Archived - Financial statements (Unaudited) Department of Finance Canada: 2022

4. Deposit liabilities

Deposit liabilities as at March 31 are presented in the following table.

5. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities as at March 31 are presented in the following table.

6. Taxes payable and receivable under tax collection agreements

The Canada Revenue Agency (CRA), an agency of the government, collects and administers personal income taxes, corporate taxes, harmonized sales tax, sales tax, goods and services tax, and cannabis excise duties on behalf of certain provinces, territories and Aboriginal governments pursuant to various tax collection agreements. The department ultimately transfers the taxes collected directly to the participating provinces, territories and Aboriginal governments in accordance with established payment schedules.

Taxes payable under tax collection agreements

Given that the government 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.

The changes in taxes collectible and payable to provinces, territories and Aboriginal governments under tax collection agreements during 2022 were as follows:

Taxes receivable under tax collection agreements

Taxes receivable under tax collection agreements 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 changes in taxes receivable under tax collection agreements during 2022 were as follows:

7. Interest payable

Interest payable as at March 31 by class of debt is presented in the following table.

8. Notes payable to international organizations

Notes payable to international organizations are non-interest bearing demand notes issued in lieu of cash in respect of subscriptions and contributions. The notes may be presented for encashment according to the terms of the related agreements.

Notes payable to international organizations as at March 31 are presented in the following table.

9. Matured debt

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

The balance of matured debt as at March 31 is presented in the following table.

10. Unmatured debt

The department borrows mostly in the domestic market, but also borrows in international markets on behalf of the government.

Domestic debt

Domestic debt consists of treasury bills, marketable bonds and retail debt denominated in Canadian dollars.

Treasury bills consist of non-callable Government of Canada discount instruments. Treasury bills are issued with terms to maturity of 3 months, 6 months, or 12 months; the Government of Canada may also issue treasury bills with terms to maturity ranging from 1 day to 3 months for cash management purposes (cash management bills).

Domestic marketable bonds consist of non-callable Government of Canada bonds paying a fixed rate of interest semi-annually. As at March 31, 2022, outstanding domestic marketable bonds have remaining terms to maturity ranging from within 1 year to 43 years (2021 – within 1 year to 44 years). Certain marketable bonds (real return bonds) pay semi-annual interest based on a real rate of interest (interest payments are adjusted for changes in the consumer price index). At maturity real return bondholders will receive, in addition to a coupon interest payment, a final payment equal to the sum of the principal amount and the inflation compensation accrued from the original issue date.

Retail debt includes Canada Savings Bonds, which are redeemable on demand by the holder. As at March 31, 2022, all retail debt has reached maturity; consequently all unredeemed retail debt outstanding as at that date is included in matured debt.

Foreign debt

Foreign debt is issued by the government under its foreign currency borrowing program. Foreign debt consists of marketable bonds, Canada bills and medium term notes.

Foreign marketable bonds are either issued in US dollars or euros to provide long-term foreign funds. As at March 31, 2022, outstanding foreign marketable bonds have remaining terms to maturity ranging from within 1 year to 5 years (2021 - within 1 year to 4 years).

Canada bills are short-term certificates of indebtedness issued in the US money market. These discount instruments mature not more than 270 days from issuance.

Medium term notes provide the government with additional flexibility to raise foreign currency. The medium term note program allows for issuance of fixed or floating rate promissory notes in a number of currencies, including the US dollar, euro and British pound sterling.

Unmatured debt as at March 31 is presented in the following table.

Contractual maturities of unmatured debt by currency, stated in terms of face value, are as follows:

The average effective annual interest rates of unmatured debt as at March 31 are as follows:

11. Derivative financial instruments

Cross-currency swaps

The government has entered into cross-currency swap agreements with various counterparties to facilitate the management of its debt structure. The terms and conditions of the swaps are established using International Swaps and Derivatives Association (ISDA) master agreements with each counterparty.

