Contingent liabilities

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A contingent liability is a potential liability which may become an actual liability when one or more future events occur or fail to occur. Contingent liabilities are recorded in the accounts when it becomes likely that a payment will be made and the amount of that payment can be reasonably estimated. The contingent liabilities of the Government are grouped into: guarantees provided by the Government, international organizations, claims and pending and threatened litigation, and insurance programs of agent enterprise Crown corporations. Additional information regarding each category is provided below.

For details of contingent liabilities of consolidated Crown corporations, refer to Table 4.4 in Section 4 of this volume. Particulars of contingent liabilities of enterprise Crown corporations and other government business enterprises are not consolidated with those of the Government but details of these contingencies may be found in Table 9.7 of Section 9 of this volume.

Guarantees

Guarantees provided by the Government include:

Losses on guarantees are recorded in the accounts when it is likely that a payment will be made to honour a guarantee and when the amount of the anticipated loss can be reasonably estimated. The amount of the allowance is determined by taking into consideration the nature of the guarantee, loss experience and the use of other measurement techniques. Borrowings of enterprise Crown corporations and other government business enterprises are recorded as liabilities for the portion not expected to be repaid directly by these corporations.

Table 11.5 lists the outstanding guarantees and is summarized in Note 6 to the consolidated financial statements in Section 2 of this volume. The authorized limits indicated in Table 11.5 represent the aggregate total of various types of authorities of Government bodies as stipulated in legislation, legal agreements or other documents that may be in force at any one time.

Table 11.5
Guarantees provided by the Government as at March 31, 2017
(in millions of dollars)

  Authorized limit (where applicable) Principal amount outstanding
Guaranteed borrowings of enterprise Crown corporations and other government business enterprises
Agent enterprise Crown corporations 276,559Link to footnote 1
Other guarantees provided by the Government
Loan guarantees
Agriculture and Agri-Food
Department of Agriculture and Agri-Food
Advance Payments Program—Agricultural Marketing Programs Act 5,000 1,246
Farm Improvement Loans Act and Canadian Agricultural Loans Act 3,000 104
Families, Children and Social Development
Employment and Social Development
Canada Student Loans Act 10,782 4
Finance
Department of Finance
International Bank for Reconstruction and Development 157 157
Indigenous and Northern Affairs
Indian Affairs and Northern Development
Indian Economic Development Guarantee Program 60 1
On-Reserve Housing Guarantee Program 2,200
Canada Mortgage and Housing Corporation 1,411
Other approved lenders 325
Innovation, Science and Economic Development
Industry
Canada Small Business Financing Act 2,343 806
Regional Aircraft Credit Facility 1,500 44
Natural Resources
Department of Natural Resources
Lower Churchill Hydro Electric Projects 6,300 5,397
Total—Loan guarantees 31,342 9,495
Insurance programs managed by the Government
Canadian Heritage
Department of Canadian Heritage
Canada Travelling Exhibitions Indemnification Act 3,000 Link to footnote 2
Finance
Department of Finance
Mortgage or Hypothecary Insurance Protection 350,000 258,345
Global Affairs
Foreign Affairs, Trade and Development
Accounts administered for the Government by Export Development Canada 20,000 130
Natural Resources
Department of Natural Resources
Nuclear Liability Account Link to footnote 2
Transport
Department of Transport
Aviation War Risks Link to footnote 2
Total—Insurance programs managed by the Government 373,000 258,475
Other explicit guarantees
Agriculture and Agri-Food
Department of Agriculture and Agri-Food
National Biomass Ethanol Program 140 20
Price Pooling Program—Agricultural Marketing Programs Act Link to footnote 2
Total—Other explicit guarantees 140 20
Total—Gross guarantees 404,482 544,549
Less: allowance for guarantees 282
Net exposure under guarantees 544,267

Advance Payments Program—Agricultural Marketing Programs Act

The Advance Payments Program (APP) provides producers with a cash advance on the value of their agricultural products during a specified period. By improving their cash flow throughout the year, the APP helps crop and livestock producers meet their financial obligations and benefit from the best market conditions.

