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1994 Report of the Auditor General of Canada

Main Points

3.1 The Auditor General Act requires the Auditor General to include in his annual Report matters of significance that, in his opinion, should be brought to the attention of the House of Commons.

3.2 The "Other Audit Observations" chapter fulfils a special role in the annual Report. Other chapters normally describe the findings of the comprehensive audits we perform in particular departments; or they report on audits and studies of issues that relate to operations of the government as a whole. This chapter is used to report individual matters that have come to our attention during our financial and compliance audits of the Public Accounts of Canada, Crown corporations and other entities. It is also used to report some specific matters that have come to our attention during our comprehensive audits.

3.3 The chapter contains a number of observations concerning departmental expenditures and tax revenues. The issues addressed generally involve failure to comply with authorities, and the expenditure of money without due regard to economy.

3.4 Observations reported cover the following:

  • after 20 years and $26.6 million, an issue of non-productive rental payments that remains unresolved;
  • approximately $3 million spent on two projects that have not served operating needs;
  • a grant agreement that fails to link payments to the recipient's financial requirements or performance targets;
  • the lack of due regard to economy in the delivery of an archival facility, and accommodation requirements not fully resolved; and
  • the matter relating to condominium corporations earning tax-free interest income that has not been resolved.
3.5 Although the individual audit observations report matters of significance, they should not be used as a basis for drawing conclusions about matters we did not examine.


3.6 This chapter contains matters of significance that are not included elsewhere in the annual Report and that we believe should be drawn to the attention of the House of Commons. The matters reported were noted during our financial and compliance audits of the Accounts of Canada, Crown corporations and other entities, or during our comprehensive value-for-money audits.

3.7 Section 7(2) of the Auditor General Act requires the Auditor General to call to the attention of the House of Commons any significant cases where he has observed that:

  • accounts have not been faithfully and properly maintained or public money has not been fully accounted for or paid, where so required by law, into the Consolidated Revenue Fund;
  • essential records have not been maintained or the rules and procedures applied have been insufficient to safeguard and control public property; to secure an effective check on the assessment, collection and proper allocation of the revenue; and to ensure that expenditures have been made only as authorized;
  • money has been expended other than for purposes for which it was appropriated by Parliament;
  • money has been expended without due regard to economy or efficiency; or
  • satisfactory procedures have not been established to measure and report the effectiveness of programs, where such procedures could appropriately and reasonably be implemented.
3.8 Each of the matters of significance reported in this chapter was examined in accordance with generally accepted auditing standards; accordingly, our examinations included such tests and other procedures as we considered necessary in the circumstances. The matters reported should not be used as a basis for drawing conclusions about matters not examined. The instances that we have observed are described in this chapter under the appropriate department heading.

3.9 Consistent with Office policy on the follow-up of matters in our annual Report, other audit observations included in this chapter are normally followed up two years after initial reporting. In our follow-up of the observations included in our 1992 Report, we found that for seven of the ten observations, either corrective action had been taken to address the matter or we no longer considered the matter to be an outstanding issue. One observation has resulted in another observation this year. Two observations remain outstanding because they involve matters that we are continuing to monitor, and corrective action or the lack thereof will be reported as deemed appropriate.

Environment Canada, Public Works and Government Services Canada and Treasury Board Secretariat

Twenty years and $26.6 million later, the federal government has still not resolved an issue of non-productive rental payments
We have reported five times since 1976 that the federal government has been making unproductive lease, property tax and grant in-lieu-of taxes payments for land in Vancouver. Sixteen years after the Standing Committee on Public Accounts recommended that the government resolve the matter, the payments continue. Since 1974, the government has paid about $26.6 million net of sub-lease revenue for the land. The Crown has recently sought private sector interest to develop the site under an environment centre concept with a federal presence, and is currently evaluating proposals received. Although numerous attempts to date to resolve the issue have been unsuccessful, the federal government believes that its present approach will finally produce results.
3.10 Background. In 1974, after acquiring an existing leasehold at a cost of $4 million, Environment Canada (Department of the Environment) entered into a 71-year lease with the Squamish Indian Band for approximately 22 hectares (55 acres) of reserve land near the Lions Gate Bridge in Vancouver.