Cross-currency swaps are used primarily to fund foreign-denominated asset levels in the foreign exchange accounts. Government debt is issued at both fixed and variable interest rates and may be denominated in Canadian dollars, US dollars, euros or British pounds sterling. Using cross-currency swaps, Canadian dollar and foreign currency debt are 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 remaining terms to maturity of the cross-currency swaps outstanding as at March 31, 2022 range from within 1 year to 10 years (2021 - within 1 year to 10 years). Cross-currency swap maturities, stated in terms of the foreign payable-leg notional amounts outstanding and translated into Canadian dollars as at March 31, 2022, are as follows:

Foreign exchange forward contracts

In the foreign exchange accounts, the government funds loans to the International Monetary Fund (IMF), 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 assets are not equally offset by fluctuations in the value of the related funding liabilities. The government enters into forward contracts to hedge the resulting foreign exchange risk.

As at March 31, 2022, the total notional amount of outstanding foreign exchange forward contracts, stated in terms of the foreign amount to be paid at maturity and translated into Canadian dollars as at March 31 was $4.7 billion (2021 - $4.2 billion). The forward contracts outstanding had remaining terms to maturity of under 2 months as at March 31, 2022 (2021 - under 2 months).

Bank of Canada bond purchase program indemnity agreements

The department and the Bank of Canada have entered into indemnity agreements which are accounted for as derivatives. Under the terms of these agreements, the department has indemnified the Bank of Canada for any losses incurred by the Bank on the disposition of securities under the Bank's Government of Canada Bond, Provincial Bond and Corporate Bond purchase programs (bond purchase programs). The Bank of Canada will also pay to the department any realized gains it earns on the disposition of securities under the bond purchase programs. The bond purchase programs were introduced by the Bank of Canada during fiscal year 2020-21 to support the liquidity and proper functioning of debt markets during the COVID-19 pandemic. No consideration was paid by either party upon entering into the agreements.

Details of the securities held by the Bank of Canada under the bond purchase programs as at March 31 are presented in the following table. The fair value represents the gain (loss) accruing to (from) the department under the derivatives if the securities were disposed of by the Bank of Canada as at March 31.

The fair value of the indemnity agreement derivatives (net) relates to certain securities that are in a gain position and certain securities that are in a loss position, as follows:

Losses paid and gains received by the department under the bond purchase program indemnity agreements in 2022 were negligible (2021 - gains received of $0.2 million).

12. Long-term annuity liability

The government and the province of Newfoundland and Labrador entered into the Hibernia Dividend Backed Annuity Agreement (HDBA) effective April 1, 2019. Under the HDBA, both parties are obligated to make certain payments through 2056.

The department's obligation under the HDBA is to pay Newfoundland and Labrador each year a stated annual payment, which over the term of the HDBA total $3.3 billion, less the provincial taxes payable to Newfoundland and Labrador in respect of that year by Canada Hibernia Holding Corporation (CHHC). The government indirectly owns all of the issued and outstanding shares of CHHC through the Canada Development Investment Corporation (CDEV), a wholly-owned federal Crown corporation.

Newfoundland and Labrador is obligated under the HDBA to pay the Government of Canada 8 fixed annual payments of $100 million each, starting in 2045 and ending in 2052. At the government's discretion, the payments may be made by way of set-off against (i) the taxes payable to Newfoundland and Labrador under tax collection agreements; or (ii) the department's obligation otherwise payable.

Amounts recognized in the financial statements

The long-term annuity liability as at March 31 is presented in the following table.

Interest expense of $40.7 million (2021 - $39.8 million) and interest revenue of $9.1 million (2021 - $9.0 million) were recognized in the Statement of Operations and Departmental Net Financial Position. In 2021, changes in the estimated future cash flows under the long-term annuity liability resulted in an increase in the carrying value and corresponding expense of $119.7 million.

Contractual payments

The estimated contractual payments to be made (received) by the department under the long-term annuity arrangement are presented in the following table.

