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1983 Report of the Auditor General of Canada


17.1 Under Section 7 of the Auditor General Act, the Auditor General is required to report annually on specific types of transactions observed during audits and to call attention to anything he considers to be of significance and of a nature that should be brought to the attention of the House of Commons. In addition, under Section 11 of the Act he is required to report on any assignment undertaken for the Governor in Council on the financial affairs of Canada. In accordance with these reporting requirements, we believe the following matters should be brought to the attention of the House.

Observations on Crown Corporations

Improper Use of Appropriations

17.2 Departmental Estimates and eventually the appropriations provided by Parliament make provision for funds to finance activities of Crown corporations. The departments control requisitioning of the funds, responding to requests from the specific corporation for whom the Estimate item was included.

17.3 Departments have a responsibility to inform Parliament in a clear manner before the voting of funds about how these appropriations are going to affect the public purse and, in the Public Accounts, to disclose the use made of the funds that were appropriated. The cash balances and cash flows of Crown-owned corporations should be adequately monitored, and the moneys should be spent in accordance with the authorization given by Parliament.

17.4 Because the Government lacks direct controls over expenditures by Crown corporations, there is an urgent need to develop a policy for controlling the timing of the drawdown of funds for Crown corporations dependent on the public purse and to ensure they are used for the purposes provided.

17.5 The following cases show instances where our review revealed improper use of annual appropriations. These include using appropriations for other than the purpose authorized by Parliament and paying funds in advance of need.

17.6 Case 1. Cape Breton Development Corporation - Use of capital appropriation for purpose other than that authorized by Parliament. Cape Breton Development Corporation (DEVCO) is a Crown corporation reporting to Parliament through the Minister of Industry, Trade and Commerce and Regional Economic Expansion. The Corporation is funded by three separate appropriations covering its coal mining operation losses, its capital expenditures in rehabilitating and developing its coal and railway operations, and its industrial development activities. In 1982-83, total funding by Canada was $96 million ($133 million in 1981-82).

17.7 In paragraph 15.10 of our 1982 Report, we observed that in 1981 and 1982 DEVCO had requested and was paid by the Department of Regional Economic Expansion (DREE) amounts totalling $57 million more than the company expended in those years for the acquisition of capital assets. In 1982-83, DREE paid DEVCO an additional $71 million for capital expenditures. DEVCO recorded capital expenditures of $82 million in that year, leaving an excess of $46 million. Notwithstanding the fact that the Corporation retained the $57 million it had received in excess of its capital expenditures in the previous years, DREE did not limit the drawdown of DEVCO's 1983 capital appropriation to the difference between amounts expended for capital in 1983 and the amount retained from previous years.

17.8 The $46 million excess was used by DEVCO to finance its 1983 coal mining operations. The interest earned on the capital appropriations drawn in advance of need was included in income, thus reducing reported operating losses. In 1982-83, operating losses were reported at $46.5 million, but appropriations for losses in 1983 were only $12.8 million, for a shortfall of $33.7 million. The magnitude of the operating losses was not revealed in the 1983-84 Main Estimates; DEVCO is requesting a Supplementary Estimate in 1983-84 of $33.7 million to cover them. In our opinion, DEVCO's use of excess funds from capital appropriations to finance operating losses is a use of appropriations for purposes other than those voted by Parliament.

17.9 Case 2. Department of Transport - Drawdown of funds in advance of need for Ridley Island Project. Our review of Transport Vote 40e (1981-82) revealed that $20.4 million was provided to the Canada Ports Corporation in advance of need early in 1982, with the approval of the Treasury Board and the Cabinet Committee on Economic and Regional Development. This amount, together with the interest it was expected to earn, was provided to allow the Crown corporation to fulfil its obligation to purchase $23.0 million worth of shares in Ridley Terminals, Inc. The share purchases were to be made in varying amounts from early 1982 to the second quarter of 1984.

17.10 We believe that, in making this unusual arrangement, central agencies responsible for controlling the funding of Crown corporations have set a dangerous precedent that could weaken parliamentary control over annual appropriations. The drawdown of these funds in advance of need has served to inflate government expenditures in 1981-82 and has resulted in an overstatement of Canada's deficit by $20.4 million at 31 March 1982.

17.11 Furthermore, the interest earned on the money, expected to be $2.6 million, creates interest income that will overstate the true profitability of the Crown corporation over the two years that the funds are invested. At the same time, $2.6 million in program costs have, in effect, been transferred from the Department of Transport and will be reflected as interest on the national debt.

17.12 Case 3. VIA Rail Canada Inc. - Payments in advance of proven need. VIA Rail Canada Inc. (VIA) has realized a substantial additional benefit from funds it received from Canada in advance of proven need. VIA's financial statements for 1979 to 1982 show that the Corporation earned $21.1 million ($17 million in 1982) in interest income by investing its surplus funds (most of which were received from Canada) in short-term securities. At 31 December 1981, VIA's investment in short-term securities amounted to $25 million. By 31 December 1982, this figure had grown to $129 million.

17.13 The Government of Canada provides VIA with funds for two main purposes: first, to finance its operating deficits in accordance with the terms and conditions of a contract requiring it to provide certain rail passenger services; second, to finance its capital expenditures. The terms and conditions for the provision of capital funds state that "the maximum payment to VIA is limited only by the lesser of the level of capital expenditures approved annually by the Governor in Council or the actual cash needs of VIA for capital contributions."

17.14 Our review of VIA's financial statements suggests a significant time-lag between the Corporation's obtaining funds from Canada and the time it pays its personnel and major suppliers. For instance, since 1 April 1982, the Department of Transport has been providing operating funds to VIA 30 days before the beginning of the month in which the Corporation was to render the services. It is highly unlikely that VIA has been required to pay its suppliers or its personnel on the same basis. Furthermore, the Department acknowledges that at 31 December 1982, VIA had requested and received at least $24 million from Canada for capital expenditure over and above its actual cash needs for capital contributions.

