The purpose of the Canada Student Loans Program is to make financial help available to students who require assistance to carry on full-time studies at the post-secondary level of education. Under the Program, the Federal Government guarantees loans made by approved lending institutions and pays interest to them during an "interest-free" period. Loans are "interest-free" to the student during the period of full-time studies and a period of six months thereafter. Beginning with the seventh month after cessation of full-time studies, the student becomes liable for interest and must start repaying the loan.
Inadequacies in controls over the Canada Student Loans Program include among others:
15.3 Acquisition of Radio Engineering Products Limited as satisfaction for debts to the Crown. Our 1972 Report (paragraph 101) described the circumstances which led to the acquisition of Radio Engineering Products Limited in 1972 as satisfaction for debts of $4.3 million due to the Crown. The Standing Committee on Public Accounts has asked us to report each year on the results of this transaction.
In our 1978 Report (paragraph 22.15), we summarized events which led the Company to file a voluntary declaration of bankruptcy in 1975. In our 1980 Report (paragraph 12.4), we noted that $503,000 was on deposit with the Trustee in Bankruptcy at 31 March 1980. The Trustee has informed us that he had $564,954 on deposit at 31 March 1981.
Distribution of trust moneys to the Crown has been delayed pending the outcome of litigation involving a claim by the Company against two of its senior officers and a counter claim by the senior officers. The initial court hearing for this litigation has been set for 15 February 1982.
During the year, the Department authorized payment of $12 million to a band council from the band's Capital Fund to be placed in interest-bearing trust accounts. We found no evidence of written authorization by the Minister or criteria used for the decision.
The Minister approved payment from band Capital Funds of $35 million to another band council for the purpose of "... forming a Band-owned Trust Company". Our examination showed that only $8 million of this amount had been used for the purpose approved by the Minister. The balance was placed by the band council with a trustee appointed by the council, who invested $18 million in short-term deposits and $9 million in a commercial joint venture involving the band council and a public company. Because the trust company is governed by the federal Trust Companies Act, only the $8 million has the investment risk safeguards afforded by that Act. The remaining $27 million was not expended by - the council for the purpose authorized by the Minister. The Department advises us that it is working with the band council to correct the situation.
15.5 Department of Public Works - Building acquired in 1976 and not used. In 1976, the Department of Public Works paid $1.98 million for a partially completed building in the National Capital Region, mainly to provide space for the National Museums of Canada. The purchase price for this 120,000 square foot building included 5 acres of land.
The building has remained vacant because of delays in preparing it for occupancy. These delays resulted from changes in plans by the National Museums and the Department of Public Works.
The Department has advised us that final construction and preparation for occupancy will not likely be completed before 1983.
15.6 Department of Transport - Double benefits to Canadian National resulting from failure to consider all significant financial implications of new legislation. When amendments to the Canadian National Railways Capital Revision Act came into force on 1 January 1978, Canadian National (CN) continued to claim reimbursement, under the Railway Act, from the Canadian Transport Commission (CTC) of approximately $150 million for certain prior years' losses. As explained below, this amount had already been paid to CN by the Department of Transport in reimbursing CN's annual deficits. Moreover, subsequent to 1 January 1978, CN has also claimed substantial income tax benefits through application of prior years' losses, although its deficits were fully reimbursed by the Government.
In our view, all the significant financial implications of these matters should have been fully considered and disclosed by the responsible departments to the Ministers of Transport and Finance during the drafting of amendments to the Canadian National Railways Capital Revision Act. The Guidance Manual for the Preparation and Handling of Cabinet Papers issued by the Privy Council Office reflects the expectation of ministers that when an entity submits a proposal to ministers (such as for new legislation), it should consider all relevant factors, fully disclose the impact of the proposal, financial or otherwise, consult other government departments and agencies affected and summarize their views in the proposal.
Payments to Canadian National
From 1933 to 1977, annual appropriation acts allowed the Department of Transport to reimburse CN for its annual deficits. In addition, from 1971, the Railway Act allowed the CTC to reimburse CN for losses incurred in operating certain branch lines and passenger services provided as an imposed public duty. These losses were included in CN's annual deficits. Double payment was not an issue prior to 1 January 1978 because amounts paid by the CTC under the Railway Act reduced CN's annual deficits in the year of the CTC's payment, which in turn decreased amounts paid by the Department of Transport under annual appropriation acts.
