - 68,477,045 66,550,166
  International organizations 381,080 - - - 381,080 490,590
  Non-profit institutions and organizations - - 183 - 183 4,010
 
Total transfer payments 68,858,125 - 183 - 68,858,308 67,044,766
Interest and other costs            
  Interest on unmatured debt (note 26b) - 14,216,015 - - 14,216,015 14,128,601
  Interest on superannuation and other
   accounts (note 26c)
- 6,609,474 - - 6,609,474 7,027,348
  Other Interest and costs - 12,836 - - 12,836 10,006
 
Total interest and other costs - 20,838,325 - - 20,838,325 21,165,955
Operating expenses (note 26d) 1,206 10 66,815 70,948 138,979 128,176
Cost of domestic coinage sold - 92,241 - - 92,241 90,796
Net foreign currency loss 19,187 240,033 - (2) 259,218 -
Other expenses - 1 11,367 2 11,370 9,910
 
Total expenses 68,878,518 21,170,610 78,365 70,948 90,198,441 88,439,603
Revenues            
Investment income            
Crown borrowings-interest - 507,991 - - 507,991 374,059
Exchange Fund Account-net revenues - 1,712,719 - - 1,712,719 1,996,259
Other interest 25,077 14,587 59 - 39,723 27,146
 
Total investment income 25,077 2,235,297 59 - 2,260,433 2,397,464
Sale of domestic coinage - 155,573 - - 155,573 137,903
Guarantee fees 98,493 - - - 98,493 127,556
Interest on bank deposits 238 417,867 - - 418,105 230,741
Unclaimed cheques and other - 63,516 1,990 9 65,515 67,825
Net foreign currency gain - - - - - 155,528
Revenues earned on behalf of Government (note 27) (123,808) (2,872,253) (2,049) (9) (2,998,119) (3,116,906)
 
Total revenues - - - - - 111
 
Net cost from operations 68,878,518 21,170,610 78,365 70,948 90,198,441 88,439,492

a) Transfer payments to provinces and territories

Transfer payments to provinces and territories are paid pursuant to the Federal-Provincial Fiscal Relations Act, Budget Implementation Acts, and other statutory authorities.

For the period ending March 31, transfer payments to provinces and territories include the following:

Transfer payments to provinces and territories
$ thousands
  2018 2017
Canada Health Transfer 37,123,934 36,057,581
Fiscal Equalization 18,290,021 17,950,295
Canada Social Transfer 13,748,395 13,347,956
Quebec Abatement (4,739,492) (4,451,002)
Territorial Financing 3,681,831 3,602,980
Home Care and Mental Health 300,000 -
Statutory Subsidies 42,356 42,356
Grant to the Government of Alberta 30,000 -
 
Total transfer payments to provinces and territories 68,477,045 66,550,166

b) Interest on unmatured debt

Interest on unmatured debt includes interest incurred, amortization of debt discounts/premiums, net interest on cross-currency and interest rate swaps.

For the period ending March 31, interest on unmatured debt includes the following:

Interest on unmatured debt
$ thousands
  2018 2017
Interest on domestic debt:    
Marketable bonds 12,873,811 13,047,043
Treasury bills 994,157 737,081
Retail debt 27,402 45,421
 
Total interest on domestic debt 13,895,370 13,829,545
 
Interest on foreign debt:    
Marketable bonds 253,318 249,167
Medium term notes 32,075 22,189
Canada bills 35,252 27,700
 
Total interest on foreign debt 320,645 299,056
 
Total interest on unmatured debt 14,216,015 14,128,601

c) Interest on superannuation and other accounts

For the period ending March 31, interest on superannuation and other accounts includes the following:

Interest on superannuation and other accounts
$ thousands
  2018 2017
Superannuation accounts 6,249,313 6,711,453
Other specified purpose accounts 189,309 192,919
Retirement compensation arrangement accounts 97,728 105,002
Special drawing rights allocations 70,504 16,686
Canada Pension Plan account 2,620 1,288
 
Total interest on superannuation and other accounts 6,609,474 7,027,348

The Department funds interest on interest-bearing specified purpose accounts established by all departments and agencies, including superannuation accounts and retirement compensation arrangement accounts established for the benefit of public service employees and members of the Royal Canadian Mounted Police and the Canadian Forces, the Canada Pension Plan Account, and other accounts.

