Guide on Grants, Contributions and Other Transfer Payments

8 Managing agreements

This section's objective is to support program officers and their supervisors at the operational level who are directly engaged in managing and administering transfer agreements. It provides advice on good management principles and due diligence in day-to-day activities. It is designed to cover most types of transfer payments, conditional or unconditional, but is not intended to supersede departmental guidelines on specific programs.

This section applies to most transfer programs but should be applied with discretion to programs designed to provide maximum flexibility to recipients and minimum direct management by the department. Even for these programs, however, the obligation of due diligence still exists.

8.1 Selecting and approving new agreements

8.1.1 Financial and operational pre-check

During this pre-assessment, the program officer should check the following:

• Is the applicant eligible for the program?
    
• Does the application meet the program's basic terms and conditions?
    
• Are there any outstanding issues, such as unpaid debt or poor delivery record, that must be taken into account during the selection and approval process?
    
• Is the applicant already receiving public funding for the activities for which it is seeking transfer payments? (Stacking of assistance may be considered.)

If the applicant is part of a larger organization, such as a university faculty, the pre-check should also be conducted at the level at which the agreement will be signed, e.g., the faculty or university.

8.1.2 Segregating duties and conflict of interest

Whenever feasible, a single person should not select and approve a new grant or contribution agreement, or renew an existing one. In most cases, the decision to approve a grant or contribution agreement has a judgmental component and often involves disbursing significant sums of money to groups or individuals. There is a potential for bias or conflict of interest. A review committee offers many advantages but it may not be practical beyond a certain volume or within given time constraints. In this case, a peer review may be a good alternative.

Being in a strict arm's length business relationship with potential or actual participants to a grants or contribution agreement is the condition for impartiality and objectivity. Supervisors should be alert to any indication that their officers might not meet this condition. An officer who feels he/she might be in a situation of conflict of interest with an applicant should inform his/her superior of the situation and abstain from influencing the application's outcome.

8.1.3 Internal and external consultation

Some programs require that certain individuals, groups or organizations be consulted during the approval process. In these cases, all mandatory consultations are to be conducted before the selection and approval processes are finalized and the favourable or unfavourable consultation results recorded in the project files.

Even when programs do not include mandatory consultations, they should take place whenever project officers handling selection and approval processes believe that they would help reach more educated or impartial recommendations or decisions. This could be the case if officers have not yet dealt directly with applicants but know that applicants have had previous transfer agreements with the department, or if applications contain technical or legal elements unfamiliar to officers.

8.1.4 Rationale for recommendation

Reference to departmental and program objectives

The rationale for recommending or accepting a transfer agreement is to be stated in the file. The factors that were considered and show how the transfer would promote this specific program's mission and objectives are to be described. For simple, straightforward and relatively low-cost projects, simple but clear statements may suffice, while for large, complex projects, files should contain evidence that all important factors were considered and properly weighted. By doing so, project officers and departments are protecting themselves against subsequent challenges of decisions taken.

Cost-benefit analysis

Assessing the expected costs and benefits of a transfer agreement should be part of the selection and approval process. Such assessments are to be conducted routinely for industry-based agreements. On the other hand, assessing factors such as incrementality and likelihood of success may not be appropriate for some programs, especially those that are clearly social-oriented. However, a cost-benefit analysis should be conducted whenever possible, even on a judgmental basis, to ensure prudent and gainful use of transfer funds.

Incrementality

Although not spelled out in the transfer policy, due consideration for incrementality is good business practice for most programs. When appropriate, the rationale for recommendation should indicate that the program officer has considered the total direct and indirect benefits expected from the transfer payment against the transfer's value. The project officer should also consider whether or not the expected result would likely occur without the transfer.

Likelihood of success

Rather than a matter of policy, the assessment for the likelihood of success is good practice in the selection and the approval of transfer payment applications. It is not always possible to conduct a feasibility analysis for every project, but a reality check should be done before recommending a new project, especially if there are no precedents. The recommendation should state how success will be measured in terms of output and/or outcome, and the odds of that happening.

8.2 Agreements

8.2.1 Grants

The transfer policy stipulates that a written agreement between the department and the recipient or sponsor is required, with one exception: for grants involving lower risk and materiality, the agreement may be in the form of an application and the related correspondence.

The policy does not spell out what a situation of "lower risk and materiality" is, but leaves it to the program officers' judgement. Sub-section 8.5.5 of this section discusses that matter and Section 7 of this Guide deals with risk management.

Whether or not a formal written agreement exists, the file should contain verifiable evidence that the recipient meets the eligibility requirements at the time of the transfer, or maintains this eligibility if the grant is paid by instalments.

8.2.2 Contributions

Contribution payments must be supported by a written agreement between the department and the recipient. Most agreements contain two sections: a generic section that is mainly related to the program's general terms and conditions, and an agreement-specific section, related to that particular agreement's terms and conditions. The agreement-specific section is often in the form of one or more appendices.

8.2.3 Delegating signing authority

The "Delegation of Signing Authorities" is the official document whereby each minister delegates signing authority to departmental officials. It typically consists of a matrix that identifies generic position titles and their matching levels of authority. In the case of grant and contribution agreements, it generally refers to the financial range within which an officer or manager can approve or modify an agreement or authorize a payment. Not only the word but also the spirit of the delegation of authority must always be respected.

8.2.4 Mutual understanding of the agreement's terms and conditions

Before finalizing the agreement's signing, the project officer should review the agreement with the recipient to ensure a common interpretation and understanding of the terms and conditions.

8.2.5 Signature of agreement

All parties should sign a written agreement before the stated start date, and, more importantly, before eligible expenses are incurred. When eligible expenditures are incurred before formal approval of the agreement, both parties, the department and the applicant, must understand the risks and consequences they face.

When eligible expenditures are to be incurred prior to formal approval, it must be made clear to the applicant that the department will not reimburse these expenditures if formal the written agreement is not approved (i.e. signed). Furthermore, should the project officer not inform the applicant of the risk involved, the applicant could argue that a verbal agreement exists since the project officer knew (or gave the impression that it was known) that expenditures were being incurred and that reimbursement was expected. Should this argument be legally up held, the department would be required to reimburse the applicant even though the department never formally approved and signed the agreement.