3.11 The Department was to construct and operate facilities consistent with an environment centre on the property. This would restrict the government to building a mixture of office, laboratory and storage type facilities. The lease provides that the government's interest in the land, plus any buildings built on it, will revert to the Band at the end of the lease in 2045.

3.12 Under the terms of the lease, the Department of the Environment pays rent for the land on the basis of the "highest and best use" of the property. This formula is based on a hypothetical mix of office, laboratory, residential, commercial (including hotels) and industrial space. The resulting rent is reviewed and adjusted every five years for existing market conditions. The result of basing the rental on highest and best use is that the Band will always achieve the maximum rent potential, no matter how the land is developed or whether it is developed at all.

3.13 In 1976, the then Minister of the Environment announced that the Pacific Environment Centre would not proceed, but committed the Crown to continue honouring the payment of rent according to the terms and conditions of the lease. Since that time, the Crown has unsuccessfully attempted to negotiate Band approval for either a termination of the lease or alternative realty management schemes. To date, these negotiations have been fruitless.

3.14 Issues. In view of the obligation to make continuing rental payments, the challenge for the federal government is to make effective use of the land in a manner consistent with the original environment centre concept - a mixture of office, laboratory and storage space. Alternatively, the federal government must negotiate with the Band another effective use for the land.

3.15 Between 1974 and 1994, the federal government paid $28.8 million for lease payments, property taxes and grants in lieu of taxes. Over this same period, the government received a total of $2.2 million in revenue from a sub-lease of a small portion of the property. However, the federal government has received little value or benefit to date in return for its net payments of about $26.6 million. The government's current annual net payments are about $4.4 million.

3.16 In 1977, 1984 and 1988, we noted the government's lack of action to resolve the matter. The Standing Committee on Public Accounts recommended that either the federal government dispose of the lease or negotiate a change of use for the property. The government has tried several approaches in the past, which have been unsuccessful in resolving this matter.

3.17 The Department of the Environment, the Department of Public Works and Government Services and the Treasury Board Secretariat are presently considering potential uses for the site. The federal government has sought and received "expressions of interest" from the private sector to develop the site in a manner consistent with the terms of the lease. Officials are now assessing these.

3.18 Conclusion. Further delays in resolving this matter will result in continuing non-productive payments for unused land.

Departments' response: The Crown is diligently trying to resolve the issue of the non-productive payments for unused land. The Crown will report back on its present efforts by March 1995.

Fisheries and Oceans Canada

Approximately $3 million spent on two projects that have not served the Department's operating needs
Fisheries and Oceans Canada (Department of Fisheries and Oceans) spent approximately $3 million on two projects without conducting appropriate analyses in their initial stages. In one case, because the Department failed to adequately address the ongoing resource requirements for a planned replacement of a fisheries patrol vessel, about $1 million was expended over a ten-year period on the design of a vessel that was never built. In another case, the Department did not conduct an analysis of the planned utilization of a deep-sea research system to support departmental operations before deciding to participate in its funding and development. The Department developed a remotely operated submersible system that, to date, has been rarely used. The system was developed at an estimated cost of $3.2 million to the federal government, of which the Department's share was about $1.8 million. In both cases, funds were expended on projects that have not served the Department's operating needs.
Case 1 - Replacement of a fisheries patrol vessel
3.19 Background. The acquisition of a new vessel is usually made in two phases, each leading to a separate contract. The first (design) contract provides a vessel design to meet specific requirements set out in the request for proposal. The second (construction) contract requires a design check to validate the vessel design, development of more detailed specifications as needed, and construction of the vessel according to the specifications.

3.20 In 1982, the Department identified the need for, and approved in principle, the design and construction of a vessel to replace an aging fisheries patrol vessel that was operating on a seasonal basis. In order to meet a higher demand for its patrol and surveillance activities, the Department envisioned that the replacement vessel would be larger and capable of surveillance further offshore year-round and would thus require more resources to operate. The design contract was awarded in 1984.

3.21 In 1987-88, Treasury Board approved up to $7.6 million to fund the construction of the replacement vessel, on the understanding that any incremental resources needed to operate the new vessel would be funded internally by the Department.