d) Operating expenses

The following table presents details of operating expenses by category:

Operating expenses
$ thousands
  2018 2017
Salaries and wages 87,688 76,795
Professional and special services 13,754 13,410
Accommodation 16,081 15,993
Contribution to employee benefit plans 10,846 10,489
Information services 2,030 3,167
Transportation and telecommunications 3,046 2,877
Amortization of tangible capital assets 1,305 1,320
Machinery and equipment 2,428 2,396
Rentals 1,475 1,336
Repairs and maintenance 354 372
Other subsidies and payments (28) 21
 
Total operating expenses 138,979 128,176

27. Revenues earned on behalf of Government

The following table presents details of the revenues earned on behalf of Government:

Revenues earned on behalf of Government
$ thousands
  2018 2017
Crown borrowing-interest 507,991 374,059
Exchange Fund Account-net revenues 1,712,719 1,996,259
Other interest 39,723 27,146
Sale of domestic coinage 155,573 137,903
Guarantee fees 98,493 127,556
Interest on bank deposits 418,105 230,741
Unclaimed cheques and other 65,515 67,714
Net foreign currency gain - 155,528
 
Total revenues earned on behalf of Government 2,998,119 3,116,906

Revenues earned on behalf of Government represent revenue which the Department cannot re-spend to fund other departmental activities.

28. Adjustments to prior year's results

In 2018, a payable to the Province of Québec was reclassified to Accounts payable and accrued liabilities. As a result of the reclassification comparative information for 2017 was restated. The effect of the restatement is presented in the table below:

Adjustments to prior year's results
$ thousands
  2017
As previously stated
Effect of
restatement
2017
Restated
Statement of Financial Position:      
  Accounts payable and accrued liabilities (note 5) 211,635 119,874 331,509
  Total net liabilities 715,268,132 119,874 715,388,006
  Loans receivable (note 20) 1,275,019 119,874 1,394,893
  Financial assets held on behalf of Government (note 14) (3,214,544) (119,874) (3,334,418)
  Departmental net debt 545,265,979 119,874 545,385,853
  Departmental net financial position (545,251,350) (119,874) (545,371,224)
       
Statement of Operations and Departmental Net Financial Position:      
  Net cash provided by Government 78,510,761 (119,874) 78,390,887
  Net cost of operations after government funding and transfers 10,074,898 119,874 10,194,772
  Departmental net financial position - end of year (545,251,350) (119,874) (545,371,224)
       
Statement of Change in Departmental Net Debt:      
  Net cost of operations after government funding and transfers 10,074,898 119,874 10,194,772
  Net increase in departmental net debt 10,073,734 119,874 10,193,608
  Departmental net debt - end of year 545,265,979 119,874 545,385,853
       
Statement of Cash Flows:      
  Net cash provided by Government of Canada 78,510,761 (119,874) 78,390,887

29. Comparative information

Comparative figures have been reclassified where necessary to conform to the current year's presentation.

Department of Finance Canada

Annex to the Statement of Management Responsibility Including Internal Control over Financial Reporting of the Department of Finance Canada for Fiscal Year 2017-18 (Unaudited)

1. Introduction

This document provides summary information on the measures taken by the Department of Finance Canada (the Department) to maintain an effective system of internal control over financial reporting (ICFR) as well as information on internal control management assessment results and related action plans.

Detailed information on the Department's authority, mandate and program activities can be found in the Departmental Results Report and Departmental Plan.

2. Departmental System of Internal Control Over Financial Reporting

2.1 Internal control management

The Department has an established governance and accountability structure to support departmental assessment efforts and oversight of its system of internal control.

A departmental internal control framework approved by the Deputy Minister and the Chief Financial Officer (CFO) is in place which includes:

  • Accountability structures relating to internal control management to support sound financial management, including clear roles and responsibilities for employees in their areas of responsibility for control management;
  • On-going communication and training on statutory requirements, policies and procedures for sound financial management and control;
  • A group dedicated to ICFR under the direction of the CFO with a primary focus on maintaining documentation in support of business processes and associated key risks and control points;
  • A risk based internal audit plan which includes audits and reviews related to business processes assessed under the Policy on Financial Management;
  • An Office of Values and Ethics to provide service and guidance on values and ethics issues, discuss ethical dilemmas in accordance with the Values and Ethics Code for the Public Sector, Policy on Conflict of Interest and Post Employment and the Department of Finance Code of Conduct to underline the need for employees to avoid, and if necessary, resolve conflicts of interest between their official duties and their personal interests. Mandatory annual reporting is an important feature of the code;
  • A Disclosure Protection Officer, housed within the Office of Values and Ethics, to facilitate protected disclosures of wrongdoing in accordance with the Public Servants Disclosure Protection Act;
  • Monitoring and regular updates on internal control management plus assessment results and action plans presented to the Departmental Audit Committee (DAC) and senior management; and
  • Advice provided by the DAC to the Deputy Minister on the adequacy and functioning of the Department's risk management, control and governance frameworks and processes.
2.2 Service arrangements relevant to the financial statements

The Department relies on other organizations for the processing of certain transactions that are recorded in its financial statements.

Common-to-government arrangements:

  • Public Services and Procurement Canada (PSPC) centrally administers banking arrangements and related processes, the payment and processing of salaries and the procurement of goods and services consistent with the Department's delegation of authority;
  • Treasury Board of Canada Secretariat (TBS) provides the Department with information used to calculate various accruals and allowances, such as loan provisions and the accrued severance liability;
  • The Department of Justice provides legal services to the Department; and
  • Shared Services Canada (SSC) provides information technology (IT) infrastructure services in the area of data centre and network services.

Specific departmental arrangements:

  • The Bank of Canada has shared responsibility with the Department for maintaining the financial records and accounts for the domestic debt of Canada and the Exchange Fund Account of Canada, for which the Bank acts as fiscal agent. These responsibilities include ensuring all related financial systems and processes are effectively designed and operating;
  • Canada Revenue Agency (CRA) provides the financial information used by the Department to determine taxes receivable from CRA under tax collection agreements, including accrual-based methodologies to determine amounts receivable at year-end;
  • TBS provides financial management and accounting services for operating expenses, managed through a shared-services arrangement; and
  • TBS provides the Department and other departments with its SAP financial system platform through which its captures and reports on financial transactions. As the service provider, TBS is responsible for ensuring that IT-general controls over the SAP environment are designed and operating effectively. As the client, the Department retains responsibility over certain IT-general controls over the SAP environment, such as user access controls and segregation of duties.

3. Departmental Assessment Results During Fiscal Year 2017 2018

The key findings and significant adjustments required from the current year's assessment activities are summarized below.

New or significantly amended key controls – in the current year, except for Payroll & Benefits, there were no other significantly amended key controls in existing processes which required a reassessment.

  • Payroll & Benefits: Following the transition to the new Pay Centre and the Phoenix payroll system in 2016, new processes and controls have been implemented to mitigate issues arising from the transition, including the development of a new control framework to review the controls under the Department's responsibilities and validate the design effectiveness of the controls in place. Considering the on-going issues with Phoenix, the Department has approved a new pay structure to hire additional resources to ensure that pay-related actions are valid, complete and accurately processed in Phoenix on a timely basis, and to assist employees in resolving pay issues. In addition, Finance is one of twelve departments selected to be involved in the first phase of the Pay Centre's official roll-out of the"Pay Pod" approach which started on June 14, 2018.
  • In response to OAG 2017 audit observations on payroll transactions, a Management Action Plan has been developed for implementation in 2018-19.
On-going monitoring program

Business process

The Department assesses the design and operational effectiveness of its high-risk business processes on an annual basis as part of its rotational on-going monitoring program (OGM).

The Department conducts walkthroughs throughout the fiscal year and selects transaction samples for testing. The testing validates that the controls in place are effective and operating as designed prior to the OAG pre-audit review. The extent of testing is determined by the frequency of the control being performed as well as the characteristics of the population. It also includes the expected size and frequency of misstatements for the population to be tested, and is based on the assessment of inherent risk, control risk and the detection risk related to the analytical procedures. The Department follows industry standards in determining the quantity of tests to be performed.

This year, the Department completed its reassessment of entity-level controls, IT-general controls under departmental management and the following business processes:

Departmental assessment results
Key control areas Assessed level of financial-reporting risk Approach to assessment
Transfer payments High Design and operational effectiveness
Domestic debt High Design and operational effectiveness
Crown borrowing High Design and operational effectiveness
International organizations High Design and operational effectiveness
Official International Reserves High Design and operational effectiveness
Domestic coinage Medium Design and operational effectiveness
Payroll & benefits  High Design effectiveness
Operating expenses Medium Operational effectiveness

Based on the work performed, key controls tested performed as intended.