17.15 We have two principal concerns about providing these funds to VIA in advance of proven need:

    - Cost of financing. The Department has not adequately considered the cost of financing these payments. Canada has had to borrow and pay interest on the funds advanced to VIA. Accordingly, although VIA is showing substantial interest income in its financial statements, much of this income, in effect, is offset by the interest cost recorded against the national debt of Canada and thus represents a further subsidization of VIA's services by Canadian taxpayers.
    - Distortion of the Public Accounts of Canada. The practice of drawing funds from the Consolidated Revenue Fund in advance of proven need could, if it were widespread, adversely affect the fairness of the Public Accounts of Canada. For example, program costs are understated by the cost of financing payments in advance of need. Such a cost is recorded by the Department of Finance, although it relates directly to a Department of Transport program activity. In addition, the funding of $24 million over and above VIA's actual cash needs for capital contributions inflates government expenditures for the Railway Transport activity as long as the Department has not recovered the amount of the overfunding.
17.16 The Department has indicated that it has taken action to address the excess funds which, in its opinion, VIA at present has under its control. Subject to Treasury Board approval, a schedule for repayment of excess funds will be put in place. The Department has sent a reconciliation of the capital funds to VIA for comment and resolution this calendar year. At the time of our audit, the Department had not come to any agreement with VIA.

17.17 These cases illustrate the urgent need for the Government to develop a policy for controlling the timing of the drawdown of funds for Crown corporations dependent on the public purse, to clarify the terms and conditions that govern the existing arrangements for subsidizing VIA, and assess the options for providing VIA with funds to meet its normal working capital requirements.

Audit Reports - Crown Corporations

17.18 Our Office issued audit reports on the accounts and financial statements of 40 Crown corporations during the year, as required by the Financial Administration Act or the individual act incorporating the specific corporation. Our opinion on three of these corporations contained a reservation in respect to their operations. The details are set out below.

17.19 In addition, the auditor's report on the financial statements of Canada Mortgage and Housing Corporation contained a "subject to" reservation. The details of this are also set out below.

17.20 Canadian Dairy Commission - Levies instituted beyond the powers of the Commission. Section 12 (f) of the Canadian Dairy Commission Act empowers the Governor in Council

to make regulations regulating the marketing of any dairy product, including regulations...authorizing the Commission to fix, impose and collect levies or charges from persons engaged in the marketing of any dairy product...and use such levies or charges for the purpose of carrying out its functions under this Act....
Since the establishment of the Canadian Dairy Commission in 1967, no regulation concerning levies has been made pursuant to section 12. We have obtained two separate legal opinions which state that, in the absence of a regulation made by the Governor in Council authorizing the imposition of levies, the Commission is powerless to impose them.

17.21 The Commission assesses levies to cover the cost of disposing of surplus dairy products. Producer levies for the dairy year ended 31 July 1982 amounted to $169.9 million, of which $7.8 million was collected direct by the Commission by deduction from subsidy payments to producers. Other deductions are made from payments by processors to producers on delivery of industrial milk and remitted to the provincial marketing boards, which in turn forward them to the Commission.

17.22 The Commission has obtained a legal opinion from the Deputy Minister of Justice that "the fixing, imposition and collection of levies has been validly adopted under the Agricultural Products Marketing Act".

17.23 Notwithstanding this opinion, our audit report to the Minister of Agriculture on the financial statements of the Commission for the year ended 31 July 1982 included a qualification that the producer levies have been instituted without benefit of regulation and are, therefore, beyond the powers of the Canadian Dairy Commission.

17.24 Canadian Saltfish Corporation - Activities beyond its statutory powers. The Canadian Saltfish Corporation was established by the Saltfish Act in 1970 to improve the earnings of primary producers of cured cod-fish. The Corporation has the exclusive right to trade in and market cured cod-fish and its by-products in the Province of Newfoundland and the Lower North Shore of Quebec and is required to buy all cured cod-fish of an acceptable standard of quality offered for sale by the fishermen.

17.25 During the year ended 31 March 1983, the Corporation sold frozen fish products in the amount of $5.3 million and marketed frozen fish products under a contractual arrangement for a group of companies at a market value of $17.8 million. These transactions accounted for more than 30 per cent of total sales for the year.

17.26 In our opinion, because the Act specifies the Corporation's rights only in relation to cured cod-fish and its by-products, these sales of frozen fish products were not within the powers of the Corporation under the Saltfish Act. Accordingly, in our audit report to the Minister of Fisheries and Oceans, our opinion on the financial statements of the Corporation for the year ended 31 March 1983 was qualified.

17.27 Loto Canada Inc. - Payments beyond the powers of the Corporation, and other concerns. Loto Canada Inc. was incorporated under the Canada Business Corporations Act in 1976 to conduct and manage a national lottery in accordance with the National Lottery Regulations as authorized by the Criminal Code.

17.28 In August 1979, federal and provincial government representatives came to an understanding that Loto Canada Inc. would withdraw from the sale of lottery tickets effective 31 December 1979 and that the Corporation would then be wound up by the federal government as quickly as legal, financial and administrative requirements permitted. The Minister responsible for the Corporation directed the Board of Directors to begin the orderly windup of the operations effective 21 August 1979. The lottery operations were terminated effective 31 December 1979, and the right to claim prizes expired on 31 December 1980.

17.29 In January 1981, the Corporation began financing research on gaming concepts, including research and development of a sports pool scheme. In August 1981, Cabinet decided that this sports pool scheme would be operated by a new federal agency. Total payments for research and development of the sports pool scheme from January 1981 to 31 March 1983 amounted to $1.8 million, of which $1.2 million has been recovered from the Government of Canada. The Corporation is confident that it will recover the balance. The research on gaming concepts financed by the Corporation formed the basis of documentation leading to passage of the Athletic Contests and Events Pools Act by Parliament on 29 June 1983.