On 1 January 1978, amendments to the Canadian National Railways Capital Revision Act came into force. The amendments included provision that future deficits of CN would not be reimbursed by the Government, nor would retained earnings become owing to the Receiver General as in the past. We were advised by the CTC that approximately $150 million claimed by CN under the Railway Act for reimbursement of losses incurred prior to 1975 had not been paid to CN at 1 January 1978 and was not included in the Company's reported financial results.
The change in the Act created a situation in which the CTC payments made after the amendments came into force resulted in what the President of CN, in his 1980 annual report to shareholders, referred to as a "windfall". At that time, the Department of Transport did not advise the CTC of these amendments, and the CTC did not consider whether it should stop payments in respect of the $150 million claimed by CN. Transport officials have stated that, in their opinion, the Department had no way of knowing at that time whether such claims were being processed at the CTC or the amount of such claims outstanding at 1 January 1978.
In 1980, the CTC recognized that CN was being reimbursed twice for losses incurred: first when the deficits that included these losses were reimbursed by the Department of Transport under annual appropriation acts; second when payments were made by the CTC under the Railway Act in 1978, 1979 and 1980. The CTC estimates that these double payments amounted to $53 million. The CTC took action to stop further payments in respect of these losses and is now attempting to assess the validity of the remaining claims, in consultation with the Department of Transport. The Deputy Minister of Transport concurred with the President of the CTC that steps be taken to resolve the matter; the President of the CTC has written to the President of CN.
We have been advised by the Department of Transport that the Government is formulating a position with respect to the $53 million already paid to CN and the remaining outstanding claims of approximately $97 million. We recommend that this matter be resolved by the responsible Ministers.
Income Tax Benefits
CN's financial statements indicate that the Corporation has claimed a reduction in income taxes otherwise due for 1978, 1979 and 1980 as a result of reducing taxable income for those years by applying losses from prior years. Part or all of these losses relate to periods prior to 1 January 1978 when the Company's deficits were fully reimbursed by the Department of Transport under annual appropriation acts. It appears that CN's ability to reduce its taxable income in this manner has provided a financial benefit to the Company which was not fully analysed and disclosed to the appropriate Ministers at the time of drafting amendments to the Canadian National Railways Capital Revision Act.
We recommend that the Departments of Transport and Finance obtain - the information necessary to determine whether, and to what extent, it is appropriate for CN to enjoy currently financial benefits which originate from periods prior to 1 January 1978 when the Company's deficits were reimbursed by the Government. This matter should be resolved on a basis consistent with the intention of Parliament in amending the Canadian National Railways Capital Revision Act.
15.7 Department of Transport - Loss of revenue to Canada from delay in renewing concession at Toronto International Airport. For the past two and one-half years, the Government of Canada's share of revenue from the duty-free shop concession at Toronto International Airport has been paid to the Government in accordance with the terms of a lease which expired on 30 April 1979, even though proposals in response to call for tenders for a new lease were received that would provide substantially more revenue. Since May 1979, the concession has been operated by the previous lessee under the terms of the expired lease.
The lease for the duty-free shop concession is authorized by the Governor in Council on recommendation of the Treasury Board and managed by the Department of Transport. Transport officials informed us that tenders for a new lease were called in May 1979. In October 1979, the Department of Transport's Evaluation Committee examining the tenders recommended that the lease be granted to the highest bidder.
We have been advised by the Department of Transport that since the highest bidder was a foreign company, an application was made by the company to the Foreign Investment Review Agency (FIRA) to operate the duty-free shop concession. The Department of Transport has also advised us that FIRA refused the application but that the company subsequently re-applied. The Department has further advised us that the lease was not awarded to the second highest bidder because it was expected that FIRA would accept the re-application of the foreign company. This would have resulted in a significant increase in concession revenue to Canada.
The Department of Transport requested but did not obtain Treasury Board approval for interim arrangements with the existing concessionaire which would have reduced the revenue loss to Canada. In April 1981, the President of the Treasury Board, in a letter to the Minister of Transport, estimated that the loss of revenue to Canada had amounted to at least $5 million. At the same time he wrote to the Minister responsible for FIRA urging, on behalf of Treasury Board Ministers, that the case then before FIRA be brought before Cabinet as soon as possible. Information from the Department indicates that, irrespective of a decision between the proposals of the highest or second highest bidder, the minimum revenue loss will be approximately $225,000 per month until this issue is resolved.
Our review of financial controls over the operation of the duty-free shop concession at the Toronto airport has indicated the need for a more detailed audit examination. We have brought this matter to the attention of the Department of Transport and have been advised by the Department that its internal audit staff will review the operations of the Department's airport concessions.