Under the APP, the federal government guarantees repayment of cash advances issued to farmers by the producer organization. These guarantees help the producer organization borrow money from financial institutions at lower interest rates and issue producers a cash advance on the anticipated value of their farm product that is being produced or that is in storage. The maximum cash advance of the program is $0.4 million and the loans generally have a repayment term of 18-24 months.

Farm Improvement Loans Act and Canadian Agricultural Loans Act

The Canadian Agricultural Loans Act (CALA) program is a financial loan guarantee program that gives farmers easier access to credit. Farmers can use these loans to establish, improve, and develop farms; while Agricultural co-operatives may also access loans to process, distribute, or market the products of farming.

The CALA program builds on and replaces the previous Farm Improvement and Marketing Co-operative Loans Act program, which has helped farming operations grow their businesses by guaranteeing loans issued through financial institutions since 1988.

Through the CALA, the Government of Canada is supporting the renewal of the agricultural sector and enabling co-operatives to better seize market opportunities. This program guarantees 95 percent of the value of loans provided to farms and cooperatives by financial institutions. For individual applicants, including corporations, the maximum amount for a CALA loan is $0.5 million. Most loans are repayable within ten years; for loans on land purchases, the repayment period is 15 years.

Canada Student Loans Act

Loans provided by financial institutions between 1964 and August 1995, under the Canada Student Loans Act, are fully guaranteed by the Department of Employment and Social Development (ESDC) to the lenders. ESDC reimburses the lenders for the outstanding principal, accrued interest and costs in the event of default, permanent disability or death of the borrower. ESDC bears all risks associated with guaranteed loans.

International Bank for Reconstruction and Development

During the year, 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 $118 million USD to the International Bank for Reconstruction and Development (IBRD) in respect to a $1,443.82 million USD loan entered into between the IBRD and the Republic of Iraq.

Under this guarantee, the Minister 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 Minister 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 $118 million USD. 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. At this point, no losses are anticipated with respect to this guarantee and no provision has been made.

Indian Economic Development Guarantee Program

This program authorizes the Department of Indian Affairs and Northern Development Canada to guarantee loans for non-incorporated Indian businesses on a risk-sharing basis with commercial lenders because security restrictions in the Indian Act prevent the mortgage and seizure of property located on reserves. Guarantees are provided for various types of borrowers whose activities contribute to the economic development of Indians and enable them to develop long-term credit relationships with mainstream financial institutions.

Loans issued under this program cannot exceed a term of 15 years and the line of credit must be renewed every year. Interest rates on guaranteed loans are consistent with rates provided by lending institutions to commercial businesses, which are usually based on a spread from the prime lending rate. Any security pledged for a guaranteed loan may not be released by the lending institution without the prior approval of the Minister of Indian Affairs and Northern Development.

On-Reserve Housing Guarantee Program

This program authorizes the Department of Indian Affairs and Northern Development Canada to guarantee loans to individuals and Indian bands to assist in the purchase of housing on reserves because security restrictions in the Indian Act prevent the mortgage and seizure of property located on reserves. These loan guarantees enable status Indians residing on reserves, Band councils, or their delegated authorities, to secure housing loans without giving the lending institution rights to the property.

Loans under this program are issued by registered lending institutions and Canada Mortgage and Housing Corporation. Payments of principal and interest for loans issued under this program are amortized over a period of 25 years. The interest rates on the guaranteed loans are consistent with conventional mortgage interest rates offered by the major banks.

Canada Small Business Financing Act

The Canada Small Business Financing Act includes loans registered since April 1, 1999. In collaboration with financial institutions, the programs offered under this Act are designed to help Canadian small and medium-sized enterprises (SMEs) get access to loans that would not otherwise have been available, or would only have been available under less favourable terms. In the event a registered loan defaults, the Government pays 85 per cent of the net eligible losses. To be eligible, SMEs must be for-profit businesses with revenues not exceeding $10 million per year.