17.30 The Corporation takes the position that this financing was a business decision within its general powers and in support of the intention of the federal government. However, in our opinion, the payments of $1.8 million were not authorized by the Corporation's Articles of Incorporation, which restrict the business that the Corporation may conduct and manage. Thus, in our opinion, the payments were contrary to the provisions of the Canada Business Corporations Act.

17.31 In view of the fact that Loto Canada Inc. terminated its lottery operations effective 31 December 1979, we are concerned about the high level of administration expenses incurred by the Corporation during the years ended 31 March 1982 and 31 March 1983, amounting to $779,000. These expenses arose from the continuing existence of this non-operating Corporation and its involvement in financing the research and development of the sports pool scheme. We are also concerned that arrangements have not been finalized between the Corporation and the Government of Canada to effect payment of $14.4 million surplus funds due to the Receiver General for Canada.

17.32 The above matters were brought to the attention of the Minister of State for Fitness and Amateur Sport in our audit reports on the financial statements of the Corporation for the years ended 31 March 1982 and 31 March 1983.

17.33 On 7 July 1983, the Board of Directors of Loto Canada Inc. passed a resolution to begin immediately the final winding up of the Corporation.

17.34 Canada Mortgage and Housing Corporation - Questionable legality of Canadian home ownership stimulation payments. Canada Mortgage and Housing Corporation was constituted as a Crown corporation by an Act of Parliament on 1 January 1946. Its activities are regulated by the National Housing Act, the Canada Mortgage and Housing Corporation Act and, in certain respects, the Financial Administration Act. One of the main activities of the Corporation is to make payments or incur expenses in the process of delivering housing programs on behalf of the federal government.

17.35 The Canadian Home Ownership Stimulation Plan (CHOSP), introduced in the June 1982 Budget, was implemented to stimulate the construction of new housing units, thereby creating employment and improving access to home ownership.

17.36 During the fiscal year ended 31 March 1983, the Corporation disbursed $538 million under CHOSP. The auditors of the Corporation issued a qualified opinion on the Corporation's financial statements ended 31 December 1982. They also qualified their opinion on the Corporation's statement of account with the Minister responsible for the Corporation and the Minister of Energy, Mines and Resources for the year ended 31 March 1983 with respect to the uncertainty about the authority under which CHOSP payments were made. Identical notes to both statements added that:

The regulatory authority under which CHOSP payments are being made has been challenged by a Co-Chairman of the Standing Joint Committee of the Senate and Commons on Regulations and Statutory Instruments. The objections relate to lack of specific government regulations covering such payments, and lack of security where the payments represent forgivable loans. However, it is the Corporation's opinion that the amounts are properly authorized and secured under the National Housing Act.
17.37 An independent legal opinion obtained by our Office concluded that, notwithstanding the Corporation's opinion, "transactions under the CHOSP are not within the powers of CMHC under the Act".

Observations on Departmental Expenditures

17.38 Department of Agriculture - Shortfall in the Western Grain Stabilization Account. The Western Grain Stabilization Act provides stabilization payments to participating grain growers. These payments are made when net eligible grain sale proceeds of all producers for the year are below the specified average. In turn, the Act requires that each participating grain grower pay a 2 per cent levy in respect of the grain sale proceeds received by him and that the government match the levies paid by participants plus 2 per cent of all participating eligible grain sale proceeds (whether or not levies were paid). The Department of Agriculture has interpreted this latter provision as applying only to sales on which levies were paid by participants and not on the total participating eligible grain sale proceeds.

17.39 The intent may well have been that the federal contribution should be equal to double the levies paid by participants. However, a literal interpretation of the Act does not appear to support this, and the Department's legal counsel states that "although the intent of the government was to only pay in relation to amounts actually paid, the plain meaning of the section (41(1)) leads to the other conclusion".

17.40 If the literal interpretation were applied, there would be an estimated $7.4 million shortfall in government contributions to the Account dating from 1976.

17.41 The Department's latest response to this issue, which has been raised by this Office in management letters since 1980, is dated 29 April 1983 and states that "the wording of the Act will be clarified through legislative amendments."

17.42 Exchange Fund Account - Valuation of gold and accounting for the realized gains on sales of gold. The Exchange Fund Account is an account in the name of the Minister of Finance, governed by the Currency and Exchange Act and administered by the Bank of Canada, to aid in the control and protection of the external value of the Canadian dollar.

17.43 Our audit report to the Minister of Finance for the year ended 31 December 1982 included two accounting matters that should be brought to the attention of Parliament. In our opinion, the accounting policies of the Account in respect of these matters are not in accordance with section 16 of the Currency and Exchange Act. The two matters are:

    - Gold is recorded at its approximate historical cost and not adjusted to its commodity market value. As a result, income does not include unrealized valuation gains on gold equal to the difference between commodity market value and approximate historical cost.
    - Realized gains on sales of gold are recorded as valuation gains and taken into income in equal amounts over a three-year period. In our opinion, section 16 of the Currency and Exchange Act requires that these gains be entirely taken into income of the year in which they are realized, and paid over to the Consolidated Revenue Fund within three months after the end of the year.
17.44 Officials of the Department of Finance have prepared proposed amendments to the Act to provide explicit authority for the accounting policies currently being followed by the Account.