We intend to continue our review of the matters included in this observation.
15.8 Overexpended appropriations. For the year ended 31 March 1981, 12 of 31 government departments reported overexpended appropriations. The total amount reported as overexpended was approximately $55 million and is presented on the Government's 1981 Statement of Use of Appropriations which forms part of the Audited Financial Statements of the Government of Canada reproduced in Appendix D of this Report. Details by department are provided in Volume II of the 1981 Public Accounts of Canada. As explained in the following paragraphs, the basis of charging amounts to appropriations was changed in 1980.
Prior to 1980, charges to appropriations on which Parliament had imposed an annual ceiling were recorded in the accounts of Canada and reported in the Public Accounts in accordance with section 30 of the Financial Administration Act (FAA). Section 30 provides that, at the end of the Government's fiscal year, any unused portion of such appropriations will lapse, except for certain payments that may be made in the 30-day period following the end of that year. These payments must be for the purpose of discharging debts payable for work performed, goods received or services rendered before the end of the year, or be payable before the end of the year under any other contractual arrangement entered into by the Government. Accounts payable were recorded at the year end for payments made in the 30-day period.
In 1980, in response to recommendations 24 and 39 of the Government's 1975 Report on the Study of the Accounts of Canada, the Government introduced a change in accounting policy for recording accounts payable at the year end. The acronym commonly used for this policy is PAYE. PAYE required departments to charge to appropriations on which Parliament has imposed an annual ceiling all debts incurred prior to the end of the year for work performed, goods received, services rendered or resulting from contractual arrangements, even though payment of such amounts was not made within the 30-day period following the end of the year. The intent of PAYE, and of recommendations 24 and 39 of the Government's Study, was to provide a more complete reporting of the use of annual appropriations. In prior years, amounts payable that were paid after the 30-day period specified in section 30 of the FAA were listed by department at the back of Volume I of the Public Accounts but were not recorded in the accounts of Canada.
The Report on the Study of the Accounts of Canada recognized that amendments to the FAA would be required to fully implement recommendation 24. The requirement to do so was included in this recommendation. In our Observations in Section 3 of Volume I of the 1980 Public Accounts, we drew attention to the need to amend the FAA to clarify the legal authority for PAYE. At that time, we were advised by the Office of the Comptroller General that amendments would be sought in the coming year. The FAA has not yet been amended.
The Oil Import Compensation Program is administered by the Petroleum Compensation Board within the Department of Energy, Mines and Resources. Under the Program, importers of crude oil and petroleum products are compensated so that the Canadian economy is cushioned from the impact of the large and rapid increases in the price of imported crude oil used in Canada.
15.10 Summary of transactions. A summary of appropriations and expenditures for the eight years to 31 March 1981 under the Oil Import Compensation Program is as follows:
| Fiscal Year | Appropriations | Expenditures |
|
|
(thousands of dollars)
|
|
| 1973-74 | $ 240,000 | $ 157,000 |
| 1974-75 | 1,165,000 | 1,162,000 |
| 1975-76 | 1,685,000 | 1,582,000 |
| 1976-77 | 1,410,000 | 945,000 |
| 1977-78 | 925,000 | 925,000 |
| 1978-79 | 631,000 | 628,000 |
| 1979-80 | 1,800,000 | 1,633,000 |
|
1980-81
|
3,162,000
|
3 162,000
|
|
|
$ 11,018,000
|
$ 10,194,000
|
|
Recoveries of prior
years' expenditures
|
|
69,000
|
| $ 10,125,000 | ||
During the fiscal year ended 31 March 1981, world prices of oil continued to increase at a faster rate than domestic prices. As a result, the rate of compensation paid to importers increased significantly again, and compensation payments increased by more than $1.5 billion over the previous year. Volumes imported decreased by a small amount, but had a negligible effect on total compensation paid.
15.11 Petroleum Compensation Revolving Fund. Section 65.12(1) of the Petroleum Administration Act ( S.C. 1974-75-76, c. 47 ) provides legislative authority for the imposition of a levy on domestic and foreign petroleum as well as on foreign petroleum products that have been processed, consumed or sold in Canada. Section 65.1 stipulates that the proceeds from the levy be for the sole purpose of assisting in meeting the cost of paying compensation on designated high-cost domestic petroleum, as authorized in section 72(4) of the Act. Domestic synthetic crude has been designated as high-cost petroleum.
For administrative purposes, the levy under section 65.12(1) and compensation payments under section 72(4) are handled separately in the Petroleum Compensation Revolving Fund.