3.22 Issue. In December 1989, a departmental analysis identified a concern that operating resources for the new vessel had not been allocated internally. Despite this concern, the Department did not explore options for redeploying resources. It was planning to seek Treasury Board approval for additional funding or, failing that, to redeploy resources at a later date. It continued the acquisition process, awarding the construction contract in January 1990, and committed further significant funding to the project.

3.23 In April 1990, the design check showed that the vessel, if built as originally designed, would not have sufficient capacity to accommodate all the systems and equipment specified and would not float properly. The construction contract contained a provision that would have permitted the Department to terminate the project, at that time at a nominal cost. At about the same time, concern was again expressed that operating the new vessel would require a significant reallocation of resources; the Department did not proceed to seek additional funding from Treasury Board.

3.24 The Department decided to rectify problems identified in the design check, which called for the vessel to be lengthened. As a result, the Department remained committed to the terms of the construction contract without having identified a source of funding to operate the new vessel when constructed.

3.25 In March 1991, after spending almost $700,000 on the project, the Department analyzed options to redeploy enforcement resources in an attempt to fund the new vessel's operations. For greater efficiency, the vessel was to be operated continuously, year-round. This would require a seven-fold increase in human resources and about a six-fold increase in the annual budget, in comparison with resources used for the aging vessel that was operating on a seasonal basis ( Exhibit 3.1 ). The Department concluded that the incremental resources needed could be made available only by removing a number of other vessels from service, which would compromise overall surveillance coverage of that region.

3.26 On the basis of the analysis and recognizing that seeking additional funding from Treasury Board was unrealistic, the Department cancelled the construction contract in June 1991. A settlement of $264,000 was paid in March 1994 to the shipyard to cover costs incurred as a result of the cancellation. The Department currently has no plans to construct a vessel using the completed design.

3.27 In our view, the Department should have conducted appropriate analysis of options for meeting incremental resource requirements before engaging in the construction contract, since it was clear that operating the new vessel year-round would require more resources. In addition, it should have pursued the availability of internal funding to operate the new vessel when the design failed to meet the validation test of the construction contract. Over a ten-year period, approximately $1 million was spent on the design of a vessel that was never built, and the Department had not taken timely and appropriate action to safeguard the use of public funds.

Case 2 - Development of a remotely-operated submersible system
3.28 Background. From 1974 to 1986, the Department operated a crewed submersible system to conduct deep-sea scientific research. The Department was the operator and one of the system's users; other users included scientists from Natural Resources Canada (formerly Energy, Mines and Resources Canada), Environment Canada and Canadian universities. In 1986, due to budget reductions, the Department cancelled the charter for the mother ship carrying the submersible system. The cancellation effectively rendered the crewed system inaccessible to the Department's operations.

3.29 The concept of developing and constructing a remotely operated submersible system was discussed between 1984 and 1986. The development was initiated in 1986, as part of the government's program of unsolicited proposal aiming to support government operations and research and development activities in the private sector. The system was developed to provide a capacity for conducting deep-sea activities to a depth of 5,000 metres, much further than the 2,000-metre limit for the crewed system. The Department advised us that another objective was to support the sub-sea industry. (see photograph)

3.30 The Department provided leadership and major funding during the system's development and was the scientific authority for the contract. The Department is also responsible for the ongoing operation of the new system. Of an overall development cost of approximately $3.2 million, the Department's share was about $1.8 million. Public Works and Government Services Canada and Natural Resources Canada contributed an estimated amount of $900,000 and $500,000 respectively. The former contributed on the basis of the unsolicited proposal program; the latter funded the development of a winch and some components of the system.

3.31 Issue. The Department decided to contribute to the development of the new system without conducting an analysis to ensure that the project could be justified based on the planned use to serve its need for deep-sea research. In arriving at its decision, the Department assumed that other users would continue to require a capacity for deep-sea manoeuvres similar to that provided by the crewed system. The Department did not prepare a plan to market the system when developed.