17.45 Department of Fisheries and Oceans - Lack of authorization for expenditures for vessel charters. Herring roe is an important resource in the Pacific fishery. To harvest as much herring roe as possible, while practising sound conservation techniques, the Department of Fisheries and Oceans monitors fish stocks by using chartered fishing boats. These chartered craft carry out test fishing to determine optimum times for opening the herring roe fishery in selected areas. However, the Department does not have appropriated funds to pay for these charters. Rather than seeking the funds, it has adopted the practice of allowing vessel owners to catch an amount of fish well in excess of that needed for test fishing and to use the proceeds as payment for chartering the vessels. The cost of charters financed through this practice has been $1.6 million a year for the past three years. In effect, the Department is bypassing parliamentary control of expenditures through this practice.

17.46 ITC/DREE - Failure to collect debt owed to the Crown. The federal government has provided assistance in the form of repayable contributions of $103 million toward the design and development of certain aircraft engines by a Canadian corporation. These contributions were made under the Defence Industry Productivity Program (DIPP) operated by the Department of Industry, Trade and Commerce (ITC). Of the total amount of $103 million, the company had repaid $32.4 million by the end of March 1983. A further $65.3 million was repayable by the end of 1983 under the contractual terms governing the assistance. The remaining $5 million was repayable under other terms.

17.47 Rather than seeking repayment, ITC obtained approval from Treasury Board in November 1981 for a revised schedule calling for repayments extending to 1988. In proposing this deferral, the Department indicated that, because sales had far exceeded original expectations, the existing contract terms would require the company to make repayments in excess of what it considered to be fair and reasonable. ITC also considered that the company and its foreign parent had met good corporate behaviour guidelines. However, we noted that criteria for fair and reasonable repayments and for good corporate behaviour had not been documented by ITC. The Department also indicated that rescheduling the repayment would provide a further incentive for a proposed expansion program in Canada. However, we could find no agreements identifying the projects for which the money would be used. Under normal circumstances, the contributions would have been repaid, and the company would have entered into specific agreements covering the proposed new projects for which financial assistance was sought.

17.48 The delay in repayment meant that the Consolidated Revenue fund did not receive $65.3 million to which it was entitled by the end of 1983. We estimated that the difference in value, in 1983 dollars, between the revised repayment schedule extending to 1988 and the repayments due by the end of 1983 as originally contracted for, amounted to an undisclosed subsidy of $25 to $30 million.

17.49 ITC/DREE - Negligence in the payment of a loan guarantee. Under the Regional Development Incentives Act, the Department of Regional Economic Expansion (DREE) provided assistance for completion of a 22-unit motel facility with restaurant and bar. The assistance was in the form of loan guarantees totalling $315,000 to a trust company.

17.50 In March 1982, after several defaults in payment, the trust company exercised a power of sale to realize on its security. DREE paid the guaranteed amount of $315,000 to the trust company, despite major deficiencies in the liquidation procedures.

17.51 The trust company disposed of the motel through public auction, contrary to the terms in the guarantee agreement, which stipulated disposal by public tender or by private sale with DREE's consent. The trust company did not seek a court judgement against the owner, although this too was called for in the guarantee agreement. A corporate guarantee by another company owned by the motel owner also was not called upon. In addition, departmental information indicated that no control was exercised over the chattels of the motel, which could have been sold separately. DREE failed to ensure that a protective bid was placed at the auction so as to minimize the loss to the Crown. Also, DREE was not represented at the auction to ensure that the liquidation proceedings were conducted in the best interests of the Crown.

17.52 The motel was sold for a total consideration of $200 at public auction, notwithstanding that an appraisal conducted by an independent evaluator in 1977 indicated a value of $393,000, a second independent evaluation in 1978 a value of $550,000, and a property tax assessment by the Province of New Brunswick in March 1982 a market value of $309,400.

17.53 The successful bidder resold the property for $75,200 one day after the auction, and the new owner obtained a mortgage of $285,000 on the motel within a month. During our review in August 1983, we noted that the motel was operating and that an offer of $625,000 had been made in May 1983 to purchase the motel property and an adjacent parcel of land.

17.54 Department of Public Works - Failure to ensure fairness and economy in the spending of public funds in negotiating a lease agreement. On 29 June 1983, the Department of Public Works obtained Treasury Board approval to enter into a 10-year lease beginning 1 December 1983 to provide occupancy for several government departments and agencies in a newly renovated building in Ottawa, at an annual rate of approximately $12 million. We noted that the Department, in negotiating for this space, contravened a number of Treasury Board directives related to contracting, acquisition of real property, and office accommodation. The selection process involved evaluating 32 lease proposals, among which this building ranked 24th. Two proposals for new buildings submitted for evaluation were not considered by the Department, although they offered better rental rates and ranked higher than the renovated building. In addition, the Department did not consider a proposal to lease an office building under construction in downtown Ottawa, even though it was offered at very attractive rates.

17.55 The Department advised us that the decision to negotiate a lease arrangement for the above building, rather than enter into negotiations with other bidders, was made because of the perceived urgent need of one agency.

17.56 The Department's submission to Treasury Board stated that the fit-up costs would be 35 per cent above cost guidelines and that full occupancy by 1 December 1983 would be impossible. To date, no Treasury Board approval has been obtained for specific fit-up costs, and no specific fit-ups have been undertaken. Under the arrangement approved by Treasury Board, rental payments start 1 December 1983. If the premises are unoccupied because of the time required for fit-ups, unproductive rental payments of up to $1 million a month could result.

17.57 Department of Public Works - Buildings acquired and either not utilized or under-utilized. In 1981, we reported that an 11,152 square-metre building, purchased by the Department for $1.98 million in 1976, was still vacant. The Department advised us, at that time, that the building would be ready for occupancy in 1983.

17.58 The Department now advises us that the building is still unoccupied. No occupancy is anticipated before April 1984, and then only if a further expenditure of an estimated $19.6 million is made for completing and fitting up the existing space and constructing an extension to the building.