Payroll & Benefits: The resolution of pay-related issues, including stabilizing pay operations and processing pay transactions, will require multiple years of effort and significant resources. In this context, and considering the adverse impact on Finance employees, the risk rating has been changed to high.

Operating expenses

The Department implemented a data analytics program in January 2016. This program analyzes accounting and other financial data for anomalies from a compliance and/or process efficiency standpoint using industry-standard data analytics software. The objective of the analysis is to detect operational, and compliance risk. The monitoring report produced quarterly support management in overseeing these activities:

  • Travel
  • Travel card purchases
  • Accounts payable
  • Acquisitions cards
  • Financial monitoring
  • Material management contracts and amendments

Service arrangements relevant to the financial statements

  • SAP environment: Initiated in 2016, the service-provider provides an annual CSAE 34161 report prepared by an external auditor on the state of internal controls in the shared SAP environment. The results for this year confirm, with five exceptions, that the controls related to the control objectives were appropriately designed and implemented. The Office of the Auditor General (OAG) has concurred with the results of CSAE 3416 report, and has highlighted from the report that two control weaknesses (timely terminating user access and inadequate segregation of duties between the developers and those transporting the change to production) are deemed significant and could impact possible future reliance on ITGCs at the Department of Finance. These two weaknesses were noted in the 2017 management letter. TBS has confirmed that corrective measures have been implemented as per the CSAE report recommendations.
  • IT Infrastructure: The OAG followed up on the 2017 management letter observations and concluded that two of the four observations, relating to weaknesses in access controls on the Windows Servers remain unresolved. SSC has confirmed that a Management Action Plan for 2018-19 is in place to address the unresolved observations.
  • The Department continues to be actively involved in the development and implementation of the Management Action Plans.

4. Departmental Action Plan

4.1 Progress during fiscal year 2017-2018

The Department continued to conduct its on-going monitoring according to the previous fiscal year's rotational plan as shown in the following table:

Progress during fiscal year 2016-17
Previous year's rotational on-going monitoring plan for current year Status
Transfer payments Completed as planned and no remedial actions required
Domestic debt Completed as planned and no remedial actions required
Crown borrowing Completed as planned and no remedial actions required
International organizations Completed as planned and no remedial actions required
Official International Reserves Completed as planned and no remedial actions required
Domestic Coinage Completed as planned and no remedial actions required
Payroll & Benefit On-going
Operating expenses Completed as planned and no remedial actions required
Entity-level controls Completed as planned and no remedial actions required
IT-general controls under departmental management Completed as planned and no remedial actions required

Payroll & Benefits: The review and assessment of the operating process is ongoing. We have not yet reached a level of maturity on the design effectiveness of the controls under the Department's responsibilities to conduct testing. The review will be ongoing until the operational effectiveness testing is completed.

4.2 Action plan for the next fiscal year and subsequent years

The Department's rotational on-going monitoring plan over the next three years, based on an annual validation of high-risk processes and controls shown in the following table:

Action plan for the next fiscal year and subsequent years
Key control area Assessed level of
financial-reporting risk
2018-2019
assessment scope
2019-2020
assessment scope
2020-2021
assessment scope
Transfer payments High Yes Yes Yes
Domestic debt High Yes Yes Yes
Crown borrowing High Yes Yes Yes
International organizations High Yes Yes Yes
Official International Reserves High Yes Yes Yes
Operating expenses Medium Yes Yes Yes
Domestic coinage Medium Yes No Yes
Payroll & benefits High Yes Yes Yes

Entity-level and IT-general controls will be validated on an annual basis. Operating expenses are monitored on an on-going basis under the data analytic program.


1 The Canadian Standard on Assurance Engagements 3416 (CSAE 3416), Reporting on Controls at a Service Organization, provides the department with the assurance that the service-provider is maintaining effective and efficient internal controls related to financial, informational, or security reporting. This examination formally designated as CICA 5970 is the Canadian equivalent of the American Institute of CPAs (AICPA) SSAE 16 audit compliance standards.