3.32 The remotely operated submersible system became operational in late 1990. As of 31 March 1994, the utilization of the system has been minimal, particularly in deep seas. In 1992-93 and 1993-94, the Department did not use the system for deep-sea operations to support its activities; it conducted testing and trouble-shooting on the system in shallow water for about 20 dives. Other users during the two years made a total of about 50 dives, approximately 40 of which were conducted in deep seas. Although the sea-bed time in dives from the remotely operated system is generally higher than in dives from the crewed system, the latter made an average of about 120 dives annually over a 12-year period.

3.33 To date, the new system has been rarely used. The Department's research requirements have largely been in shallow waters. Moreover in 1993-94, the Department started to charge for the operating and maintenance costs of the system and, due to decreased availability in funding to all users, scientists were making less use of it.

3.34 The Department is currently identifying other potential domestic and international users. Current departmental analysis shows that usage of the new system has to increase at least six-fold to break even. It is also developing options that include allowing Canadian user groups to take over the ongoing responsibility for operating its remotely operated submersible system.

3.35 In our opinion, the Department should have ensured that the project was justifiable on the basis of operational needs prior to making its decision to participate in the development of the remotely operated submersible system.

3.36 Conclusion. In both cases, the Department failed to take appropriate steps at the early stages of the projects to ensure that public funds were expended in a manner that would achieve good value for money.

Department's response:

Case 1 - Replacement of a fisheries patrol vessel. The Department contends that appropriate analyses had been conducted on the incremental cost of operating the replacement vessel at the outset of the project, and proper consideration was given to options to meet these incremental resource requirements before engaging in the construction contract. In the early 1980s, it was reasonable to assume that needed resources to operate the vessel would be available from within. However, successive operating and personnel cuts over the ensuing years mandated recourse to considering a Treasury Board submission to obtain the required resources. This led to the development of a departmental omnibus Treasury Board submission that, until the spring of 1991, had well-founded expectations that additional vessel resources for the entire departmental fleet would be approved.

With the tabling of the February 1991 Federal Budget and continuing fiscal restraints, it became evident that the request for additional resources was no longer a realistic expectation. Internal funding sources that had been constantly eroded during the period could not be reallocated at that time without prejudicing higher-priority programs. The Department had no choice but to reluctantly cancel the project, thus avoiding the fiscally irresponsible state of having delivered a vessel, at a cost of $7.6 million, that it would not have been able to operate efficiently.

Case 2 - Development of a remotely operated submersible system. The remotely operated submersible system (ROPOS) today remains an example of leading-edge technology and is one of the relatively few submersibles in the world capable of diving to Canada's continental shelf territory. At the time of the unsolicited proposal, there was a requirement for an unmanned remotely operated vehicle. There was support from other users with sources of funds identified. The proposal was put forward by industry, confident there would be a commercial market. This was an opportunity to support Canadian enterprise in leading-edge technological development, and there was a climate that encouraged Canadian scientific achievement. A user survey, in 1988, verified client need for a submersible of this type.

The Auditor General's conclusions appear premature. The submersible is now available for use. As the economy picks up, with the Law of the Sea Convention coming into force in November 1994, and with a revitalized Canadian and international marine industry, it is expected that dives with the ROPOS will increase substantially.

Industry Canada

Grant agreement fails to link payments to the recipient's financial requirements or performance targets
Under a grant agreement, the Department has paid $12.75 million to a venture capital corporation. This agreement was not structured to ensure that financial assistance was provided only when needed; nor was it linked to performance targets. The Department continues to pay grant money despite the fact that the corporation's income from investments exceeds its operating expenses.
3.37 Background. In May 1988, the Department of Regional Industrial Expansion (now Industry Canada or the Department of Industry) entered into a $15 million grant agreement (subsequently reduced to $14.55 million) to a labour-sponsored venture capital corporation. The purpose of the grant was to assist the corporation in the establishment, development, promotion, operation and investment of a venture capital fund. It is to be paid over seven years, from May 1988 to March 1995. The grant is not repayable unless the corporation does not meet the terms of the agreement.

3.38 The main objective of the corporation, as endorsed by the Department in approving the grant, is to make investments in Canadian small and medium-sized businesses in order to stimulate the economy and promote job creation and maintenance.