13. Employee future benefits

a) Pension benefits

The department's employees participate in the public service pension plan (the plan), a defined benefit pension plan sponsored and administered by the government. Pension benefits accrue up to a maximum period of 35 years at a rate of 2% per year of pensionable service, times the average of the best 5 consecutive years of earnings. Benefits under the plan are integrated with Canada/Québec Pension Plan benefits and are indexed to inflation. The department's financial obligations with regard to the plan is limited to its contributions.

Employees and the department both make contributions to the plan. Employees who were existing plan members as at December 31, 2012 (group 1 employees) are subject to different Public Service Superannuation Act rules and contribution rates (employee and employer rates) than those who became plan members on or after January 1, 2013 (group 2 employees).

The expense related to the plan was $9.0 million (2021 - $9.4 million). For group 1 members, the expense represents approximately 1.01 times the employee contributions (2021 - 1.01) and, for group 2 members, approximately 1.00 times the employee contributions (2021 - 1.00 times).

b) Severance benefits

Severance benefits provided to the department's employees were previously based on an employee's eligibility, years of service and salary upon 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 or to 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 obligation for severance benefits during the year were as follows:

14. Liabilities owed and financial assets held on behalf of government

a) Liabilities owed on behalf of government

Notes payable to international organizations are used in lieu of cash to fund investments in those entities. Since the investments are considered to be financial assets held on behalf of government, the notes payable funding those investments are considered to be liabilities owed on behalf of the government.

b) Financial assets held on behalf of government

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

The liabilities owed and financial assets held on behalf of government as at March 31 are presented in the following table.

15. Cash held as collateral

Cash held as collateral is cash deposited by the government as credit support under collateral agreements with financial institutions. Interest is received on the balance.

As at March 31, 2022 the department had pledged total collateral of $505.8 million (2021 - $1,365.9 million) in the form of cash.

16. Accounts receivable

Accounts receivable as at March 31 are presented in the following table.

17. Foreign exchange accounts

The foreign exchange accounts represent the largest component of the official international reserves of the government and consist of the following as at March 31:

a) Investments held in Exchange Fund Account

Investments held in the Exchange Fund Account consist of cash advanced from the government to the Exchange Fund Account, in Canadian dollars and other currencies, holdings of foreign currencies and securities, and SDRs. The Exchange Fund Account is operated pursuant to Section 17 of the Currency Act. Total advances are limited to US$150 billion.

The total investments held in the Exchange Fund Account as at March 31 are presented in the following table.

Collateral pledged

As part of its operations, the Exchange Fund Account is required to pledge collateral with respect to credit facilities granted by its European clearing house. Collateral pledged must have a fair value of a minimum of US$250 million, post-haircut, in equivalent securities. As at March 31, 2022, the Exchange Fund Account had pledged collateral of marketable securities having a carrying value of $409 million and fair value of $401 million (2021 – carrying value and fair value of $411 million).

b) Subscriptions to the International Monetary Fund

Subscriptions to the IMF consist of Canada's subscription ("quota") to the capital of the IMF, an international organization of 190 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 the following 5 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.

Subscriptions to the IMF during 2022 decreased by $580.9 million (2021 - $1,545.6 million) due to foreign exchange revaluation.

c) Loans receivable from the International Monetary Fund

Loans receivable from the IMF consist 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 two outstanding lending arrangements with the IMF outside of the quota system: the New Arrangements to Borrow (NAB) and the temporary Bilateral Borrowing Agreement (BBA).

Canada's current participation in the NAB is governed by the October 2020 NAB Decision, which took effect in January 2021 and remains in effect through the end of 2025. Canada's maximum commitment under the NAB as at March 31, 2022 is SDR 7,747.4 million (2021 - SDR 7,747.4 million). As at March 31, 2022, SDR 76.2 million or $131.7 million (2021 - SDR 110.8 million or $197.4 million) in lending has been provided by Canada to the IMF under the NAB.