Regional Aircraft Credit Facility

The Regional Aircraft Credit Facility Program was established in 2004 to provide sales financing assistance in the form of loan guarantees to enable domestic air carriers to acquire Canadian-built fixed-wing commercial jets.

The guarantees are provided on commercial terms and are secured by the aircraft financed by private lenders. These guarantees have a life of 15 years. This program expired on March 31, 2008.

Lower Churchill Hydroelectric Projects

In 2011, the Government of Canada committed to providing a loan guarantee to support the Lower Churchill Hydroelectric Projects, including two projects sponsored by Nalcor Energy ((1) Muskrat Falls and Labrador Transmission Assets and (2) Labrador-Island Link) and one project sponsored by Emera Inc. (Maritime Link). The federal loan guarantee applied to the debt raised for the construction of these projects. Subsequent to signing of the Guarantee Agreements by the Minister of Natural Resources for the Muskrat Falls / Labrador Transmission Assets and for the Labrador Island Link, on December 13, 2013, the financing was completed for the Nalcor-led projects, raising $5 billion of guaranteed debt in the form of a bond financing. These bonds have a life varying from about 15 years to 40 years. After the Minister of Natural Resources signed the Guarantee Agreement for the Maritime Link on April 23, 2014, the bond financing was completed for the Maritime Link, raising $1.3 billion of guaranteed debt for a life of about 39 years. As of March 31, 2017, $5,396,676,272 of guaranteed debt has been released to the project entities. As per the terms of the bonds that were issued, initially, only interest payments are being made on the guaranteed debt. The commencement of principal payments on the guaranteed debt has been scheduled to coincide with the expected commissioning dates of the projects, with the schedule of these payments depending on the specific terms and conditions of each of the guaranteed bonds. Among the many safeguards put in place to protect Canada's interest, all of the project entities' shares, assets and agreements have been pledged as security to Canada.

Canada Travelling Exhibitions Indemnification Act

Pursuant to s. 3(1) of the Canada Travelling Exhibitions Indemnification Act (the Act) the Minister of Canadian Heritage is authorized to enter into indemnification agreements with owners of objects or appurtenances on loan to travelling exhibitions in Canada. Under the Act, maximum levels of liability are established including: no more than $600 million in respect of each travelling exhibition and; no more than $3 billion at any given time in respect of all travelling exhibitions. The Canada Travelling Exhibitions Indemnification Regulations set out specific requirements to be met when owners are seeking indemnification agreements with the Minister. The Regulations also set limitations on the scope of indemnity, establish deductibles, define maximums for and period of coverage, set requirements for condition reporting, outline a claims procedure and provide for dispute resolution, among other things. Applicants may include institutions organizing or participating in travelling exhibitions who apply on behalf of owners. Upon approval of an application by the Minister, the owner of an object or appurtenance included in the particular travelling exhibition may enter into an indemnification agreement with the Minister.

Mortgage or Hypothecary Insurance Protection

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, 2017, the aggregate outstanding principal amount of loans that are guaranteed under the PRMHIA is estimated at $291.2 billion ($242.5 billion in 2016). Any payment by the Minister is subject to a deductible equal to 10 percent of the original principal amount of these loans, or $32.9 billion ($26.8 billion in 2016). The principal amount outstanding presented within Table 11.5 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, 2017, there are two approved mortgage insurers under the PRMHIA: Genworth Financial Mortgage Insurance Company Canada, and Canada Guaranty Mortgage Insurance Company.

Accounts administered for the Government by Export Development Canada

The Government of Canada has authorized support for insurance and guarantee programs which on the basis of Export Development Canada's (EDC) risk management practices, could not be supported under EDC's Corporate Account but are in the national interest. Canada Account transactions consist of activities undertaken by EDC pursuant to Section 23 of the Export Development Act.