17.59 To date, costs associated with this non-productive acquisition, exclusive of the original purchase price, are approximately $1.96 million for heating, consultant design fees, grants in lieu of taxes and imputed interest charges.

17.60 A review of departmental vacancy reports showed that other buildings have remained unoccupied since the date of purchase or have remained vacant for extended periods. We noted that three buildings in the National Capital Region with a total rentable space of 49,400 square metres, had been vacant from two to five years. Their direct operation and maintenance cost was $2.9 million, and the foregone annual rental revenue, calculated by the Department, amounted to $7.7 million.

17.61 Department of Public Works and Harbourfront Corporation - Failure to provide essential information and obtain appropriate authority. The Department of Public Works recommended to the Treasury Board and the Minister of Public Works that an eight-storey warehouse building, together with the associated lands held by the Department, be conveyed to the Harbourfront Corporation for condominium development purposes. The Department failed to advise them that the Harbourfront Corporation, or the Crown, would be obliged to maintain the refurbished warehouse building in perpetuity to support the four storeys of residential condominium units constructed on top of it by a private developer. The Harbourfront Corporation, as the owner of the refurbished building and the land on which the whole structure stands, will also have to ensure perpetual easement and access rights for the condominium owners.

17.62 In accepting the Department's recommendation, the Treasury Board directed the Department to ensure that the development would not entail an indirect subsidy to the condominium purchasers or the developer. The Department advised us that it was not able to comply but has not informed Treasury Board of this fact.

17.63 The property in question, which formed the major part of an expropriation by the Department in 1972 for $9.4 million, was conveyed to Harbourfront Corporation for a nominal sum of $1.

17.64 The management agreement between Her Majesty the Queen, as represented by the Minister of Public Works, and the above Crown-owned corporation states that the Corporation should not enter into condominium development agreements without the prior approval of the Minister of Public Works and the Deputy Attorney General of Canada. However, the Corporation entered into major condominium development agreements without obtaining the authority as stipulated.

17.65 As a result, the Crown, without Treasury Board having essential knowledge of the pertinent facts, has assumed obligations in perpetuity, and major Crown assets have been transferred to the Corporation for its own specific use at a nominal cost.

17.66 Department of Public Works - Contravention of the Government Contracts Regulations. In our 1982 Report, we noted a number of weaknesses in government contracting practices. We view with concern the Department of Public Works' failure to comply with the Government's competition policy, which was designed primarily to ensure consistency, economy, and fairness in selecting and procuring consulting services.

17.67 During 1982-83, the Department of Public Works entered into agreements with 14 architectural and engineering consulting firms without holding competitions. In each case, the agreement was in excess of the mandatory threshold of $100,000, and together the agreements committed the Department to expenditures in excess of $8.8 million.

17.68 Section 8 of the Government Contracts Regulations allows a contracting authority to enter into a contract for acquiring construction-related architectural, engineering and other services without inviting tenders where the expenditure does not exceed $100,000.

17.69 The Regulations were last revised on 20 September 1982, when the threshold for mandatory tendering for the services of consulting architects and engineers was raised from $30,000 to $100,000. In approving the new threshold, Treasury Board Ministers noted that the Department of Public Works would, from then on, be expected to comply with the Government Contracts Regulations and Treasury Board contracting policy.

17.70 Department of Public Works - Cost of $697,000 attributable to deficient wording in a lease drawn up by the Department. Because of a deficiency in the wording of a lease agreement entered into by the Department of Public Works, the Crown has been compelled to pay additional rent amounting to $697,000 to a landlord in an out-of-court settlement.

17.71 The lease agreement was for a term of five years, beginning 1 December 1975, at an annual rental of $732,874, and called for additional payments of $263,775 a year over the lease term to cover amortization of the cost of improvements made by the lessor.

17.72 The agreement included a renewal option clause which gave the Department the right to renew the lease on the same terms and conditions. The renewal clause did not clearly specify that the renewal would be at the original rental rate only. As a result, when the Department renewed the lease, the lessor claimed additional annual rental payments of $263,775 over the three-year renewal period.

17.73 A legal opinion obtained by the Department concluded that the court would hold the Crown liable for the "additional rent" payments made during the renewal period. Accordingly, the Department settled the claim for $697,000, representing approximately 87.5 per cent of the additional rent claimed by the lessor plus the plaintiff's court costs, amounting to $5,000.

17.74 Department of Transport - Up-front payments of $72 million made to a CN Marine contractor without adequate security. The Department of Transport made three up-front payments, totalling $72 million, to Davie Shipbuilding Limited, a subsidiary of Dome Petroleum. The payments were made through the Canadian National Railway Co. (CN) and CN Marine, in connection with the construction of a vessel identified as the Gulfspan. These payments were not adequately secured and were made in advance of need - approximately six months before construction was scheduled to begin.

17.75 CN Marine was incorporated as a subsidiary of CN in 1978. An agreement between three parties - the Minister of Transport, CN and CN Marine - established the terms and conditions under which CN Marine would provide Atlantic ferry services. The agreement required that the Minister of Transport should be satisfied with the form and timing of each capital project to which the Department contributed and that every project should be necessary to enable CN Marine to provide the agreed water transportation services. The Minister was also required to be satisfied that all requests for funding capital projects were justified. The construction of the Gulfspan was such a capital project.

17.76 The lowest bid for the vessel was $130 million. However, pursuant to a government decision to keep the cost under $127 million, the Department negotiated a lower price with Davie Shipbuilding by agreeing to accelerate the payment schedule for the vessel. The new schedule allowed the company to reduce the vessel's price by $9 million to $121 million. Under the revised schedule, payments of $23.5, $18.4 and $30 million were advanced to the shipbuilder in January, February and April 1983 respectively. However, construction of the vessel was not due to begin until September 1983.