In addition, the project officer should ensure that the applicant's legal name appears on the agreement and that the applicant himself or his authorized representative signs it.

8.3 Overseeing

8.3.1 Supervision

Supervision provides employees with direction and support. In the context of transfer programs, supervision is also a key element of a good management and control framework. Program officers are engaged in activities that involve disbursing large amounts of money to organizations or individuals. Supervisors should ensure that public funds are used effectively and for their intended purpose within the program's terms and conditions.

8.3.2 File maintenance

A transfer agreement file serves many purposes. It is:

• a working and reference tool for the project officer(s) handling the case;
    
• a supervision and control tool;
    
• a central location where all documents and information related to an agreement are grouped; and
    
• an important element of the audit trail.

For this reason, the file must be well documented and kept current.

For a grant and a contribution, the file must contain:

• the original application,
    
• enough documentation to support the application's approval,
    
• the original agreement (except when the application is considered the agreement, as allowed by the Transfer Policy for low-risk grants) and any subsequent amendments; and
    
• a record of all important communications, written or verbal, that have taken place between the recipient and the program officer.

Contribution agreements files should also contain the following:

• original claims, along with supporting documentation, presented by the recipient (unless the original is held by Finance) and
    
• monitoring and progress reports.

8.3.3 Operational and financial monitoring of contribution agreements

Monitoring of contribution agreements is the cornerstone of an effective management and control framework. Financial monitoring provides ongoing assurance that reimbursements claimed by the recipient are based on legitimate expenses actually incurred for activities specified in the agreement. Operational monitoring verifies that the recipient meets the agreement's terms and conditions. Monitoring is covered in Section 9.

8.4 Disbursements

8.4.1 Financial controls

The size of contribution programs' budgetary allocations vary between departments but they often represent several millions of dollars. These public funds must be adequately protected against errors, misuse, abuse and fraud.

The two universal financial controls of supervisory review and segregation of duties apply to contribution programs. Supervision is an ongoing requirement. Supervisory review should be conducted regularly by a person who has adequate knowledge of the transfer program's financial aspect and has independent access to the information required to determine if disbursements made from transfers accounts are legitimate.

Segregation of duties means that at least two persons work independently in issuing a transfer payment for a grant, an advance, or a reimbursement of contribution expenses or costs.

Various employees require access to financial systems. This access should be restricted to those employees who require it to conduct their legitimate duties and limited to their functional requirements. No single employee should have simultaneous access to financial functions that are intended to be segregated, such as the input and approval of a payment. It is management's responsibility to ensure that employees only have access to the profile they require at any time period. The employee is responsible for protecting the confidentiality of his/her password.

8.4.2 Cash management

Calculating imputed interest cost

Under certain circumstances, an advance paid to a recipient may not be spent immediately for various reasons. In this case, if the recipient is allowed to keep the money, the unused funds should be put in an interest-bearing account. The amount of interest that was or should have been generated is deducted from the amount of the advance paid for the subsequent periods. (The amount of interest revenue should be at least sufficient to cover the cost and efforts to calculate and allocate it.) The policy does not dictate the interest rate to be used in this instance, but the 90-day Treasury Bill rate or some other approximation such as the bank rate may be used.

Scheduling payments

Frequency of payments

Grants may be paid once or in instalments, while contributions are generally paid monthly or quarterly.

When grants are paid in instalments, the minimum number of instalments depends on the grant's total value as shown in Appendix B of the Transfer Payment Policy. The program officer may decide more instalments are in order when risk, materiality, the quality and quantity of financial information and past experience with the recipient support the decision.

The same factors should guide the program officer in deciding at what frequency a contribution recipient should provide progress reports and claim for reimbursement.

It is important to realize that a reporting and payment schedule and an advance schedule are two different things. If it has been agreed that the recipient will produce a claim every quarter, this does not mean that he or she has an automatic right to a three-month advance at the beginning of each quarter.

Determining advance payments requirements

The policy on transfer payments clearly states that advance payments should only be made available when required. Typical contribution payments are by design the reimbursement of expenditures or costs incurred by a recipient who is thus expected to make the disbursement and then claim for reimbursement.

When it is clear that this approach would result in serious cash flow problems for the recipient, then advance payments might be made. It is the applicant's responsibility to demonstrate up-front that advance payments are essential to achieve the objectives of the project. This is generally done by producing a detailed cash flow forecast for the duration of the agreement. Advances are more likely to be required in social transfer programs where the recipient is often a small non-profit organization. In that case, however, the advance amount should be limited to the amount needed to bridge the time gap between expected revenues and expenses. Allocation of advance payments should be justified in the file and be subject to supervisory review.

Accounting for advances at year end

Extra care should be taken when advances result in funds being transferred from one fiscal year to the following year. The strict and basic rule for contributions is that expenditures incurred in one fiscal year should be reimbursed from funds appropriated in the same fiscal year. Under exceptional circumstances, advances paid in one fiscal year may cover expenses incurred in the subsequent year, but the period covered in the new year must not exceed one month.

Advances at year end must not be used as a means to avoid or reduce lapsing transfer funds. Program and financial officers should closely supervise the use of transfer funds in the last months of the fiscal year.

Advances are not made for grants and, therefore, accounting for advances at year end is not an issue. However, grants may be paid in instalments spanning over two fiscal years. In this case, the individual instalments must be allocated to the period to which they pertain.

8.4.3 Payments

Section 34 requirements

Section 34 of the Financial Administration Act (FAA) stipulates that no payment shall be made unless a person with the proper delegated authority certifies that the payee is eligible or entitled to the payment. This applies to transfer payments. For grants, the officer authorizing the payment under section 34 must be satisfied that the right amount is sent to the right person.

In the case of contributions, the authorizing officer must be satisfied that the reimbursement claimed by the recipient is based on eligible expenditures or costs actually incurred within the terms and conditions of valid agreement. To directly obtain such assurances, the officer should review the supporting evidence for the claim. (There is nothing in the transfer policy that prevents a project officer from requesting documentary evidence to support a claim, such as receipts, payrolls and cheques processed by the bank.) To indirectly obtain the assurance related to section 34, periodic monitoring visits or a financial post audits should be conducted.