3.39 As of 31 March 1994, the corporation had raised over $280 million in share capital. Approximately 11 percent of the share capital had been invested in Canadian small and medium-sized businesses. The balance of approximately $250 million remained in low-risk interest-bearing securities. This level of investment activity does not violate the terms of the grant agreement or the tax act.

3.40 Issues. Up to 31 March 1994, the Department of Industry had provided the venture capital corporation with $12.75 million. The payments, to be used to establish and operate a venture capital fund, were in compliance with the terms of the grant. The result, however, was that the grant provided government support for start-up and ongoing operating costs to a corporation that, as of 31 March 1994, had made few investments in Canadian small and medium-sized businesses.

3.41 Financial assistance provided to the corporation was justified by the Department on the basis of offsetting start-up and operating costs. However, we found no evidence that the Department had analyzed the operating requirements of the corporation or considered structuring an agreement with sufficient flexibility to ensure that payments were made only on the basis of demonstrated need. Also, the Department did not assess the impact expected from the corporation's investments in Canadian businesses or include specific performance targets in the agreement.

3.42 Currently, the income generated by the corporation's investments exceeds its operating expenses; yet, under the grant agreement, the Department must continue to provide financial support until March 1995.

3.43 In our view, the agreement should have been structured so that financial support was provided only as long as a review of the corporation's financial position indicated that assistance was needed. Our review of the corporation's financial position at 31 March 1994 indicated that the corporation would be in a position to meet its operating costs without continuing to receive financial assistance from the government.

3.44 Conclusion. In our opinion, the Department has not been prudent in the spending of public funds. We believe that agreements of this type need to provide sufficient flexibility to ensure that financial assistance is provided only when needed or when specific performance targets are achieved.

Department's response: In 1988, Treasury Board approved a grant of $15 million, to be disbursed over seven years, to support the establishment of a national, labour-sponsored venture capital corporation. The size and structure of the grant were based on an analysis conducted for the recipient by a respected private sector firm with recognized expertise in the operations of the venture capital industry.

Up to March 1994, the corporation had spent in excess of $16 million on start-up, development and operation. It expects that amount to reach about $20 million by March 1995 when the grant expires. The grant has permitted the corporation to keep its management expense ratio within industry norms, allowing it to compete with others for investors' funds.

Industry Canada considers that the grant was appropriately structured to meet both federal objectives and the needs of the venture capital corporation.

National Archives of Canada and Public Works and Government Services Canada

Lack of due regard to economy in the delivery of an archival facility, and accommodation requirements not fully resolved
As part of a composite project to respond to the needs of the National Archives of Canada, its new conservation and laboratory building under construction in Gatineau, Quebec is designed to provide a safe environment for the country's valuable archival records. However, the location in the planned city centre of Gatineau has resulted in a design that responds to factors other than the functional requirements. Funds are being spent on site and design considerations that are in excess of the need for the building's intended role. In addition, although there will be a total investment of $107 million for a storage and laboratory facility, the choice of the "split-facility, two-site option" by the government results in one of the three major problems expressed by the House of Commons Committee on Communications and Culture remaining unresolved (see paragraph 3.55).
3.45 Background. Responding to concerns that over 75 percent of archival holdings were stored in substandard facilities, the House of Commons Standing Committee on Communications and Culture initiated a study of the National Archives accommodation in 1987. The Committee identified three major problems facing the National Archives: a need for additional storage space; operating out of dispersed locations and the associated risks of transporting archival records between sites; and current storage and laboratory spaces that were well below acceptable standards. The Committee concluded that the situation posed serious consequences for the sound operation of the institution and the protection of the archival heritage of Canadians.

3.46 The Committee recommended to Parliament that a single new building be constructed to house all archival functions. The Committee also identified a split-facility as the second best option. These options had been developed by the National Archives as part of a draft long-range accommodation plan in 1987.

3.47 The Minister of Communications tabled the government's response to the Committee's recommendations in May 1988, which accepted the split-facility, two-site option. The response stated that the West Memorial Building would be renovated to serve as the new headquarters, housing administrative services, reading and research rooms and exhibition areas. The laboratories and heritage collection storage areas would be accommodated in a new satellite facility located outside the core area of the National Capital Region.