Nuclear Liability Reinsurance Account

Under the Nuclear Liability and Compensation Act (NLCA), which entered into force on January 1, 2017, and replaced the Nuclear Liability Act (NLA), operators of designated nuclear installations are required to maintain financial security against the liability imposed on them by the NLCA.

The NLCA establishes that the operator's liability for damages resulting from a nuclear incident is limited to $1 billion, an amount to be phased in over four years with $650 million applying in 2017, and $1 billion in 2020. This amount applies to the "Power Reactor Class" of nuclear installations prescribed in the Nuclear Liability and Compensation Regulations (NLCR). Lower liability amounts for lower-risk installations, based on their commensurate risk, are prescribed in the NLCR. The Minister of Natural Resources is required to review the operator's liability limit at least once every five years, and the Government may increase the limit by regulation.

The financial security covering the operator's liability must be in the form of insurance obtained from an insurer approved by the Minister. However, up to 50 per cent of the operator's financial security can be in some other form subject to the Minister's approval.

Both the insurance to nuclear operators under a standard policy, which is approved by the Minister, and the other forms of financial security cover all the categories of damage that are compensable under the NLCA, with the exception of damage arising from normal emissions, and bodily injury occurring 10 to 30 years after a nuclear incident. Through the indemnity agreement, entered into with 17 operators, the federal government covers the liability associated with the two exceptions and the difference between the lower liability amount prescribed in NLCR and liability amount assigned in the NLCA to nuclear operators of the "Power Reactor Class". The federal government charges each operator an annual fee for providing this indemnity coverage.

The Department of Natural Resources administers the Nuclear Liability Account (Account) on behalf of the federal government through a consolidated specified purpose account. This Account is a continuation of the Nuclear Liability Reinsurance Account under the previous NLA. All fees paid by the operators of nuclear installations are credited to this Account. The closing balance of this Account as at March 31, 2017, is $4,025,440. Any claims under an indemnity agreement could be up to the level of the liability amount assigned in the NLCA; however, there is no limit to the number of incidents to which the indemnity could apply. There have been no claims against — or payments out of — the Account since its creation under the NLA.

Aviation war risks

The Aviation War Risk Liability Program's guarantee is a blanket indemnity to the air industry for any losses arising as a result of war risks causing personal injury or property damage to third parties. Under the current program, airlines and other stakeholders are responsible for obtaining a certain threshold of third party war risk liability insurance. The Government's indemnity covers the gap between the threshold amounts and the individual policy holder's general liability policy limit. There is neither specified amount, nor amount specifiable—any given claim is up to the level of the individual participants' general insurance policy and there is no limit on the number of claims that can be made. The guarantee is in effect until June 30, 2016.

National Biomass Ethanol Program

By Agreement dated March 30, 2001 (and amended in September 1, 2003), Her Majesty the Queen in Right of Canada as represented by the Minister of Agriculture and Agri-Food and Farm Credit Canada (FCC) entered into the National Biomass Ethanol Program. The purpose of the program is to encourage new biomass fuel ethanol production in Canada. Guarantees are provided in relation to the Line of Credit Agreements entered into by FCC.

Price Pooling Program—Agricultural Marketing Programs Act

The Price Pooling Program provides a price guarantee that protects marketing agencies and producers against unanticipated declines in the market price of their products. Program participants use the price guarantee as security in obtaining credit from lending institutions. This credit allows the marketing agency to improve cash flow of producers through an initial payment for products delivered. It also provides equal returns to producers for products of like grades, varieties and types. This program is designed to assist and encourage cooperative marketing of eligible agricultural products, including processed products.

International organizations

Within contingent liabilities, callable share capital represents the portion of Canada's capital subscriptions that has not yet been paid-in. Callable capital is subject to call by offshore banks in the event that they were unable to meet their obligations.