Canada also participates in the BBA, which increases further the financial resources the IMF can borrow from member countries. Canada's commitment under the BBA as at March 31, 2022 is SDR 3,532 million (2021 - SDR 3,532 million). As at March 31, 2022, no lending (2021 - nil) has been provided to the IMF under the BBA.

Collectively, the outstanding loans under multilateral and bilateral arrangements with the IMF cannot exceed SDR 13 billion or any other amount that may be fixed by the Governor in Council at any given time. Commitments under the NAB and BBA fall within this limit.

Amounts advanced under these arrangements are considered part of the Official International Reserves of Canada.

d) Notes payable to the International Monetary Fund

Notes payable to the IMF are 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 reissue, 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 1% of Canada's subscription) held on deposit at the Bank of Canada.

Notes payable to the IMF decreased during 2022 by $490.0 million (2021 - $3,024.0 million) due to $1,173.3 million in net repayments, partially offset by an increase of $683.3 million due to foreign exchange revaluation (2021 - net repayments of $1,525.9 million and a decrease of $1,498.1 million due to foreign exchange revaluation).

e) Special drawing rights allocations

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

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.

As at March 31, 2022, SDR allocations to Canada are SDR 16,554.0 million, which translated into Canadian dollars of $28,608.7 million at that date (31 March 2021 – SDR 5,988.1 million or C$10,664.2 million). During the year, the IMF allocated to Canada SDRs of 10,565.9 million having a Canadian dollar value of $19,007.1 million (2021- nil). This was partially offset by a decrease due to foreign exchange revaluation of $1,062.6 million (2021 - $839.5 million).

18. Loans to Crown corporations

Loans to Crown corporations as at March 31 are presented in the following table.

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

The average effective annual interest rates for the loans outstanding as at March 31 are as follows:

19. Other loans receivable

Other loans receivable as at March 31 are presented in the following table.

The currencies in which other loans receivable are denominated and the Canadian dollar equivalent as at March 31, 2022 are presented in the following table.

Government business enterprises

Canada Lands Company Limited (CLCL) is a self-financing federal Crown corporation incorporated under the Canada Business Corporations Act. CLCL's objectives are to ensure the commercially oriented, orderly disposition of selected surplus federal real properties, and the holding of certain properties. The Canada Lands Company CLC Limited (CLC) and Parc Downsview Park Inc. are two of CLCL's wholly-owned subsidiaries.

a) Canada Lands Company CLC Limited (CLC)

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 are recorded at their discounted value using the government's cost of borrowing at the time of issuance.

No new promissory notes were issued during the year (2021 - $7.6 million). Repayments of $153.9 million were received during the year (2021 - nil). Discount amortization of $1.5 million (2021 - $3.9 million) was recognized in income.

b) Parc Downsview Park Inc.

Parc Downsview Park Inc. owns a unique urban recreational green space located in Toronto, Ontario. The loan receivable from Parc Downsview Park Inc. is a non-interest bearing promissory note repayable in full on July 31, 2050. The note is recorded at its discounted value using the government's cost of borrowing at the time of issuance.

No promissory notes were issued or repaid during the year (2021 – no notes issued or repaid). Discount amortization of $0.2 million (2021 - $0.2 million) was recognized in income.

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.

During the year, transactions included issuances of $5.4 million (2021 - $37.4 million) and repayments of $60.4 million (2021 - $28.4 million).

d) 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% per year and are repayable either in annual installments over 5 to 20 years, or at maturity.

e) 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% per year and are repayable in annual or semiannual installments over 15 to 50 years.

International and other organizations

f) International Monetary Fund Poverty Reduction and Growth Trust

Canada has made loans denominated in SDR to the IMF's Poverty Reduction and Growth Trust 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 revolving loan authority pursuant to the Bretton Woods and Related Agreements Act was set at $550 million or such greater amount as may be fixed by the Governor in Council. The current limit set by the Governor in Council relating to the Poverty Reduction and Growth Trust is SDR 2.0 billion.