3.48 The National Archives Architectural Program explained that it was unacceptable to have the public shuttle between facilities and that, accordingly, the West Memorial Building would house public displays and research rooms as well as all administration functions. The satellite facility would house the conservation functions, primary records storage and archival work spaces and other support spaces.

3.49 In July 1989, Public Works and Government Services Canada was authorized by Treasury Board to begin preliminary design work for the West Memorial Building. However, in December 1989 work on the project was frozen for two years as part of the government's restraint measures. In June 1993, National Archives resubmitted its requirements to Public Works and Government Services Canada for the renovation of the West Memorial Building. Approval to proceed with the renovation has not been given.

3.50 Treasury Board granted Preliminary Project Approval for the Gatineau Building Phase I (the satellite facility) in October 1990 for $107 million (Phase II containing additional archival storage would be built at a later date). Effective Project Approval was given in April 1992 for the same budget, with a usable area of 23,500 square metres. The total project budget is: construction $59.2 million; fees, contingencies and GST $23.1 million; land (including fees) $6.7 million; and National Archives (project management, preparation of the collection, additional fit-up, shelving and moving) $18.2 million. As of September 1994, the project managers have said that there are no indications that the budget will be exceeded. (see photograph)

3.51 Public Works and Government Services Canada is building the facility; the National Archives will be the tenant and is responsible for describing the program requirements and obtaining space authorization from Treasury Board. The project is now under way and has an expected construction completion date of November 1996.

3.52 Audit Scope and Objectives. The audit examined the preliminary stages of the construction of a new facility in Gatineau for the National Archives of Canada. Specifically, we reviewed the needs definition, the options analysis, the project definition, and the design and review processes. We did not audit the construction activities, but will review the appropriateness of doing so at a later date.

3.53 The objectives of the audit were to determine: whether the concerns of the Committee on Communications and Culture are being addressed; whether the National Archives facility in Gatineau will meet the project's objectives; and whether the project is being implemented with due regard to economy and efficiency. We included in our audit a review of the West Memorial Building project, its impact on the National Archives' Accommodation Program and how it supports the mandate and objectives of the National Archives.

3.54 Issue - Committee's concerns not fully resolved. One of the three major problems facing the National Archives, identified by the House of Commons Committee, is not fully resolved by the construction of the Gatineau Building.

3.55 The Gatineau project is expected to remedy the long-term problems of providing state-of-the-art storage and laboratory space and allowing for future growth of the collection. However, the problem of the risks inherent in transporting the documents has not been fully resolved. Furthermore, the requirement for new public research and display spaces, identified in the government's response to the Committee's report, has also not been resolved because a decision on whether to proceed with the renovation of the West Memorial Building has not been made.

3.56 The Effective Project Approval for the Gatineau Building involves the use of four facilities: the current National Library building, the unrenovated West Memorial Building, the Renfrew building (for additional storage space) and the new Gatineau Building. As a result of the decision to locate the public space and the archivists in the West Memorial Building, the documents will have to be brought there from the storage facilities. However, National Archives acknowledges that "it is inherently risky to move the records between buildings regardless of security and handling precautions." As well, the House of Commons Committee noted, in 1987, that the documents were deteriorating as a result of being transported from one building to another.

3.57 In an effort to mitigate the risk, the National Archives is planning to implement measures to reduce the transportation of fragile records. It is also planning to use specially modified trucks with controlled environments. The National Archives will transport some of the documents to the unrenovated West Memorial Building, which does not have environmentally controlled research or storage rooms and loading docks. In our opinion, despite the National Archives' efforts, transporting the documents continues to place them at some risk.

3.58 Plans for the new Gatineau facility and the renovation of the West Memorial Building were fully co-ordinated as two components of a single accommodation program. It was assumed that the two facilities would open at the same time. However, at the time of the audit, Public Works and Government Services Canada did not have authority to proceed with the West Memorial Building renovation. As a result of this major change in planning assumptions, the National Archives and Public Works and Government Services Canada need to develop contingency plans, which could include changes to the Gatineau Building.