17.77 The immediate need for the construction of this vessel, from a transportation point of view, was questioned by the Department. We were informed that all the pros and cons of this project were presented and all necessary approvals obtained before these financial arrangements were entered into. However, we have two principal concerns about the advance of the $72 million:

    - Lack of adequate security. The $72 million in up-front payments (60 per cent of the contract price) was not adequately secured. We were told that Davie Shipbuilding could not provide a performance bond. Instead, its parent company, Dome Petroleum Limited, provided a letter of guarantee. Normal business practice requires a performance bond and not a letter of guarantee. Nevertheless, the money was advanced, placing taxpayers' money at abnormal risk.
    - Vessel cost understated. Davie agreed to reduce the price of the vessel by $9 million (7 per cent of the contract price) in return for accelerated payments. However, Canada presumably had to borrow and pay interest on the funds it had advanced to Davie. Therefore, in effect, $9 million in program costs were transferred from the Department of Transport and will be reflected as interest on the national debt.
17.78 Department of Transport - Payments of $282 million made to railways without enabling legislation. On 1 February 1983, the Government announced that the Minister of Transport would table a comprehensive bill in Parliament that would replace the existing fixed Crowsnest Pass freight rate with a new grain transportation program. The railways were informed that the Government would seek authority from Parliament to provide compensation to the railways for revenue losses incurred in the 1982-83 crop year.

17.79 Pending introduction of this legislation, the Department of Transport (DOT) sought and obtained spending authority of up to $130.4 million through Final Supplementary Estimates 1982-83 in DOT's Vote 65 - Contributions. In April 1983, payments of $65.2 million each were made to Canadian National Railway Company and Canadian Pacific Limited. These payments were to compensate the railways for losses incurred from August to December 1982 of the 1982-83 crop year in transporting western grain at the current statutory rate, and the Government expected they would use the money to upgrade their grain handling capacity. Additional contributions for the crop year 1982-83 of $53 million relating to the period January to March of the fiscal year 1982-83 and $99 million for the period April to July of 1983 were authorized in Supplementary Estimates "A" 1983-84 and paid to the railways in July 1983.

17.80 We were informed that these interim payments were made in order to expedite a new government program, despite the fact that Parliament had not finished debating the policy or passed the proposed enabling legislation.

17.81 The Speaker of the House of Commons has, in the past, ruled that appropriation acts are not the place to seek authority to do something such as establishing a new program. The appropriation act should only seek authority to spend money for a program that has been previously authorized by a statute. Similarly, according to parliamentary rules, "if a Vote in the Estimates relates to a bill not yet passed by Parliament, then the authorizing bill must become law before the authorization of the relevant Vote in the Estimates by an appropriation act".

17.82 We have two major concerns. First, we believe that approving the $282 million in payments while enabling legislation was still under review runs counter to the rules and spirit governing the parliamentary system. The procedure used in this case bypasses normal parliamentary safeguards against decisions with respect to public expenditure on new programs. Second, the authority sought for expenditure for 1982-83 did not reflect the known compensation due to the railways for all the revenue loss subject to subsidy during the fiscal year. As explained earlier, the $53 million has not been recorded as an 1982-83 expenditure. In our opinion, this unrecorded amount understates the Department's actual expenditures.

17.83 Department of Transport - $46.8 million double payment made to CN not recovered. In paragraph 15.6 of our 1981 Report, we stated that the Canadian National Railway Co. was being reimbursed twice for losses incurred: first, when the deficits that included these losses were reimbursed by the Department of Transport under annual appropriation acts; second when payments were made by the Canadian Transport Commission (CTC) under the Railway Act in 1978, 1979 and 1980.

17.84 The Public Accounts Committee, following its hearing on this subject held on l8 May 1982, recommended that:

    - the Department of Transport take measures to ensure that double benefits do not occur; and
    - the Government resolve the question of double benefits to CN and report back to the Committee by 31 December 1982.
17.85 The Department of Transport has determined that the amount of the double payment to CN is $46.8 million. In December 1982, the Minister, on advice from the Department, proposed to CN that, rather than raise a claim to recover the double payment, this amount be formally incorporated into its outstanding consolidated loan from the Government of Canada. The Public Accounts Committee was also informed on the course of action proposed by the Department.

17.86 However, the Department requires parliamentary approval prior to an increase in its loans to CN. In spite of this, CN has chosen to show in its financial statements for the year ended 31 December 1982 the amount owing to Canada as a long-term debt.

17.87 We have been informed by the Department that a Treasury Board submission has been prepared that puts forward the loan option. However, Treasury Board has not yet concurred with the proposed departmental approach.

17.88 Department of National Revenue (Taxation) - Incorrect assessments of 1982 income tax returns. The Federal-Provincial Fiscal Arrangements and Established Programs Financing Act, 1977, provides for tax collection agreements between the federal government and the provinces and territories. All territories and provinces, with the exception of Quebec, have signed such agreements with respect to taxes on incomes of individuals. Under the terms of the agreements, National Revenue - Taxation (NRT) is responsible for administering and enforcing these territorial and provincial income tax acts.

17.89 Current forward averaging provisions for individuals, which were introduced for 1982, allow qualifying taxpayers to elect to spread certain income received in one year over future years. Anticipating that specific changes would be made to territorial and provincial income tax acts in connection therewith, NRT prepared its 1982 tax forms to reflect the anticipated amendments. However, these amendments have not yet been enacted. As a result, NRT has incorrectly assessed certain taxpayers who elected to take advantage of forward averaging provisions in 1982. In addition to being contrary to the law, this current assessing practice will result in inequities for some taxpayers.

17.90 For example, taxpayers using forward averaging who reside outside Quebec but have business income in Quebec would be taxed twice at the provincial level on the forward averaged amount that is subject to Quebec income taxes.