During the year, transactions included repayments of $43.7 million (2021 - $27.4 million) and an exchange revaluation adjustment which resulted in a decrease of $38.9 million (2021 - $104.5 million). There were no issuances during the year (2021 - $798.4 million).

g) International Development Association (IDA) – concessional partner loan

In connection with the 19th replenishment of the resources of the IDA, Canada agreed to provide a loan of US$575.4 million to the IDA under the IDA's concessional partner loan program. Of the total loan committed to, US$287.7 million was advanced to the IDA in 2022 and US$287.7 million will be advanced in 2023.

The loan bears interest at 1.2% per year, payable semi-annually. Loan principal is repayable in 20 equal semi-annual instalments beginning in 2027 and ending in 2047. At Canada's request and with agreement of the IDA, the loan already advanced, or the advances to be made, may be converted into Canadian dollars. Such a conversion would result in a modification to the interest rate, and would require the payment by Canada of a transaction fee and the reimbursement to the IDA of any fees, costs or losses incurred by the IDA.

The loan advanced during the year of US$287.7 million translated upon issuance into $360.7 million Canadian dollars. To reflect the concessionary terms of the loan, a discount of $33.0 million was recognized upon issuance. Additionally, discount amortization of $1.3 million was recognized in income during the year, and as at March 31, 2022 exchange revaluation and other valuation adjustments resulted in decreases of $1.0 million and $0.2 million, respectively.

h) Orphan Well Association

Canada made an unconditionally repayable contribution of $200 million during the year ended March 31, 2021 to the Alberta Oil and Gas Orphan Abandonment and Reclamation Association Canada (the Orphan Well Association) to support the association's efforts in cleaning up oil and gas properties. The contribution is to be used by the Orphan Well Association on eligible expenditures incurred or committed to by the Association up to March 31, 2023. The portion of the contribution not expended by March 31, 2023 is to be returned to Canada. The contribution does not bear interest and is repayable in 16 equal quarterly instalments starting in 2032 and ending in 2035. Earlier repayment is permitted.

To reflect the concessionary terms of the loan, a discount of $19.1 million was recognized upon initial recognition of the contribution in 2021. Discount amortization of $1.4 million was recognized in income (2021 - $0.7 million).

i) International Finance Corporation Catalyst Fund

Canada has provided financing for the IFC's Catalyst Fund, as authorized by the Bretton Woods and Related Agreements Act and various appropriation acts. The Catalyst Fund supports private sector engagement in climate change mitigation and adaptation activities through the provision of concessional and commercial financing arrangements.

j) Canadian Commercial Bank (CCB)

Canada has provided financial assistance in respect of the CCB as authorized by the Canadian Commercial Bank Financial Assistance Act. The amounts reported as other loans receivable represent the government's participation in the loan portfolio that was acquired from the CCB and the purchase of outstanding debentures from existing holders.

k) Global Environment Facility (GEF)

Canada has provided funding for 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.

20. Investments and capital share subscriptions

Investments and capital share subscriptions as at March 31 are presented in the following table.

Certain of Canada's capital share subscriptions have both a paid-in portion and a portion which is callable. Only if certain circumstances arise in the future, such as the inability of the investee to otherwise meet its financial obligations, would the department be obligated to pay for some or all of the callable share capital. Details of the paid-in and callable portions of investments and capital share subscriptions, where applicable, are provided in the following table.

International Development Association (IDA)

Canada's contributions and subscriptions to the IDA (part of the World Bank Group) are authorized by the Bretton Woods and Related Agreements Act and various appropriation acts. The contributions and subscriptions to the IDA are used to lend funds to the poorest developing countries for development purposes on highly favourable terms (very low interest, with a 25- to 40-year maturity and 5 to 10 years of grace).  An additional contribution to the IDA of $423.2 million was made during the year (2021 - $423.2 million).