A summary of the operations of the Fund since its beginning is presented in the following table. The figures for 1979 and 1980 are shown on a cash basis rather than on an accrual basis as in previous Reports.
| Fiscal Year | Levy | Expenditures |
|
|
(thousands of dollars)
|
|
| 1978-79 (9 months) | $ 66,000 | $ 20,000 |
| 1979-80 | 389,000 | 378,000 |
| 1980-81 | 1,393,000 | 915,000 |
The substantial increase in levy revenue during 1980-81 resulted from a series of levy rate increases during the fiscal year (12 July 1980 - $4.72 per cubic metre; 1 November 1980 - $5.03 per cubic metre; and 1 January 1981 - $15.73 per cubic metre) that brought the rate from a level of $6.29 per cubic metre at 31 March 1980 to $31.77 per cubic metre at 31 March 1981. These increases were outlined in the Notice of Ways and Means Motion to amend the Petroleum Administration Act that accompanied the Budget of 28 October 1980.
The levy rate increases are not intended to provide revenue solely to assist in the payment of compensation on designated high-cost domestic petroleum, as required by section 65.1 of the Petroleum Administration Act. The discussion draft of the Energy Security Act, 1981, presented to Parliament by the Minister of Energy, Mines and Resources, notes that under the Energy Administration Act (the new name for the Petroleum Administration Act), section 65.1 is to be repealed. This will permit proceeds from the levy to be used to assist in meeting the cost of making other petroleum compensation payments under the Energy Administration Act. It is because of these circumstances that levy revenue exceeded expenditures by $478 million in 1980-81.
The increase in expenditures during 1980-81 resulted in part from the compensation rate increases noted earlier and in part from the increased volumes of domestic synthetic crude being consumed.
15.12 Audit scope. Our examination of the administration of expenditures of the Oil Import Compensation Program and of the operations of the Petroleum Compensation Revolving Fund was made in accordance with generally accepted auditing standards and, accordingly, included such tests and other procedures as we considered necessary in the circumstances, except as explained in the following paragraphs.
The Petroleum Compensation Board, by virtue of its policy and program regulations, has recognized the need to have some audit work performed on all claims submitted for compensation and on all petroleum production levy payments received. Accordingly, the Board has made arrangements with independent auditors, generally the claimants' shareholders' auditors, to confirm that the supporting documentation provided to the Board agrees with documentation recorded in the records of the claimants and to conduct certain other specific tests. The Board's staff performs similar audits on claims of small importers and on claims under the high-cost domestic petroleum program. The petroleum levy, on the other hand, is audited by the audit staff of the Department of National Revenue - Customs and Excise, pursuant to an Order in Council under section 5(3) of the Energy Supplies Emergency Act ( S.C. 1973-74, c. 52 ).
At the time of our examination, the Board had not received from the claimants' auditors all reports relating to amounts of compensation paid to 31 March 1981. Because of this, until we review the outstanding reports, we will not be able to fully satisfy ourselves as to the validity of the information reported by the claimants to the Board. Our review of reports received during the year, which were not available for examination and reporting in 1980, disclosed no significant discrepancies.
At 31 August 1981, the following amounts of compensation had not been reported on by the claimants' auditors:
| Fiscal Year |
Total
Compensation Payments |
Compensation
Paid but not Reported Upon |
Percentage
Not Reported Upon |
|
|
(thousands of dollars)
|
|
|
| 1979-80 | $ 1,633,000 | $ 343,000 | 21.0% |
|
1980-81
|
3,162,000
|
3,150,000
|
99.6%
|
| $ 4,795,000 | $ 3,493,000 | ||
15.13 Conclusion. In our opinion, except for any significant discrepancies that may be determined when outstanding reports from claimants' auditors are received, payments in the fiscal year ended 31 March 1981 have been properly processed and are in conformity with applicable legislation, regulations and guidelines.
15.14 Outstanding litigation. Our 1980 Report noted the legal action undertaken by an importer to reverse a $1.9 million recovery by the Board of excessive freight compensation. Our follow-up on this matter disclosed that the legal action is continuing.
15.15 Matters previously reported on and now resolved. In our 1980 Report, it was pointed out that importing companies must refund compensation on imported oil which is subsequently exported. We noted one case where, in our view, the method used by an importer to deduct exports resulted in excessive compensation of $3.7 million. The Board did not concur with our view and referred the matter to the Department of Justice for an opinion.
The Department of Justice has since given an opinion that supports our view, and the Board has recovered the excess compensation.