In the case of advance payments, the authorizing officer should ensure that the amount of the advance is justified and within the limits set in the agreements.

Authorized budget

Recipient payments must not exceed the total budget authorized by the agreement, initial or amended.

Expenses

Eligibility of expenses is a matter of fact based on the agreement's nature and content. As explained above, a contribution agreement should clearly indicate what costs and expenditures can be claimed and to what limit. Therefore, any expense that is not authorized in the agreement, or that is claimed in excess of the maximum authorized, is not eligible for reimbursement. The degree to which budgeted expenses in an agreement are individually detailed (or aggregated to allow for more flexibility) is a matter of risk management. For example, for a high-risk project, specifying a maximum level of support for a specific line item expenditure (e.g., salaries) may be warranted. For a low-risk project, aggregating salaries as part of a larger classification (e.g., research and development that includes salaries, benefits, overhead, supplies) would allow for flexibility among the line items.

Allowed and disallowed expenses

Acceptance of expenses is a matter of credibility and evidence. As a general rule, when costs and expenditures meet the eligibility test described above and the officer is satisfied that they were actually incurred for activities specified in the agreement, reimbursement is allowed. Statistical sampling methodologies based on a risk management approach may be used for claims verification. The degree of verification required may be based on criteria such as the risk profile of recipients, experience of staff administering the program, sensitivity or materiality of the claims. Officers who have responsibility for verifying accounts should refer to the policy on Account Verification.

GST expenses and rebates

Grant and contribution recipients do not render services and provide goods and, therefore do not charge GST/HST to departments.

Where recipients incur GST/HST on the supplies purchased pursuant to grant or contribution agreements, departments can reimburse the amounts if the recipients are not entitled to an input tax credit or GST rebate from the Canada Customs and Revenue Agency (CCRA).

Recipients who are GST registrants may be entitled to input tax credits from the CCRA in respect of tax paid when certain conditions are met. When recipients are not GST registrants, they may still be entitled to a partial rebate of any tax paid. Rebates may be claimed by the following public bodies at the following percentages: Hospitals-83%; Schools-68%; Universities or public colleges-67%; Municipalities-57.14%; Charities or Qualifying Non-profit Organizations-50%.

Cash versus accrual accounting

Many organizations use accrual accounting. This means that a purchase made on a given day will be recorded as an expense on that day even if the payment is made at a later date. In general, advances should cover actual cash requirements and claims for reimbursements should be based on actual cash disbursements. However, if the purchase of goods or services is paid for after the end of the project or in the next fiscal year, then the expense may be claimed before the final payment is made.

Retroactive expenses

Retroactive expenses are costs incurred prior to a project's official start date. Unless authorized, costs incurred before the project start date are not eligible for reimbursement.

On occasion, a case may be made to authorize retroactive expenses.

If retroactive expenses have not been incurred prior to application for assistance, but, for operational reasons, must be incurred prior to the start date (e.g. refer to example below), the applicant must request their inclusion as eligible expenses. Once an application with retroactive expenses is submitted, the applicant should be advised in writing of the risk being assumed. That is, the applicant must understand that the project funding and/or the retroactive expenditures may or may not be approved by authorized departmental officers.

If retroactive expenses have been incurred prior to application for assistance and prior to the start date and the applicant wishes to receive reimbursement for the retroactive expenses, again the applicant must request their inclusion as eligible expenses during the application process. However, for such expenses to be approved by authorized departmental officers, the circumstances surrounding the eligibility of the retroactive expenses would need to be exceptional, and the rationale would need to be very compelling.

Note: Such a practice should not be used as a means to circumvent the year-end spending policy.

Stacking of assistance provisions

It is the applicant's responsibility to disclose in the application all relevant information on other sources of expected funding or in-kind participation, or to inform the project officer if new funding sources for the same project become available during the life of the agreement. The project officer has the right and the duty to ask questions and perform whatever verification deemed necessary to prevent the same costs and expenditures from being claimed and reimbursed under another agreement. For example, if the rent is reimbursed entirely by one program, then it cannot be claimed as an expense from another program. The issue of stacking is discussed in more detail in sub-section 4.6.4.

In-kind contributions

Stacking implications: In-kind contributions involve non-cash asset transactions (e.g., securities, land, buildings, equipment, use of facilities, labour, goods) that are provided by interested parties such as recipients, ultimate recipients, departments or other government bodies, in support of a federally approved transfer payment project or initiative. (The term "asset" here means a future benefit that can contribute directly or indirectly to future net cash flows).

All contributions, whether cash or in-kind, made toward a project's eligible costs must be taken into account when considering the stacking policy and sources and uses of funds. In-kind contributions that are considered ineligible costs but are related to the project should be considered in the sources and uses of funds but not in the stacking calculation.

The policy threshold for stacking is $100,000 (the point at which other sources of government assistance must be considered in determining and monitoring the appropriate level of total government assistance for a project or initiative). It includes all government sources-non-monetary as well as monetary assets.

Eligibility: To be eligible as an in-kind contribution:

• The asset must be essential to a project's or initiative's success, eligible under the program's terms and conditions, and otherwise would be purchased and paid for by the recipient.
    
• It must be supported by a commitment from the applicant (unless it is a departmental contribution) and its valuation confirmed by departmental officials during the project's assessment phase.
    
• Support for in-kind contributions must be justified and documented at the initial approval or amendment stage.
    
• The asset must be recorded in the recipient's contribution agreement and records at fair value. Applicants' in-kind contributions should only be recognized when fair value can be reasonably estimated.
    
• To determine fair value, use either the asset's market value or an appraisal. An appraisal that uses the cost basis as one method of valuation may be required where competitive market forces are weak or absent (e.g., valuation of "use of facilities" in a remote northern settlement where no similar properties exist).
    
• In determining fair value, refer to section 4410 of the CICA Handbook (from the Canadian Institute of Chartered Accountants) regarding non-profit organizations and contributions.

Reimbursing in-kind contributions

As a general rule, reimbursements of in-kind contributions should be addressed during the negotiations of the agreement.