International Bank for Reconstruction and Development (IBRD)

Canada's subscription to the capital of the IBRD (part of the World Bank Group) is authorized by the Bretton Woods and Related Agreements Act and various appropriation acts. The IBRD provides loans, guarantees, risk management products and advisory services to middle-income and creditworthy low-income countries, and also coordinates responses to regional and global challenges.

International Finance Corporation (IFC)

Canada's subscription to the capital of the IFC (part of the World Bank Group) is authorized by the Bretton Woods and Related Agreements Act and various appropriation acts. The IFC works to further economic development by encouraging the growth of productive private enterprise, particularly in less developed areas. An additional investment of US$175.9  million (C$220.8 million) in the capital shares of IFC of was made during the year (2021 – nil).

European Bank for Reconstruction and Development (EBRD)

Canada's subscription to the capital of the EBRD is authorized by the European Bank for Reconstruction and Development Agreement Act and various appropriation acts. The EBRD provides financing for well-structured and financially robust projects of all sizes, with the objective of making economies more competitive, well governed, green, inclusive, resilient and integrated. Each payment to the EBRD is comprised of cash and a promissory note.

Asian Infrastructure Investment Bank (AIIB)

Canada is a member of the AIIB pursuant to the Asian Infrastructure Investment Bank Agreement Act and as noted in various appropriation acts. The AIIB invests in infrastructure and other productive sectors in Asia and promotes regional cooperation in addressing development challenges. Canada issued a note payable to the AIIB in consideration for its paid-in capital contribution.

Multilateral Investment Guarantee Agency (MIGA)

Canada's subscription to the capital of the MIGA (part of the World Bank Group) is authorized by the Bretton Woods and Related Agreements Act and various appropriation acts. The MIGA provides political risk insurance and credit enhancement for projects in developing countries covering all regions of the world.

21. Fair value of financial instruments

Fair value is the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. Fair values are management's estimates and are generally calculated using market conditions as at a specific point in time, where a market exists. The determination of fair value is subjective and inherently involves uncertainties due to the unpredictability of future events and conditions. Fair values may not reflect future market conditions nor the actual values obtainable should the instrument be exchanged in the market. For instruments with a short term to maturity or of a non-negotiable nature, fair values are assumed to approximate carrying values.

The following table presents the carrying and fair values of certain financial instruments as at March 31.

Fair value of foreign exchange forward contracts (net) and cross-currency swaps (net)

The fair values of the foreign exchange forward contracts and cross-currency swaps represent the estimated amounts that the government would receive or pay if the contracts were terminated on March 31, based on market factors as at that date. The fair values are established by discounting the expected future cash flows of the forward contracts and swaps, calculated from the contractual or notional amounts and year-end market interest and exchange rates. A positive (negative) fair value indicates that the government would receive (make) a net payment if the agreements were terminated on March 31.

Fair value of bond purchase program indemnity agreement derivatives

The fair value of the bond purchase program indemnity agreement derivatives is calculated as the difference between the fair value and the amortized cost of the securities held by the Bank of Canada under the bond purchase programs as at March 31. The fair value is equivalent to the amount accruing to (from) the department under the derivatives if the securities were disposed of at their fair value by the Bank of Canada as at March 31.

22. Financial risk

a) Credit risk related to cross-currency 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 cross-currency swap and foreign exchange forward contracts. The government participates in a 2-way collateral program in accordance with Credit Support Annex (CSA) agreements for its cross-currency swap portfolio. Under the CSA agreements, the department and the counterparty are required to provide collateral, either in the form of securities or cash (CAD or USD), based on the terms and conditions of the agreements, such as when the fair value of a contract exceeds a minimum threshold. The collateral pledged to the government by a counterparty could be liquidated to mitigate credit losses in the event of that counterparty's default.

Collateral pledged by the government and by counterparties under 2-way CSA agreements as at March 31, 2022 is presented in the following table.

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 cross-currency swap and foreign exchange forward contracts.