3.59 Issue - lack of due regard to economy. The Treasury Board submission requesting authority to purchase the land stated that the site chosen for the Gatineau facility was selected because it met all the National Archives criteria. However, we found that the selected site did not meet several of these criteria. In addition, we found no documented evidence that a comparative analysis of the eight Gatineau sites identified by Public Works and Government Services Canada was carried out against the criteria. Furthermore, although the analysis of the selected site acknowledged that there were costs associated with not meeting the criteria, these costs were not determined before the site was purchased, despite a specific requirement in the site selection criteria to do so. We noted that costs related to the site are now being incurred that were not discussed in the Treasury Board submission. Given the lack of comparative analysis and documentation on the site selection process, we could not determine the basis for the choice of site or if it was the most appropriate one.

3.60 The downstream effects of choosing this site are significant. More expensive design considerations were required to fit the new facility into the proposed Gatineau town centre development, as well as to maintain a prominent public presence. These design elements exceed the basic building requirements and do not significantly enhance the preservation of the records. Treasury Board indicated its intended role for the Gatineau facility by directing that emphasis be placed on functional requirements. A Public Works and Government Services Canada design document supported this view by noting that the exterior finish and landscaping for the Gatineau Building should be appropriate for a laboratory and storage facility, and not to the level of a cultural facility.

3.61 Treasury Board Secretariat was informed that the cost premium for building in downtown Gatineau was considered minimal, about $2 million; the facility would include upgraded external cladding and landscaping, consistent with any large federal project, and finishes were intended to be utilitarian.

3.62 The roof is intended to be clad in stainless steel supported by stainless steel columns. The "building within a building" design incorporates a concrete structure enclosed by exterior glass walls that buffer the inner vault environment from the outside. In our opinion, this design is not consistent with the commitment to Treasury Board that simple approaches were to be used. (see photograph)

3.63 At the time of our audit, plans called for $4.8 million to be spent on landscaping and site development that included, among other things, artificial marshes in a park-like setting for the building. Because of the facility's proximity to the Gatineau city core and a residential neighbourhood, special efforts have been made to reduce the imposing nature of the building and to ensure that it does not look like a warehouse. For example, the building will be surrounded by contoured land (berms).

3.64 The selected site was three times larger than required for Phases I and II. The 37.4-hectare (92.4 acres) site was purchased at a cost of $ 6.6 million (including fees), although the land requirement was only 12.8 hectares (31.6 acres). Furthermore, because the site is adjacent to the residential neighbourhood, the building has been situated well back from the property line, resulting in an inefficient use of land.

3.65 The Gatineau Building is a unique special-purpose building, although a few similar projects exist to provide a basis for comparison. We considered several archival facilities in Canada and the United States and selected the recently completed United States National Archives and Records Administration (NARA II) facility in College Park, Maryland, for a comparison of total project costs. Our preliminary analysis indicated that on a comparable unit-cost basis, the Gatineau project appears to be significantly more expensive. In reviewing our findings with the project management team, it was determined that further analysis would be required to confirm and explain the cost differences. We have asked Public Works and Government Services Canada, with support from National Archives and this Office, to undertake this analysis and to provide us with the appropriate explanations. We believe that such cost analyses are useful if completed early in the life of any project, and may contribute to identifying potential savings in the remainder of this project.

3.66 Conclusion. In our view, the original intent of both the Committee and the government was to provide the National Archives of Canada with proper and up-to-date archival storage, conservation laboratories, public spaces and research rooms. We concluded that the Gatineau Building is designed to provide a safe environment for the country's valuable archival records and should meet those project objectives. However, in our opinion, the project demonstrates a lack of due regard to economy because funds are being spent on site and design considerations that exceed the needs of the building's intended role. The choice of this site and the concerns with public visibility have added costs to the project and have resulted in a design that responds to factors other than the functional requirements.

3.67 Furthermore, although there will be a total investment of $107 million, the Commons Committee's concerns for adequate public space and research rooms may remain unresolved; the National Archives will still have to transport some fragile archival records; and researchers will continue to use them in buildings that do not meet archival standards.

National Archives of Canada's response: The National Archives is assisting in implementing an accommodation solution, consistent with government decisions, and within approved budgets. Laboratories and storage spaces will meet all known safety, health and conservation standards for long-term preservation of the various media held by the Archives. The program and design of the Gatineau Building is consistent with the 1988 decision to accommodate the Archives in split facilities - separating storage and labs from public and office spaces. This split requires the Archives to move records between locations; however, significant investments have been made in order to eliminate risk to collections from transportation. The risks noted in the audit were not the subject of an examination, nor were the strategies developed by the National Archives examined in any detail. It is our informed opinion that any transportation-related risks are well below those related to other mandated responsibilities, such as the examination and use of records by researchers, a public right enjoyed by all Canadians. Finally, space limitations in the core of the National Capital has imposed, in Canada as in most developed countries, split facilities for the National Archives because of the inevitable growth of the collections.

Although the audit observation suggests that changes to the Gatineau Building should have been considered because of fiscally imposed delays in the West Memorial project, it is irresponsible and fiscally imprudent to make any such changes in mid-construction and contrary to the government's intent for the Archives accommodations.

The Gatineau location provides the National Archives with a storage and laboratory facility in relative close proximity to the downtown location (12 minutes away). It also offers the very important advantage of knowing that only safe and compatible activities will be located close by in the future, as the site is part of a planned town centre. Most other locations will not provide this assurance of future compatible use required for the safety of collections.

Public Works and Government Services Canada's response: The purchase was based on the Gatineau Site Analysis that recommended "... proceeding with the purchase of the site (is) based on a predominance of positive factors and the judgment that the negative factors can be successfully mitigated." This project was developed consistent with the parameters defined and approved by Treasury Board. The design and construction are appropriate for a utilitarian building and were chosen to ensure the long-term safekeeping of the archival collection and due regard to economy.

As to the statement that, on a comparable unit-cost basis, the Gatineau project appears to be significantly more expensive, as compared to the NARA II project, we believe it is premature to draw any indication as to which project has the higher cost until the study is completed.

Revenue Canada

The matter relating to condominium corporations raised in our 1992 Report has not been resolved
In 1992 we reported that Revenue Canada was allowing condominium corporations to earn tax-free interest income for the benefit of their members, the individual condominium owners.
3.68 Background. Revenue Canada's Information Circular No. 79-7 states that, although a condominium corporation cannot qualify as an exempt non-profit organization, Revenue Canada is prepared not to tax any interest earned on a condominium corporation's operating or reserve funds provided that such funds are not maintained at an unreasonably high level in relation to the purposes for which they were created.

3.69 The tax exemption for interest earned on a condominium corporation's operating and reserve funds indirectly benefits the condominium owners. Homeowners not living in condominiums must pay tax on any interest earned on funds set aside for maintaining their homes. This situation creates an inequity between homeowners who own condominiums and those who own other types of residential dwellings.

3.70 In 1992, Revenue Canada advised us that it was studying the status of these condominium corporations under the Act. In July 1994, Revenue Canada further advised us that it had undertaken a detailed study of this practice, including a review of various provincial laws, and had prepared tentative recommendations. It also informed us that The Canadian Condominium Institute and The Association of Condominium Managers of Ontario were contacted for input, but consultation had been delayed. Revenue Canada recently received comments from these organizations.

3.71 There are hundreds of thousands of condominium units in Canada. A 1992 Canada Mortgage and Housing study on the Toronto Census Metropolitan Area (which includes the regional municipalities of Metro, York, Peel, and parts of Durham and Halton regions) reported that there were about 163,800 residential condominium units just in that area.

3.72 Issue. While some activity, primarily relating to consultations and research, has occurred, Revenue Canada has not resolved the matter by changing its Information Circular or its assessing practice. In our opinion, undertaking a study of the issue does not relieve Revenue Canada of the responsibility for resolving the matter.

Revenue Canada's response: It is our intention, by the end of January 1995, to have the consultative process completed with all stakeholders, to clarify any issues related to the taxability of interest earned by condominium corporations, and to set in motion processes required, if any, to modify Revenue Canada's application of the law related to the taxability of interest earned by condominium corporations.