Table 11.6 details the contingent liabilities for international organizations and is summarized in Note 6 to the consolidated financial statements in Section 2 of this volume.

Table 11.6
International organizations—Contingent liabilities
(in millions of dollars) Link to footnote 3

  March 31, 2017 March 31, 2016
Non-budgetary share capital and loans
Callable share capital
Finance
Department of Finance
European Bank for Reconstruction and Development 1,146 1,193
International Bank for Reconstruction and Development (World Bank) 8,786 8,580
Multilateral Investment Guarantee Agency 61 59
Subtotal 9,993 9,832
Global Affairs
Department of Foreign Affairs, Trade and Development
African Development Bank 4,386 4,216
Asian Development Bank 8,462 8,264
Caribbean Development Bank 163 159
Inter-American Development Bank 8,776 8,570
Subtotal 21,787 21,209
Total 31,780 31,041

Claims and pending and threatened litigation

Please refer to Note 6 to the consolidated financial statements in Section 2 of this volume for information on claims and pending and threatened litigation.

Insurance programs of agent enterprise Crown corporations

An insurance program is a program where the insured, an outside party, pays an insurance fee which is credited to an insurance fund or provision. The amount of the fee is based on the estimated amount of insurance fund or provision needed to meet future claims. The Canada Deposit Insurance Corporation, Canada Mortgage and Housing Corporation, Export Development Canada and Farm Credit Canada currently operate insurance programs as agents of Her Majesty. Insurance programs operated by private corporations such as employee group insurance, dental plans, etc., are not included in this definition.

The insurance programs are intended to operate on a self-sustaining basis. However, in the event the corporations have insufficient funds, the Government will have to provide financing. The Government expects that all four corporations will cover the cost of both current claims and possible future claims.

Information presented in Table 11.7 has not been audited. Additional financial information relating to these corporations may be found in the quarterly Inventory of Government of Canada Organizations. This information is also summarized in Note 6 to the consolidated financial statements in Section 2 of this volume.

Table 11.7
Summary of insurance programs of agent enterprise Crown corporations for the year ended March 31, 2017
(in millions of dollars)

  Canada Deposit Insurance CorporationLink to footnote 4 Canada Mortgage and Housing CorporationLink to footnote 5 Export Development CanadaLink to footnote 6 Farm Credit CanadaLink to footnote 7
Mortgage Insurance Fund Mortgage-Backed Securities Guarantee Fund
2016–2017 2015–2016 2016–2017 2015–2016 2016–2017 2015–2016 2016–2017 2015–2016 2016–2017 2015–2016
Insurance in force as at reporting date 741,328 696,059 502,000 520,000 457,000 429,000 22,112 21,943 5,872 5,617
Opening balance of Fund 2,116 1,801 17,070 15,840 1,898 1,676 Link to footnote 6 Link to footnote 6 14 12
Revenues for the period
Premiums and fees 421 361 1,515 1,585 300 279 194 197 26 25
Investment income 40 40 668 585 45 45
Other revenues (negative 1) 3 6 6
Total revenues 461 401 2,182 2,173 351 330 194 197 26 25
Expenses for the period
Loss on/provision for claims 300 50 310 305 6 9
Administrative expenses 41 40 270 222 38 32 7 7
Other expenses (includes taxes) (negative 4) 393 402 78 74 57 65 9 7
Total expenses 341 86 973 929 116 106 57 65 22 23
Net income or (loss) for the period 120 315 1,209 1,244 235 224 137 132 4 2
Adjustments 37 (negative 14) 3 (negative 2)
Closing balance of Fund 2,236 2,116 18,316 17,070 2,136 1,898 Link to footnote 6 Link to footnote 6 18 14
Net claims during the periodLink to footnote 8 352 364 82 124 6 10
Five year average of net claims paid 409 462 134 122 8 8

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