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

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 currency and the duration of the Exchange Fund Account assets and the related foreign currency borrowings of the government. As at March 31, 2022, the impact of price changes affecting the Exchange Fund Account assets and the liabilities funding the 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 the assets are denominated in SDR; however, foreign exchange risks relating to loans to the IMF have been mitigated by entering into foreign exchange forward contracts.

The majority of the Exchange Fund Account foreign currency assets and liabilities are held in 4 currency portfolios: US dollar, euro, British pound sterling, and Japanese yen. As at March 31, 2022, a 1% appreciation in the Canadian dollar as compared to the US dollar, euro, British pound sterling and the Japanese yen would result in a foreign exchange loss of $10.6 million for the US dollar portfolio (2021 - $11.2 million loss), a foreign exchange gain of $0.1 million for the euro portfolio (2021 - $1.9 million loss), a foreign exchange loss of $0.3 million for the Japanese yen portfolio (2021 - $0.7 million loss) and a foreign exchange loss of $4.3 million for the British pound sterling portfolio (2021 - $4.6 million loss).

23. Tangible capital assets

The change in tangible capital assets during 2022 is presented in the following table.

24. Contractual obligations

Contractual obligations are financial obligations of the government that will become liabilities when the terms of the related contracts or agreements for the acquisition of goods and services or the provision of transfer payments are met. The expected payments to be made under the department's significant contractual obligations that can be reasonably estimated are summarized as follows:

25. Contingent liabilities

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. They are grouped into 3 categories as follows:

a) Callable share capital

The department has subscribed to callable share capital in certain international organizations. In the event of the capital being called, the likelihood of which is low, payments to these organizations would be required. Callable share capital as at March 31 is presented in the following table.

b) Loan guarantees

Mortgage or Hypothecary Protection Insurance

The Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA), which came into force on January 1, 2013, authorizes the Minister of Finance to provide protection in respect of certain mortgage or hypothecary insurance contracts written by approved mortgage insurers. As at March 31, 2022 there are two approved mortgage insurers under the PRMHIA: Sagen Mortgage Insurance Company Canada (formerly known as Genworth Financial Mortgage Insurance Company Canada) and Canada Guaranty Mortgage Insurance Company.

Under the PRMHIA, payments in respect of the guarantee would only be required if a winding-up order were made in respect of an approved mortgage insurer. Where this is the case, the Minister would honour lender claims for insured mortgages in default, subject to: (a) any proceeds the beneficiary has received from the underlying property or the insurer's liquidation, and (b) a deductible of 10% of the original principal amount of the insured mortgage.

As at March 31, 2022, the aggregate outstanding principal amount of loans that are guaranteed under the PRMHIA is estimated at $292.6 billion (2021 - $289.9 billion). Any payment made by the Minister is subject to a deductible equal to 10% of the original principal amount of these loans, or $34.9 billion (2021 - $34.4 billion). No provision has been made in these accounts for payments under the guarantee.

International Bank for Reconstruction and Development (IBRD)

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 million to the IBRD in respect of 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 6 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 the fixed aggregate amount of US$118 million (C$147.5 million translated at the March 31, 2022 exchange rate).

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, 2022, no losses are anticipated with respect to this guarantee and no provision has been made (2021 - no losses anticipated).

c) Bank of Canada money market purchase program indemnity agreements

In addition to the bond purchase program indemnity agreements accounted for as derivatives, the department and the Bank of Canada have entered into indemnity agreements for the Bank's Provincial Money Market and Commercial Paper Purchase Programs (money market purchase programs). These programs were introduced by the Bank of Canada to support the liquidity and proper functioning of debt markets during the COVID-19 pandemic. The Bank of Canada discontinued further purchases under the Provincial Money Market purchase program during 2021, and discontinued the Commercial Paper purchase program effective April 2, 2021. The programs can be restarted by the Bank of Canada if necessary.

Under the money market purchase program agreements, the department has indemnified the Bank of Canada for any losses incurred by the bank on the money market securities not being paid in full by the issuers. The department is not obligated to pay for any losses or entitled to any gains sustained by the Bank of Canada on the disposition of securities under the money market purchase programs. No consideration was paid by either party upon entering into the agreements.