17.91 Neither NRT nor the Department of Finance has quantified the effect of the incorrect assessments.

17.92 Use of appropriations granted by Parliament. For the year ended 31 March 1983, 4 of 30 government departments reported overexpended appropriations. The total amount reported as over-expended was approximately $29 million and is presented in the Government's 1983 Statement of Use of Appropriations which forms part of the Audited Financial Statements of the Government of Canada, reproduced in Appendix D of this Report. Details by department, as provided in Volume II of the 1983 Public Accounts of Canada, are shown in Exhibit 17.1.

Exhibit not available

17.93 In paragraph 15.8 of our 1981 Report, we called attention to the need to amend the Financial Administration Act (FAA) to clarify the legal authority for the Government's Payables at Year End (PAYE) policy. In paragraph 15.14 of our 1982 Report, we stated that it was our understanding that proposals for an appropriate amendment to the FAA would be presented to Parliament in the near future. The FAA has not yet been amended.

17.94 An appropriation available for current year spending is the amount granted by Parliament, reduced by debts under PAYE that gave rise to any overexpenditure reported in the prior year. The reduction is called a reserved allotment and constitutes payment authority for settling such prior year debts. In 1982, overexpenditure reported by the Department of National Defence (DND) included debts owing for contract holdbacks of $10,460,894. In 1983, DND with the concurrence of Treasury Board, did not include this amount in its reserved allotments as required by PAYE. As a consequence, the authority reported as being available for 1983 spending is overstated, and amounts reported as lapsed and overexpended in that year are inaccurate. If PAYE had been followed, DND Vote 5, which is reported in Exhibit 17.1 as overexpended by $10,495,852, would be overexpended by $19,032,202. DND Vote 1, which is reported as having lapsed $42,628,109, would have lapsed $40,703,565.

Exhibit not available

1983 IMPAC Progress Review


17.95 The effort by the Office of the Comptroller General to bring about an improvement in management practices and controls (IMPAC) in departments and agencies is a unique initiative in government. It deals with the processes by which programs are planned, controlled and evaluated so that departmental operations will be more economical, efficient and effective.

17.96 IMPAC was designed to survey the state of management practices and controls in departments and agencies, to identify deficiencies, to develop individual action plans to remedy identified deficiencies, and to support the implementation of these plans. Typical IMPAC action plans include projects covering such key areas as:

    - planning - developing departmental planning systems, establishing strategic objectives, short and long-term operational plans;
    - financial function - developing systems and procedures for improving financial management and control;
    - information systems - developing management, operational and financial information systems;
    - program evaluation function - developing a program evaluation infrastructure to assist in ensuring that deputy heads of departments and agencies have appropriate information on the results of their programs;
    - internal audit function - developing the internal audit infrastructure to ensure that departments have an independent review and appraisal of all departmental operations for the purpose of advising management as to the efficiency, economy and effectiveness of internal management practices and controls; and
    - others - for example, human resource planning, personnel training projects, and other areas not included above, such as projects to meet new requirements of central agency policies (PEMS, Part III of the Estimates, etc.).
17.97 Monitoring of IMPAC by this Office is carried out in response to a request from the Public Accounts Committee and is designed to provide the House of Commons with an independent, ongoing review of the status of the IMPAC process and the implementation of individual departmental action plans.

Scope of Progress Review

17.98 Our 1983 review of the IMPAC process included all departments surveyed by the Office of the Comptroller General (OCG) as part of the IMPAC process before 31 March 1982 and focused on:

    - the status action plans; and
    - progress in implementing action plans to 31 March 1983.
17.99 Information for this review was provided by the departmental IMPAC co-ordinators and the liaison officers of the Office of the Comptroller General.

17.100 We integrated the IMPAC review with our comprehensive audits of departments and agencies. Consequently, chapters reporting on comprehensive audits, as well Chapter 3, our government-wide study of program evaluation, provide audit-based opinions, where reasonable and appropriate, on management practices in the key areas covered by IMPAC action plans.

Status of Action Plans

17.101 In total, 30 departments were surveyed as part of IMPAC from 1979 to March 1982. These entities account for about 85 per cent of government expenditures, excluding the public debt.

17.102 Three departments included in the IMPAC survey became disengaged from the process. The Treasury Board Secretariat stated that its management practices and controls had been improved to such an extent that further OCG involvement was no longer required. In the case of the Department of National Defence, the OCG rated its management systems as satisfactory and did not require the preparation of an action plan. The Post Office Department's establishment as the Canada Post Corporation placed it outside the OCG's mandate.

17.103 At 31 March 1980, the OCG had endorsed six action plans; that is, approved their content, costs and implementation strategy. In the following two years, the number of endorsed action plans increased to 18 and 25, respectively. By 31 March 1983, the number had risen to 27, representing about two-thirds of government expenditures.

17.104 Exhibit 17.2 shows the status of the 27 action plans at 31 March 1983, in terms of endorsement and expected completion dates as well as budget and cost data. Endorsed plans for the Departments of Industry, Trade and Commerce and Regional Economic Expansion were terminated because of government reorganization. Progress in the remaining 25 departments is summarized in Exhibit 17.3. In 21 of these departments, implementation is in progress. In three, action plans are under revision. Most action plans have undergone some degree of revision in content or timing; however, 7 of the 27 plans underwent major revisions and were re-endorsed by the OCG.

Exhibits not available

17.105 Project work is complete on two plans (DSS-Supply and Employment and Immigration), and the official sign-off from the OCG is pending.

17.106 Two departments, DSS-Services and National Revenue-Taxation, have "graduated" from the IMPAC process. This term is used by the OCG to indicate that the completed action plan has been reviewed, validated, judged satisfactory and signed off.

17.107 Exhibit 17.2 also shows the costs estimated by departments. In the 22 departments for which they could be identified, estimated committed costs for IMPAC were $238.6 million, including 3,500 person-years. About $177.3 million had been spent at 31 March 1983. Because the cost figures to date have not been compiled in a uniform manner, their accuracy cannot be assessed.

Exhibit not available

17.108 As of 31 March 1983, the OCG identified tangible benefits of $126.6 million (annually recurring) and $16.6 million (non-recurring) as a result of the IMPAC process. Deputy heads in many departments and agencies have formally committed themselves to achieving a further $128.8 million of potential benefits. We did not review these figures. Confirmation of these potential benefits could be one of the subjects of the evaluation of the IMPAC process planned by the OCG for 1984.

Progress in Implementing Action Plans

17.109 Departmental progress. Exhibit 17.3 shows the overall rate of progress achieved by the 25 departments currently working on their action plans.

Exhibit not available

17.110 Progress is summarized according to information supplied by departments; a standard indicator was selected that permitted a reasonable measure of progress. This indicator, shown in Exhibit 17.3, is the number of completed tasks as a percentage of the total number of tasks in a particular action plan. A task in this context means a project activity, with clearly defined starting and completion points, undertaken to improve some aspect of management procedures and controls.

Exhibit not available

17.111 It is important to emphasize that Exhibit 17.3 shows only the progress made by each of the 25 departments in implementing its action plan, according to a common indicator of progress. Other comparisons were not possible because of the unique nature of each action plan in terms of content as well as complexity and size. For example, the plan for National Revenue-Taxation contains 10 projects, while plans for Transport Canada and Veterans Affairs contain 82 and 74 projects respectively.

Exhibit not available

17.112 Progress in key IMPAC areas. Exhibit 17.4 shows the progress in implementing action plans for the six key IMPAC functional areas by aggregating the information for 25 departments.

Exhibit not available

17.113 It shows that departments have made notable overall progress during the past three years in establishing and improving the infrastructure for the internal audit and program evaluation functions. Reasonable progress has been made in improving the infrastructure for the planning and financial management functions. Progress in establishing management information systems is slow; however, it should be noted that projects in this area are often very complex, costly and time consuming.


17.114 Improvements to management systems continue to be made by departments as a result of the IMPAC process. While progress in implementing action plans varies considerably among departments and agencies, completed tasks as a percentage of total planned IMPAC tasks increased from about 40 per cent at the end of 1981-82 to about 65 per cent at March 1983.

17.115 In 1981, we commented on the need for evaluating the success of IMPAC as a whole. The Comptroller General advised the Public Accounts Committee in 1982 that he planned to conduct a formal evaluation of the program in 1984. Such an evaluation should provide an assessment of the achievements of the IMPAC program and its effectiveness in meeting its objectives.

Report Under Section 11 of the Auditor General Act on Our Continuing Review of the Oil Import Compensation Program

17.116 In 1974, at the request of the Governor in Council, we began a continuing inquiry under Section 62 of the Financial Administration Act into the administration of expenditures of the Oil Import Compensation Program. When the Petroleum Compensation Revolving Fund was established in 1978, we included it in our inquiry because expenditures from the Fund were made under the same legislative authority that applied to the Oil Import Compensation Program.

17.117 Section 50 of Bill C-103 to amend the Petroleum Administration Act eliminated the Petroleum Compensation Revolving Fund. The Fund was replaced by the Petroleum Compensation Accounting process, as set out in the Canada-Alberta Memorandum of Agreement and provided for by section 77 of the Act. This represents a broader concept of pricing and compensation for oil products under which all compensation payments are funded by a single charge. Thus, expenditures under the Oil Import Compensation Program and the revenues and expenditures of the Petroleum Compensation Revolving Fund have been brought together.

Petroleum Compensation Accounting Transactions

17.118 The following table summarizes the revenue and expenditure transactions for 1982-83.

(Millions of dollars)

     Petroleum Compensation Charge



     Oil Import Compensation
     New Oil Reference Price
     Special Old Oil Price
     Synthetic Oil Supplement Program
     Domestic Transfers Compensation Program
     Crude Oil Exchange Program

1, 398


To establish the appropriate level for the Petroleum Compensation Charge, and given the commitment to balance compensation revenues and expenditures by the end of 1986, surpluses or deficits are carried from one year to the next through the rate setting mechanisms.

17.119 Audit scope. This year, we audited major segments of the Energy Program of the Department of Energy, Mines and Resources. Our findings on the Program are in Chapter 9 of this Report.

17.120 We examined the revenue and expenditure transactions of the Petroleum Compensation Accounting process in accordance with generally accepted auditing standards and, accordingly, included such tests and other procedures as we considered necessary in the circumstances.

17.121 Audit observations. One levy payer owes $26.2 million to the Crown in unpaid levies. Departmental officials have been monitoring this situation from the beginning and are making arrangements with the levy payer for the repayment of arrears.

17.122 Litigation. At the date of our audit, two legal matters were outstanding.

17.123 A legal action had been taken by an importer to recover $3.7 million of compensation paid to the Minister of Energy, Mines and Resources pursuant to a decision by the Minister that the importer had used an incorrect method of deducting exports of previously compensated oil. A judgement was rendered by the Federal Court of Canada on 3 June 1983 dismissing the recovery claim against the Crown. The importer has subsequently filed an appeal of that decision.

17.124 The other matter was a legal action taken by the Trustee in Bankruptcy for an importer, challenging the right of the federal government to offset $5.2 million in import compensation due to the importer against the amount owing by the importer to another federal government department. A defence had been filed; however, no further action had been taken by the plaintiff.

17.125 Conclusion - financial transactions. In our opinion, revenues and payments for the fiscal year ended 31 March 1983 have been properly processed and are in conformity with applicable legislation and regulations.