Reimbursable

• In-kind contributions may be claimed for reimbursement if they are eligible project costs incurred by the recipient (they do not form part of the recipient's contribution towards the project). For example, if clerical support is contributed to a project and the cost was approved as an eligible cost towards the project, it would be reimbursable because an expenditure has been incurred by the recipient.
    
• Use of Assets - Assets owned by a recipient and required for the project may be reimbursable. For example, a recipient uses a property it owns to carry out a project activity and claims rent expenses based on fair market value. This cost may be reimbursable if the recipient otherwise incurs a loss of revenue from rental of the space or if there is a cost associated with using the premises for the project. Because there could be a "profit" generated by the recipient from the facility after the cost of taxes, interest, maintenance, etc), a 100% reimbursement of costs is discouraged even if the department has the authority to disburse up to 100% of eligible costs.

Not Reimbursable

There are a number of instances where in-kind contributions may not be reimbursed:

• the related costs are not eligible
    
• the recipient has not incurred an expenditure:

For example: the reimbursement of assets donated by individuals or organizations such as voluntary materials or labour would result in a profit to the recipient because the recipient's cost base is zero.

• The in-kind contribution is the recipient's share of the project.

Non-monetary transfers

The Transfer Payment Policy stipulates that the transfer of non-monetary assets or benefits with an aggregate value of $100,000 or more must be recorded and accounted for as a transfer payment according to the Treasury Board Policy on Accounting for Non-Monetary Transactions and the Treasury Board Accounting Standards.

This should not be interpreted to mean that a non-monetary transfer of less that $100,000 should not be accounted for in the context of the agreement. For instance, assume that a transfer agreement stipulates that in addition to a certain amount in cash, a recipient will receive equipment worth $20,000. This person should be held accountable for the equipment's use and eventually its return or proper disposal if the agreement's conditions are not met, or if the agreement does not stipulate that the recipient will own the equipment at the project's completion. Similarly, if the non-monetary transfer is in the form of labour, it is the recipient's responsibility to account for the work done under that agreement. The agreement should clearly indicate the nature, value and terms and conditions attached to the non-monetary transfer, and at the agreement's termination, the file should contain information as to the disposal of these assets.

8.4.4 Identifying overpayments

It may happen during the life of an agreement that a transfer recipient cannot account for the money he or she has received either as an advance, a reimbursement or a grant instalment. This situation may be detected during on-site monitoring or during the final accounting at close down, or after the agreement has terminated, during an audit. (Most agreements require that the recipient retain all documentation from project-related activities for a number of years and give the department the right to audit the project during that period. Such an audit is often conducted after the department has received a complaint or an allegation that wrongdoing has occurred.)In the case of a grant, it may be found that the beneficiary has obtained his grant under false or misleading representation. In the case of contribution agreements, it generally occurs after it has been found that some of the advance received has not been used or costs and expenditures already claimed and reimbursed were non-eligible or non-allowable.

This situation does not necessarily lead to the creation of an overpayment, the opening of an account receivable or to collection process.

If the agreement has not terminated when the overpayment is determined, you should investigate the circumstances that led to this overpayment. If it resulted from an honest mistake made by either party, such as a calculation error or a claim in excess made in good faith, simply deduct the overpayment amount from future payments. If there is an appearance of fraud, use internal or external auditors to fully investigate the case. Fraud is the false representation of a matter of fact that deceives and is intended to deceive another. It comprises all acts, omissions and concealment involving a breach of a legal or equitable duty and resulting in damage to others. It can involve misappropriation of assets or misrepresentation of financial information either to conceal misappropriation of assets or for other purposes. Attempted fraud is also an offence.

If the agreement has terminated and there is an outstanding balance, management should start the procedures to claim the money back from the recipient.

If negligence or fraud is confirmed, bring the case to the attention of program management who should decide if any action beyond collecting the overpayment is warranted. This action may involve referring the case to the police and/or taking legal action.

8.4.5 Repaying contributions (repayable transfers only)

The policy on transfer payments stipulates that "Where a contribution is made to a business and is intended to allow the business to generate profits or to increase the value of the business, the business is required to repay the contribution or to share the resulting financial benefits with the government commensurate with its share of the risk." A detailed definition of the term "business" for the Transfer Payment Policy is found in Appendix A of the policy document.

The main exceptions to the repayment requirement are when the transfer payment's primary aim is income support and income stabilization for individuals, when the contribution is to a non-profit organization, when the contribution is less than $100,000 or when no quantifiable benefits will accrue to the recipient as a direct result of the contribution.

One of the main challenges in managing repayable transfers is to find the appropriate balance between a program's mandate and the requirement to recover the investments. Program policy design will directly impact on recovery results. However, the more the terms and conditions and/or management controls are tightened to maximize collection results, the greater the risk that measures taken may be counterproductive to the program's original mandate. (For example, an economic development agency may choose a policy of taking security to minimize losses, but this also diminishes the proponent's access to bank financing.)

When introducing repayability in a transfer agreement, consider the following factors:

• When approaching due diligence, place more emphasis on issues relating to viability and debt servicing.
    
• How terms and conditions of repayment are structured will directly impact on collection and recovery results.
    
• Establish a risk management framework to minimize or control losses and to ensure timely recovery of funds. Such a framework would address issues relating to risk assessment, risk rating, and appropriate levels and frequencies for monitoring and reporting.
    
• Develop a collection policy to ensure that officers are consistent in their dealings with clients and that they treat them in a fair and reasonable commercial manner. It should also provide guidance on how to deal with problem accounts.
    
• Establish corporate reporting requirements on portfolio activity and performance to ensure appropriate monitoring of results.
    
• Assess adequacy of resources and training to ensure that risk management and monitoring regimes are effectively implemented.

8.4.6 Amending transfer agreements

Amendments may affect the maximum allowable amount payable under the agreement, the termination date and the terms and conditions, including the definition of allowable expenses and expected output. Justify any amendment in writing and keep it in the file with the amended agreement. If the amendment is minor, such as a short extension of the project's duration and the reason for it is obvious, the request for amendment signed by the recipient may suffice to justify it, but the amendment should still be acknowledged and signed off by an authorized departmental representative. Do not retroactively amend an agreement that has terminated.

8.4.7 Renewing transfer agreements

Multi-year agreements

Program funds are voted by Parliament on a year-to-year basis. A multi-year agreement is automatically renewed from year to year until the period has expired, provided the required funds have been voted and there are no circumstances that call for its termination. For that reason, multi-year agreements must have a clause that relates their continuation to the availability of funds. Also see the discussion on this topic in sub-section 4.6.4. of this Guide.

One-year agreements

Do not automatically renew agreements. Basically, the same criteria used to select and approve a new agreement should be used to renew an existing one. The fact that an initiative has been achieving its objectives in the past does not necessarily mean that it will achieve them in the future or that the objectives are still valid.

8.4.8 Closing down transfer agreements

At completion of a project or, in the case of a repayable transfer, after repayment obligations have been met

This is the "normal" way for an agreement to terminate. Transfer agreements may last only one day in the case of a grant payment to an individual or span over several years (subject to appropriation). Close-off procedures apply to contribution agreements and should be conducted just before closure date. The Transfer Payment Policy states that "a portion of the contribution should only be paid following the final accounting of the contribution by the recipient." The portion of the contribution held back is a matter of judgement based on risks and projected cash flow, but a good rule of thumb is to hold back an amount corresponding to the expected last claim.

For very small agreements, close-off procedures should include at least a financial monitoring of all expenses claimed since the last time the project was financially monitored and an operational monitoring of deliverables since the last time the project was operationally monitored. For multi-year projects, a process similar to close-up should be conducted once a year or at least at mid-course, depending on risk and materiality. Note: Financial and operational monitoring is defined in sub-section 9.2.2.

In the case of a repayable transfer, the agreement terminates when the sponsor or recipient has met his financial obligations toward Canada, either by reimbursing the full amount specified in the agreement, or by reaching a settlement with the department.

For cause

Defaulting on performance of contractual obligations

A recipient has the contractual obligation to perform in accordance with the contribution agreement's terms and conditions. Failure to do so generally results in a breach of contract, which may lead to the agreement's early termination. In such a case, the department would seek the reimbursement of any funds not accounted for. In the case of a repayable contribution, the full amount of the contribution paid should be immediately demanded and recovered.

False declaration

Any party to a transfer agreement that obtains benefits in money or in kind through a false declaration is no longer eligible to the benefits. The trust is broken and the appropriate action will normally be to terminate the agreement and seek appropriate remedies.

Where illegal acts are suspected, the department must immediately refer the matter to the RCMP for investigation.

By definition, fraud is false representation of a matter of fact that deceives and is intended to deceive another. It comprises all acts, omissions and concealments involving a breach of a legal or equitable duty and resulting in damage to another. It can involve misappropriation of assets or misrepresentations of financial information, either to conceal misappropriation of assets or for other purposes, by such means as:

1. manipulation, falsification or alteration of records or documents;
2. suppression of information, transactions or documents;
3. recording of transactions without substance; and
4. misapplication of accounting principles.

Attempted fraud is also an offence, where the false representation is intended to deceive another. It contains the same elements as set out above for fraud.

For other reasons

Voluntary withdrawal of one party to the agreement

Standard contribution agreements generally spell out the conditions under which one of the parties can voluntary withdraw. Normally, the party that chooses to withdraw notifies the other parties in writing within a certain time, generally three months.

Mutual consent

Standard contribution agreements generally allow for an early termination by mutual consent. Special conditions need not be specified in the agreement since the parties are by definition satisfied of the arrangement.

8.4.9 Delivery of a transfer program by another organization

In a transfer agreement, there are always at least two parties involved: the department, which provides transfer funds and manages the program, and the recipient, which may be an individual, an organization, a business or another level of government. Some agreements may be signed with more than one recipient, who become jointly responsible for delivering the project.

In some cases, the recipient is expected to sign sub-agreements, under the authority of the initial agreement, with other individuals or organizations. In this case, the recipient essentially becomes the program's fund manager and spending department of the sub-agreements. This situation offers many advantages but creates unique challenges in terms of accountability and management and, sometimes, financing. Most of what is said in this section applies to that type of delivery but the following additional factors must be taken into consideration. Special considerations for monitoring and auditing will be discussed in the next sub-section.

Accountability of the parties in a sub-agreement

In the case of a sub-agreement, risk and responsibility can be shared but the federal department's obligation to ensure that Canadian citizens receive value for money from the agreement is not suppressed, nor is its accountability for the expenditure of public funds and responsibility to Parliament.

Managing a sub-agreement

Departments should manage the original agreement with due diligence but they should also put in place controls and reporting mechanisms to demonstrate that the sub-agreement deliverer is managing with good business practices.

Financing a sub-agreement with another federal government department

When a department wants to use another government department (OGD) to administer a program, it may use one of the following two financing arrangements possible:

• the delegation of authority to the other department through an OGD suspense account; and,
    
• the transfer of authority to the department through Supplementary Estimates process.

Under the OGD suspense account arrangement, the funding department delegates to the spending department but the former retains full accountability for delivery of the program.

Under the Supplementary Estimates arrangement, the spending authority is transferred from the funding department to the spending department but the latter assumes full accountability for delivery of the program.

Under both arrangements, the authority delegated or transferred, if not fully utilized, will lapse at the end of each fiscal year.

8.5 Appendix and tools

8.5.1 Checklist-recipients distributing contributions

Additional Provisions to Be Included in Contribution or Contractual Agreements with Third Parties or Recipients Who Further Distribute the Contribution Amounts (Re: Policy on Transfer Payments, Appendix C, Part 2)

• description of the initial recipient accountability and management framework
    
• assurance that the program's public purpose and the need to provide transparent, fair and equitable service are not lost in the desire for efficiency
    
• clear and agreed expectations between the parties
    
• clear roles and responsibilities, including financial roles and responsibilities
    
• clear, transparent and open decision-making process
    
• assurance that departmental requirements for selecting and managing projects by recipients or ultimate recipients are met
    
• provision for ongoing assessment by the department to ensure performance is in line with expectations and that the initial recipient exercises due diligence in selecting and managing projects
    
• provision related to the requirements for the initial recipient's operating plans including annual performance expectations and a description of the process to select and approve projects
    
• departmental right of access to relevant initial recipients, and where warranted, ultimate recipients' documents and premises
    
• clear provision for audits of program performance and recipient
    
• provision for the department to receive periodic (e.g., quarterly and/or annually) financial and performance reports from the initial recipient, certified by a company officer, including, if appropriate, annual audited financial statements with the external auditor's report and opinion, and any completed evaluations funded in whole or in part by the transfer payment program
    
• provision that the department obtains from the initial recipient, or has ready access to, a copy of all signed agreements with recipients
    
• description of the redress provisions for ultimate recipients affected by decisions of the initial recipient
    
• provision for appropriate reviews, program evaluations and audits; and specification of admissible administrative costs that can be applied to the contribution by the initial recipient based on an accounting of expenses

8.5.2 OGD suspense account, MOU template and Supplementary Estimates

An OGD suspense authority is a mechanism introduced in the early 1980s under the authority of section 7c (financial management) of the Financial Administration Act (FAA). Where not feasible or not efficient for a department to administer a program or to make payments itself, it can arrange for such administration to be carried out by other departments. In these cases, the administering department will normally use an other government department (OGD) suspense account.

An OGD suspense account is meant to render more efficient some elements of program delivery. It is intended to improve the decision-making process and resource. The creation of the OGD suspense account, in effect, establishes a "line of credit" that permits the spending department to charge expenditures on behalf of the funding department.

Under a memorandum of understanding (MOU), the funding department delegates its spending authority up to a certain limit to the spending department while the funding department retains full accountability for resource use. The funding department's parliamentary appropriation is charged for the amount advanced to the spending department's suspense account. Over the year, the spending department must charge to the OGD suspense account all expenses related to the program. At year end (or more often, as specified in the MOU), all charges under the MOU must be transferred from the spending department OGD suspense account to the funding department's appropriation.

Several requisites must be in place before an OGD suspense account can be created and used to authorize a payment out of the Consolidated Revenue Fund:

• The funding department must have legislative authority to make payments under the program. (For example, funds are provided in a vote and the funding department has program legislative authority to conduct the activities in question.)
    
• An MOU must be in place between the funding department and the spending department outlining the basis of authority, the responsibilities of each department, the specific activities or programs to be administered, the limit on any expenditures and other relevant conditions. This MOU must provide an explicit delegation of authority to the spending department to manage the program and to make payments on the funding department's behalf up to a specified limit.
    
• The funding and spending departments must ensure that their Departmental Delegation of Financial Signing Authorities, approved by their Ministers, include delegations for signing MOU's relating to the administration of another department's program and for signing under FAA sections 32, 34 and 33 for activities/projects which are funded under the OGD Suspense Accounts. In the absence of these delegations of authority, the funding Minister will be required to sign the MOU delegating the FAA authorities to the spending department.
    
• There must be an appropriate management framework in place in the spending department to undertake the program and make the payments involved (e.g., Treasury Board approved terms and conditions for a contribution program.)
    
• The funding and spending departments must process the appropriate accounting transactions in accordance with FIS Accounting Manual.
    
• The spending department cannot charge expenditures to the OGD suspense account in excess of the delegated limit or the amount credited to the account (i.e., the account cannot have a debit balance).
    
• The spending department must report regularly to the funding department, on an agreed schedule, on the accounting transactions in the OGD suspense account and on results.
    
• The OGD suspense account (i.e., debtor and creditor department) must be cleared at the end of the fiscal year and all expenditures accounted for within the appropriations of the funding department.
    

Alternatively a department (the funding department) that wants another department to administer a program may request a transfer of authority to the spending department through the Supplementary Estimates process. In this case, the authority will be transferred, not delegated. The spending department will have full authority to deliver the program. Note that under this option, the spending department, will bear full responsibility for delivering the program, and will account for all expenditures charged to its appropriation.

This authority will be subject to an MOU signed by both ministers. A separate Treasury Board submission is not normally required, however, a copy of the MOU must be provided to Treasury Board to effect the transfer. The eventual changes are to be reflected in the Supplementary Estimates plates that both ministers will sign on behalf of each department.

8.5.3 Generic agreement

Generic agreements contain elements that appear in every contribution agreement, such as the name of the contribution program, the name of the parties to the agreement, the starting date and intended duration and the name and title of the representatives who will sign the agreement.

Some generic sections contain clauses that apply to most, but not all, agreements. Authority to remove or modify any generic clauses should be obtained prior to the changes.

In the case of third party delivery, the agreement should also specify the nature and level of accountability of both parties vis-à-vis the performance of the third party.

The appendix's agreement-specific section is part of the agreement. It describes in detail the parties' rights and obligations under this specific agreement. For most agreements, the appendix should contain expected deliverables, a budget, milestones, a list of allowable expenses by category, and all applicable terms and conditions that are not specified in the generic section.

8.5.4 Basic provisions to include within contribution agreements

The majority of the requirements below are listed in the policy's Appendix C. A few requirements have been added because they are mandatory under the policy or other government legislation. A few optional requirements have been added to enhance the implementation of contribution projects or initiatives.

This list has been categorized by those requirements that are mandatory, procedural and optional.

• Mandatory-policy and Mandatory-other are those minimum requirements that must be included in an agreement unless TB has approved an exemption to the requirement(s) in the terms and conditions.
    
• Procedural requirements are expected to be included in an agreement but may be modified or deleted for reasons such as its inappropriateness (e.g., declaration of debts owing to the Crown by a province). Any divergence from the procedural requirements must be justified and documented in the program file.
    
• Optional requirements are offered as good practices or where they are appropriate only in specific cases. Their inclusion in an agreement is at the department's discretion.

Mandatory Requirements - Policy

1. An identification of the recipient;
     
2. The contribution's purpose and expected results;

• Make clear that the contribution is to fund a project rather than to pay for the performance of the project, as the latter may be viewed as a procurement contract.

For example, under "Purpose of the contribution" or similar heading, if any, set out that the contribution's purpose is to fund, subject to this agreement's terms and conditions, the project (which you should define) that the recipient will carry out (or cause to be carried out) on its own behalf and not on behalf of Her Majesty. This does not preclude the department to require that, in its terms and conditions, the project shall be carried out in a diligent manner and shall be completed as at a certain date.

Avoid wording such as: "The recipient agrees to perform the project."

• The agreement should include a Description of the Project that is usually prepared as a schedule attached to the agreement. The description should include activities, milestones and eligible costs.

3. The effective date, the date of signing, and the agreement's duration;
     
4. The reporting requirements expected of the recipient;

• References in the policy include paragraphs 7.11.6 and sub-section 8.3.

5. The financial and/or non-financial conditions attached to the contribution and the consequences of failing to adhere to these conditions;
     
6. For contributions exceeding $100,000, a requirement for the recipient to declare any and all proposed funding sources for the project before and/or shortly after the agreement commences, as well as upon completion of the project. A repayment provision should be included should total government assistance exceed the amounts anticipated;

• Clause 7.13.1 indicates that all funding sources should be declared prior to approving a contribution exceeding $100,000 or providing a grant exceeding $100,000. However, Appendix C (1) (vi) states that for contributions exceeding $100,000, the declaration may be made before or shortly after the agreement commences, as well as upon project completion. (This inconsistency will eventually be corrected in the policy).
    
• Instances where the declaration is made shortly after a project starts should be rare and exceptional. Normally, these unusual circumstances would apply where it is critical to achieving program objectives. The rationale must be justified and fully documented in program files.

Note: When the declaration is to be made shortly after a project starts, be prudent in drafting the agreement so that the department is not required to disburse funds before all sources of funds have been declared and verified.

7. The allowable costs or the types or classes of expenditures eligible for reimbursement (profit to the recipient is not a "cost" nor an "expense" and therefore may not be included);
     
8. The conditions to be met before payment is made and the basis or schedule of the payments;
     
9. The maximum amount payable and appropriate provisions for the department to terminate the agreement and withdraw from the project if the original objectives are not being met;

• There are two distinct provisions in this requirement:
    
•  
  • the maximum amount payable to a recipient and
      
  • the provision on termination. Spell out this requirement in more detail (i.e., rather than stating "if the original objectives are not being met...", state "if the conditions are not complied with, termination may be subject to "x" days notification." In keeping with this provision, a department may also wish to include an alternative dispute resolution clause as an optional requirement.

10. A clause to limit the government's liability where the recipient is entering into a loan, a capital lease or other long-term obligation in relation to the project for which the contribution is provided;

• The value of the potential obligation is irrelevant in the application of this clause.

11. The minister's right to conduct an audit of a contribution agreement, even though an audit may not always be undertaken;
      
12. A requirement that any payment by Canada under the agreement is subject to there being an appropriation by Parliament for the fiscal year in which the payment is to be made (required under section 40, FAA); and
      
13. Provisions for cancelling or reducing transfer payments if departmental funding levels are changed by Parliament (required under section 40, FAA);

• A number of departments may experience resistance from potential recipients when attempting to include this condition in a transfer payment agreement.
    
• Although Clause 7.3.6 states that "Terms and conditions, program literature and agreements must include provisions for cancellation or reduction of transfer payments in the event that departmental funding levels are changed by Parliament," section 40 of the Financial Administration Act states that it is a term of every contract that payment is subject to there being an appropriation (i.e., an appropriation must exist for the particular payment). Therefore, in effect, every agreement or contract implicitly includes such a clause.
    
• However, for greater certainty and disclosure, departments must include the "level of funding changed by Parliament" clause in all transfer payment agreements as per section 40. In instances where a recipient has a particular problem with its inclusion in program literature, departmental officials must decide whether or not the opposition is justified and the exclusion of the condition is warranted. In order to exclude this requirement (from program literature but not from the agreement), an exemption from TB is required.

14. An indemnification clause for the Crown's benefit;

• with reference to the activities funded under contribution agreements, Canada should not be liable for any claims for damages from the recipient or third parties related to activities carried out by the recipient or on his/her behalf. The clause aims to reflect the understanding that the recipient is controlling the risk associated with the funded activities and consequently is ready to bear the consequences associated with them.

15. A clause that requires the recipient not to represent itself, including in any agreement with a third party, as a partner or agent of the Crown;
      
16. A requirement for the recipient to repay overpayments, unexpended balances and disallowed expenses and a declaration that such amounts constitute debts due the Crown;
      
17. A requirement that no member of the House of Commons shall be admitted to any share or part of this funding agreement or to any benefit arising there from;

• Refer to section 34 of the Parliament Act, where the wording is broad enough to cover transfer payment agreements.

18. A requirement that it is a term of this funding agreement that no current or former public office holder or public servant who is not in compliance with the Conflict of Interest and Post-employment Code for Public Office Holders or the Conflict of Interest and Post-Employment Code for the Public Service shall derive a direct benefit from this agreement;
      
19. A requirement that any person lobbying on the applicant's behalf is registered pursuant to the Lobbyist Registration Act.

• Clause 7.5.1 of the policy requires that departments establish policies and procedures to ensure that any person lobbying on an applicant's behalf be registered pursuant to the Lobbyist Registration Act. Departments should be familiar with the exemption provisions of this Act. Questions can be directed to the Office of the Ethics Counsellor at http://www.parl.gc.ca/oec/en/.
• In general, the Lobbyist Registration Act, (http://laws.justice.gc.ca/en/l-12.4/248568.html) adopted in 1985, requires people who are paid by their clients to influence federal politicians or government officials for financial benefits or legislative changes, to file a detailed report with Industry Canada in which they disclose their lobbying activities and clients. In addition, Appendix M of the Contracting policy, entitled Lobbyists and Contracting, states that fees paid to a lobbyist should not be commensurate with the amount of the grant or contribution raised. Refer to Appendix M at http://www.tbs-sct.gc.ca/pubs_pol/dcgpubs/contracting/contractingpol_m_e.html
    
• Therefore, where transfer payment project activities might include lobbyists, departments may require a certification by the recipient at the application time. A risk-based approach is an effective means to monitor this requirement.

20. A clause specifying the date on which interest charges on overpayments will commence.

• Paragraph 7.12. states in part that interest must be charged on overpayments and that "where a refund of overpayment is required, the due date is to be no later than the date that the recipient is required to report back to the department on the results achieved or expenditures incurred."

Mandatory Requirements - Other

21. A requirement that the agreement constitute the entire agreement;

• This would preclude the recipients from raising any declaration-e.g., a false representation made by Canada-before or after the agreement is signed.

22. A requirement to specify the applicable provincial law where the project is implemented or the name of a province.

• If the applicable provincial law is not specified, there could be a debate should a legal challenge be made; for example, if one party signed in one province and the other party in another.

23. A provision for non-assignment of payments (debt);

• Section 67 of the FAA prohibits the assignment of the amounts payable by Canada. This clause prevents payments from being assigned to other parties.

Procedural Requirements

24. Procedures to be followed to recover payments should the recipient be in default of the contribution agreement's provisions;
      
25. A clause outlining the disposal of assets acquired with contribution funds;

• A provision for disposing assets is not a legal requirement but assets should not be returned to the Crown; otherwise, the contribution would end up being a contract for acquiring goods.

Suggested Wording

• "The Recipient" shall preserve any assets acquired with the Contribution and with the Contribution under the Original Agreement, and use them for the purposes of the Project during the Project Period unless:

1. CANADA authorizes their disposition;
     
2. replacement of assets subject to wear is necessary;
     
3. assets that have become outdated require replacement.

• "The Recipient" agrees that, at the end of the Project Period, or upon termination of this agreement, if earlier, and if directed to do so by CANADA, the assets shall be

1. sold at fair market value and that the funds realized from such sale be applied to the eligible costs of the Project to offset Canada's Contribution to the Eligible Costs of the Project;
     
2. turned over to another person or organization designated or approved by CANADA; or
     
3. disposed of in such other manner as may be determined by CANADA.

26. a requirement for the recipient to declare any amounts owing to the federal government under legislation or contribution agreements and recognition that amounts due to the recipient may be set off against amounts owing to the government;

• The policy directs that contribution agreements should include a clause that requires recipients to declare amounts owing to the federal government and to recognize that amounts due to the recipient may be subject to set-off. * "Amounts owing" and "amounts due" refer to debts that are overdue and not to debts in good standing.
    
• The rationale for this requirement is based on the premise that debts owing to the Crown ought to be settled before transfer payments (which usually represents discretionary funds) are authorized and disbursed to potential recipients.
    
• Nevertheless, departmental officials can use their discretion in choosing an appropriate course of action. These are the most probable outcomes:

1. The applicant is not requested to declare any amount owing to the Crown. In this scenario, a department would conclude that the greater public good would be served by authorizing a transfer payment despite an applicant's potential indebtedness to the Crown. In addition, program officials would feel that setting off a transfer payment would jeopardize the project. Therefore, it would be expected that the responsible minister would not approve set-off.
     
2. The applicant is informed that if the transfer payment(s) is authorized, the amount owing may be set off. In this case, the applicant is deemed worthy of support even with a debt outstanding to the Crown. But unlike the former scenario, the responsible minister would approve set-off of the transfer payment if requested by another department. It is assumed in this case that the project or initiative would not be put into jeopardy if the debt were set off.
     
3. The applicant is informed that the debt has to be settled before an application can be approved. In this scenario, the department cannot justify providing assistance until the debt is settled.

*Set-off is the act of taking a government refund or payment due to a person or corporation and applying the payment against a debt due to the Crown by that same person or corporation. A set-off can occur intradepartmentally as well as interdepartmentally.

Process:

1. Where applicants are not asked for a declaration of amounts owing and/or the program has been deemed by the responsible minister not to be subject to set-off, the department must thoroughly justify the decision and document it in the program file.
     
2. To arrive at one of the other two decisions (options B or C) the department should follow the process below:

• Determine that the transfer payment program is eligible for set-off (i.e., responsible minister would likely approve set-off).
    
• Request applicants to declare all debts that are in arrears to the government, the nature of the debt and the name of the department(s) to which it is owed.
    
• Request applicants for permission to share this information with the department(s) in question.
    
• Inform applicants of the consequences of failure to provide the requested information (e.g., the application will be denied).
    
• Inform applicants of the potential consequences if a debt is outstanding (i.e., transfer payments may be set off and/or the application may be denied).
    
• Inform applicants that the provision of misleading or incorrect information after a contribution has been authorized is an act of default that will lead to the recovery of the transfer payment.

Note: If the applicant is an individual, all requests by the department for personal information must comply with the Privacy Act and TB policies on privacy.

27. A clause respecting the Official Languages requirement;

• Refer to sub-section 11.6 of this Guide and sub-section of 8.6 of the policy to determine applicability for inclusion in an agreement.

Optional Requirements

28. a provision that requires best value in performing a project;

• In some cases, it may be prudent to require that a competitive process be followed to achieve best value and to avoid situations where there may be a bias toward awarding a contract (e.g., purchase of capital) to a specific person or entity. This is probably more relevant where government support is relatively high compared with the recipient's contribution.

29. a provision where funding provided by Canada should be maintained in a separate bank account exclusively dedicated to the contribution;

• A separate bank account allows for easier project monitoring and, if necessary, auditing. In some cases, large institutions, such as universities, with a centralized accounting and banking system may not be able to comply with this requirement.

30. a termination clause wherein a department can, upon due notice, terminate the agreement unilaterally;

• In cases where recipients enter into multi-year agreements that extend beyond the program's approved terms and conditions, a termination clause is required.

8.5.5 Risk-written agreement for grants

One rule of thumb may be that if the total cost of creating a written agreement is equal to or exceeds the grant's value, then the grant should be regarded as having a "low materiality."

Risk, on the other hand, can generally be measured, at least intuitively on a scale of 0 (it will never happen) to 100 (it will certainly happen in a foreseeable future). One way to approach the problem is to evaluate the risk first. If it is high, a written agreement is required. If the risk is low, then the next question would be is the cost (in terms of time and money) of developing a written agreement higher than the grants' value? If the answer is yes, then the program should be designed to allow for an application in lieu of a written agreement. More about risk management is found in Section 7.

8.5.6 Table-summary of accountability and management and control frameworks
  

8.5.7 Manager's Program Guide and Examples of Grant and Contributions Agreements

This document is a good, concise guide prepared by Environment Canada (EC) that integrates program terms and conditions with agreements. This document is presently being updated by EC and will be available at a later date and attached to the Best Practices Annex.