Details of the outstanding indemnified exposure of the department, based on the securities held by the Bank of Canada under the money market purchase programs as at March 31, are presented in the following table. The outstanding indemnified amount represents the amortized cost of the securities held by the Bank of Canada under the money market purchase programs as at March 31, which approximates the maximum amount payable by the department in the event that none of the amounts due under those securities are paid by the issuers.

No losses were paid by the department under the money market purchase program indemnity agreements in 2022 (2021 - nil).

26. 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. The department also receives common services without charge from other government departments as disclosed below.

a) Common services received without charge from other government departments

The services received without charge from other government departments have been recorded as expenses in the Statement of Operations and Departmental Net Financial Position as follows:

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

b) Other transactions with related parties

Other transactions with related parties are summarized in the following table.

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 reorting (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 are available in the 2021-22 Departmental Results Report and the 2021-22 Departmental Plan.

2. Departmental system of internal control over financial reporting

2.1 Internal control management

The department has a well-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. In addition, the Department of Finance Code of Conduct underlines 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 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 on public service insurance and centrally administers payment of the employer's share of contributions toward statutory employee benefit plans;
• The Department of Justice provides legal services to the department; and
• Shared Services Canada (SSC) provides information technology (IT) infrastructure services, with the exception of the infrastructure service for the SAP financial system. Effective January 2020, the SAP financial system transitioned to a Cloud environment, which is housed within TBS and managed by a third party.

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, including TBS infrastructure services, are designed and operating effectively. The department retains responsibility of certain IT-general controls within the SAP environment, such as user access controls and segregation of duties.

3. Departmental assessment results during fiscal year 2020-21

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, there were no significantly amended key controls in existing processes, which required a reassessment.

COVID-19

The department continues to monitor COVID-19 expenses to ensure they are processed in compliance with applicable legislation, and Treasury Board policies and guidance.

On-going monitoring of key controls:

The department assesses the design and operational effectiveness¹ of its high-risk business processes on an annual basis as part of its rotational on-going monitoring of key controls.

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 performed. This means that not all controls are tested on an annual basis, but follow a rotational, risk-based approach in association with their inherent level of risk.

This year, the department did not reassess the entity‑level controls, as senior management is the primary source of these controls, the internal control group will perform a re-assessment of entity-level controls once all the changes are finalized, formally approved, and implemented. The department completed the reassessment of IT-general controls under departmental management and the following business processes.

Based on the testing, the key controls that were tested have performed as intended.

Operating expenses

This year, the department reviewed and updated the analytic software implemented in 2016. The 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.

During the year, the department terminated the monitoring of travel card purchases as activity is limited and use is controlled and monitored by TBS, and increased the monitoring of Acquisition card activity to monthly. All other programs remain quarterly monitoring reports. The monitoring reports support management in overseeing these activities:

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

Service arrangements relevant to the financial statements - IT-General Controls

SAP environment: The service-provider (TBS) provides an annual CSAE 3416³ report prepared by an external auditor on the state of internal controls in the shared SAP environment. In January 2020, the SAP financial system was upgraded and moved to a cloud environment, and the audit scope was expanded by adding 18 controls to access controls over the cloud environment. This audit is important to ensure the department is able to rely on the SAP system in advance of new public sector accounting standards on financial instruments, effective April 1, 2022.

For fiscal 2021-22, the CSAE 3416 report is unqualified. In this year's report, there were no exceptions noted on the 53 controls tested (compared to 16 exceptions in the prior year).

Over the 2022-23 fiscal year, the department and the OAG will continue to follow-up with TBS in consideration of the importance for Finance to maintain reliance on the SAP system. 

4. Departmental monitoring plan of key controls

4.1 Monitoring plan for the next fiscal year and subsequent years

The department's rotational on‑going monitoring plan of key controls over the next 3 years is based on an annual validation of high‑risk processes and controls as is shown in the following table: