Consolidated financial statements

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Government of Canada
Consolidated Statement of Operations and Accumulated Deficit for the year ended March 31, 2020

Government of Canada
Consolidated Statement of Financial Position as at March 31, 2020

Government of Canada
Consolidated Statement of Change in Net Debt for the year ended March 31, 2020

Government of Canada
Consolidated Statement of Cash Flow for the year ended March 31, 2020

Notes to the consolidated financial statements of the Government of Canada

1. Summary of significant accounting policies

Reporting entity

The reporting entity of the Government of Canada includes all of the government organizations which comprise the legal entity of the government as well as other government organizations, including Crown corporations, which are separate legal entities but are controlled by the government. For financial reporting purposes, control is defined as the power to govern the financial and operating policies of an organization with benefits from the organizations activities being expected, or the risk of loss being assumed by the government. All organizations defined as departments and as Crown corporations in the Financial Administration Act are included in the reporting entity. The definition of control for financial reporting purposes may be met by other organizations not listed in the Financial Administration Act, these organizations are therefore included in the government's reporting entity if their revenues, expenses, assets or liabilities are significant.

Some Crown corporations and not-for-profit organizations rely on the government for a portion of their financing. The consolidated Crown corporations that receive significant funding from the government include Atomic Energy of Canada Limited, Canada Infrastructure Bank, Canadian Air Transport Security Authority, Canadian Broadcasting Corporation, Windsor-Detroit Bridge Authority and VIA Rail Canada Inc. The consolidated not-for-profit organizations that receive significant funding are the Canada Foundation for Innovation and the Canada Foundation for Sustainable Development Technology. The financial activities of all of these entities are consolidated in these financial statements on a line-by-line and uniform basis of accounting after eliminating significant inter-governmental balances and transactions. Detailed information on the consolidated entities is included in Section 4 (unaudited) of this volume.

Enterprise Crown corporations are government business enterprises able to raise substantial portions of their revenues through commercial business activity and are therefore considered self-sustaining. The major enterprise Crown corporations include the Bank of Canada, Canada Mortgage and Housing Corporation, Canada Post Corporation and Export Development Canada. In addition, there are a number of self-sustaining government business enterprises that are not Crown corporations but which are controlled by the government. These include various Canada Port Authorities. Investments in government business enterprises are recorded under the modified equity method. Detailed information on the enterprise Crown corporations is included in Section 9 (unaudited) of this volume.

The Canada Pension Plan (CPP), which includes the assets of CPP under the administration of the Canada Pension Plan Investment Board, is excluded from the reporting entity because changes to CPP require the agreement of two thirds of participating provinces and it is therefore not controlled by the government.

Basis of accounting

These consolidated financial statements are prepared using the government's accounting policies stated below, which are based on Canadian public sector accounting standards. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian public sector accounting standards.

Foreign currency translation

Transactions involving foreign currencies are translated into Canadian dollar equivalents using rates in effect at the time of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated using rates at March 31. Gains and losses resulting from foreign currency translation are reported on the Consolidated Statement of Operations and Accumulated Deficit according to the activities to which they relate. Net gains and losses relating to the foreign exchange accounts, foreign debt, swap and foreign exchange forward agreement revaluations are presented with investment revenues from foreign exchange accounts under net foreign exchange revenues. Net gains and losses relating to loans, investments and advances are presented with the return on investments from these loans, investments and advances under other revenues. Net foreign exchange gains and losses relating to transfer payments are reported in the transfer payment expenses under other transfer payments. Net foreign exchange gains and losses relating to departmental sale or purchase of goods or services in foreign currency are reported under other expenses.

Measurement uncertainty

The preparation of consolidated financial statements requires the government to make estimates and assumptions that affect the reported and disclosed amounts of assets, liabilities, revenues and expenses in the consolidated financial statements and accompanying notes at March 31. The estimates are based on facts and circumstances, historical experience, general economic conditions and reflect management's best estimate of the related amount at the end of the reporting period. Estimates and underlying assumptions are reviewed annually at March 31. Revisions to accounting estimates are recognized in the period in which estimates are revised if revisions affect only that period or in the period of revision and future periods if revisions affect both current and future periods.

Measurement uncertainty that is material exists when it is reasonably possible that a material variance could occur in the reported or disclosed amount in the near term. Near term is defined as a period of time not to exceed one year from March 31. The government has determined that measurement uncertainty exists with respect to the reported amounts for public sector pensions and other employee and veteran future benefits (Note 10); the provision for contingent liabilities (Note 7); the accrual of tax revenues and the related amounts receivable and payable and the allowance for doubtful accounts (Note 4 and Note 13); environmental liabilities and asset retirement obligations (Note 8); enterprise Crown corporations and other government business enterprises (Note 15); other loans, investments and advances (Note 16); the expected useful life of tangible capital assets (Note 17); contractual rights (Note 19b); and the impact of the COVID-19 pandemic (Note 4, Note 10, Note 13, and Note 21). It is reasonably possible that the government's reassessments of these estimates and assumptions could require a material change in reported amounts or disclosures in the consolidated financial statements. Refer to the specific note disclosures for more information on measurement uncertainty.

Additional significant accounting policies

To facilitate the understanding of these consolidated financial statements, the significant accounting policies related to the following financial statement line items are detailed in the referenced note.

• revenues (Note 4)
• expenses (Note 5)
• contingent liabilities (Note 7)
• environmental liabilities and asset retirement obligations (Note 8)
• unmatured debt (Note 9)
• public sector pensions and other employee and veteran future benefits (Note 10)
• taxes and other accounts receivable (Note 13)
• foreign exchange accounts (Note 14)
• enterprise Crown corporations and other government business enterprises (Note 15)
• other loans, investments and advances (Note 16)
• tangible capital assets and inventories (Note 17)
• contractual obligations and contractual rights (Note 19)
• segmented information (Note 20)
• subsequent events (Note 21)

2. Comparative information

The Government of Canada has changed the presentation of the Consolidated Statement of Operations and Accumulated Deficit to separately present the recognition of actuarial gains and losses related to public sector pensions and other employee and veteran future benefits. These amounts were previously presented within the Other expenses line item but are now presented in a new consolidated financial statement line item titled net actuarial losses. A new subtotal line titled Annual deficit before net actuarial losses has also been added. The purpose of this revised presentation is to enhance financial reporting and decision-making for users of the consolidated financial statements by isolating the impacts of re-measurements of public sector pension and other employee and veteran future benefit obligations which are often significant and could potentially mask underlying events and trends in current government spending. The related comparative figures have been reclassified to conform to the current year’s presentation.

In addition, the presentation of the Consolidated Statement of Cash Flow changed to segregate cash from non-cash items related to the amortization of discounts and premiums on debt and for the provision for valuation on other loans, investments and advances. These were included in the net change in other accounts line item under operating activities and in repayment of other loans, investments and advances line item under investing activities in previous years.

Amounts have also been reclassified in certain notes to the consolidated financial statements.

3. Spending and borrowing authorities

a. Spending authorities

The authority of Parliament is required before moneys can be spent by the government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes. When Parliament is in session but not sitting or is dissolved for the purposes of general election, section 30 of the Financial Administration Act authorizes the Governor General, under certain conditions, to issue a special warrant authorizing the government to withdraw funds from the Consolidated Revenue Fund. During fiscal year 2020, there were no requirements to issue special warrants to support expenditures. The government uses the full accrual method of accounting to prepare its Budget and present its current consolidated financial statements. However, the spending authorities voted by Parliament are on an expenditure basis, which uses only a partial accrual method of accounting. During the year, expenditures were made under the authorities indicated in the following table:

The use of budgetary expenditure authorities reported in the preceding table differs from the total expenses reported in the Consolidated Statement of Operations and Accumulated Deficit. The difference is due to various factors. The transactions of consolidated specified purpose accounts and of certain Crown corporations and other controlled entities are consolidated in the financial statements but are not included in the budgetary expenditure authorities available for use. Transfer payments to organizations within the government reporting entity are recorded against a budgetary expenditure authority in the year they are disbursed to the organization, but they are recorded as a consolidated expense only when the transfer is authorized and all eligibility criteria have been met by the ultimate recipient outside of the government reporting entity. Provisions for valuation of assets and liabilities are also not included in spending authorities.

In addition to the authorities for budgetary expenditures, non-budgetary spending of $245,913 million ($231,653 million in 2019) was authorized for loans, investments and advances. A net amount of $60,412 million ($50,784 million in 2019) was used, an amount of $339 million ($375 million in 2019) lapsed and an amount of $185,162 million ($180,494 million in 2019) is available for use in subsequent years.

Details about the source and disposition of authorities (unaudited) and the details of ministerial expenditures are provided in Volume II of the Public Accounts of Canada.

b. Over-expenditure of spending authorities

During the fiscal year, the CORCAN Revolving Fund, a special operating agency within Correctional Service Canada, overspent its authority limit by $6,120,686. Details (unaudited) of this overexpended authority can be found in the ministerial sections of Volume II of the Public Accounts of Canada.

c. Borrowing authorities

Authority to borrow is granted through Part IV of the Financial Administration Act (FAA) and the Borrowing Authority Act (BAA).

Under the FAA and the BAA, the Minister of Finance (the Minister) may borrow money on behalf of Her Majesty in Right of Canada with the authorization of the Governor in Council (GIC). Subject to limited exceptions, borrowings undertaken by the Minister – together with amounts borrowed by agent Crown corporations and Canada Mortgage Bonds guaranteed by the Canada Mortgage and Housing Corporation – may not exceed the maximum amount of $1,168,000 million specified in the BAA. As at March 31, 2020, these borrowings totalled $1,075,082 million ($1,015,813 million in 2019).

Additionally, Part IV of the FAA gives the Minister, with the approval of the GIC, the power to carry out borrowings that have been authorized by Parliament, and empowers the GIC to authorize the Minister to borrow for the specific purposes of refinancing outstanding debt, extinguishing or reducing liabilities, and making payments in extraordinary circumstances, such as natural disasters.

The GIC specifies a maximum amount of borrowing for the given fiscal year. In 2020, the GIC specified $330,000 million ($300,000 million in 2019) to be the maximum aggregate amount of principal that may be borrowed by the Minister during that fiscal year. The maximum aggregate amount of principal is the sum of i) the maximum stock of treasury bills anticipated to be outstanding during the year, ii) the total value of refinanced and anticipated new issuances of marketable bonds and retail debt and iii) an amount to facilitate intra-year management of the debt and foreign exchange accounts. During the year, $284,549 million was borrowed ($240,708 million in 2019).

d. Source of budget amounts

The budget amounts included in the Consolidated Statement of Operations and Accumulated Deficit and the Consolidated Statement of Change in Net Debt are derived from the amounts that were budgeted for 2020 in the March 2019 Budget Plan (Budget 2019). To enhance comparability with actual 2020 results, Budget 2019 amounts have been reclassified to conform to the current year's presentation in the consolidated financial statements, with no overall impact on the budgeted 2020 annual deficit.

Since actual opening balances of the accumulated deficit and net debt were not available at the time of preparation of Budget 2019, the corresponding amounts in the budget column have been adjusted to the actual closing balances of the previous year.

4. Revenues

The government has four major types of revenues: tax revenues, employment insurance premiums, fuel charge proceeds and other revenues. Tax revenues are comprised of income tax revenues from personal, corporate and non-resident taxes, and other taxes and duties. Other revenues are mainly comprised of consolidated Crown corporations revenues, other program revenues from returns on investments and proceeds from sales of goods and services, as well as other miscellaneous revenues.

a. Fuel charge proceeds

As part of the federal carbon pollution pricing system, the fuel and excess emission charges are collected pursuant the Greenhouse Gas Pollution Pricing Act and are applicable for jurisdictions that voluntarily adopt the federal carbon pollution pricing system and for those that do not meet the federal benchmark requirements. The charge on fossil fuels for regulated fuel distributors applied as of April 1st, 2019, in Ontario, New Brunswick, Manitoba and Saskatchewan, on July 1st, 2019, in Nunavut and in the Yukon, and on January 1st, 2020, in Alberta. As of March 31, 2020, there were $2,655 million of fuel charge proceeds recorded (nil in 2019).

b. Other taxes and duties

c. Federal tax objections

As of March 31, 2020, $18,273 million of federal taxes were under objection ($16,068 million for 2019).

5. Expenses

The government has three major types of expenses: transfer payments, other expenses and public debt charges.

Transfer payments are monetary payments, or transfers of goods, services, or assets to third parties. These transfers do not result in the acquisition by the government of any goods, services, or assets.

Other expenses include personnel, professional and special services, repair and maintenance, utilities, materials and supplies, as well as amortization of tangible capital assets. Provisions to reflect changes in the value of assets or liabilities, such as provisions for bad debts, loans, investments and advances and inventory obsolescence, as well as utilization of inventories and prepaid expenses, and other are also included in other expenses. Public sector pensions and other employee and veteran future benefit expenses are included in personnel expenses except for Net actuarial gains and losses which is presented separately on the Consolidated Statement of Operations and Accumulated Deficit (Note 2).

Public debt charges include interest, servicing costs, costs of issuing new borrowings, amortization of premiums and discounts on market debt including amounts arising on the extinguishment of debt, as well as interest on public sector pensions and other employee and veteran future benefits.

Expenses in the Consolidated Statement of Operations and Accumulated Deficit include:

a. Major transfer payments to other levels of government

Major transfer payments to other levels of government include the Canada Health Transfer, the Canada Social Transfer and fiscal arrangements pursuant to the Federal-Provincial Fiscal Arrangements Act. Other major transfers include contributions under the federal Gas Tax Fund program and the Home Care and Mental Health Transfer.

b. Employment insurance

Pursuant to the Employment Insurance Act, employment insurance includes income benefits and support measures paid to individuals of $17,660 million ($16,717 million in 2019) and payments to provinces and territories related to Labour Market Development Agreements of $2,329 million ($2,171 million in 2019). The Employment Insurance Act was amended to authorize $1,761 million of emergency response benefit payments to individuals eligible for Employment insurance (EI), as part of the Government's Economic Response Plan. Refer to Note 5d) for further information on the Canada Emergency Response Benefit (CERB).

c. Fuel charge proceeds returned

As part of the federal carbon pollution pricing system, the government will return all direct proceeds from the fuel charge to the jurisdiction of origin in the following manner:

• For jurisdictions that voluntarily adopt the federal carbon pollution pricing system, directly to the governments of those jurisdictions beginning in 2020. As of March 31, 2020, $6 million were paid or payable;
• For other jurisdictions that do not meet the federal benchmark requirements:

1. Directly to individuals and families through Climate Action Incentive (CAI) payments which started in the 2018 taxation year. These payments are provided for under the Income Tax Act and are delivered through the personal income tax system. In 2020, $2,630 million ($664 million in 2019) of CAI payments were made or were payable by the government;
2. To particularly affected sectors including schools, hospitals, small and medium-sized enterprises, colleges and universities, municipalities, non-profit organizations, and Indigenous communities beginning in 2020. As of March 31, 2020, $7 million were paid or payable. These proceeds returned were included in Other transfer payments expenses on the Consolidated Statement of Operations and Accumulated Deficit as disclosed in Note 5e).

d. Canada Emergency Response Benefit

The CERB provides Canadians who meet certain eligibility criteria with $2,000 per four-week period up to a maximum of 16 weeks starting March 15, 2020. Subsequent to March 31, 2020, it was announced that the benefit would be extended to a maximum of 28 weeks.

CERB payments to individuals eligible for EI are recorded as part of EI expenses on the Consolidated Statement of Operations and Accumulated Deficit, and have been charged to the EI Operating Account. Payments to those individuals not eligible for EI are recorded under the Canada Emergency Response Benefit on the Consolidated Statement of Operations and Accumulated Deficit, and have not been charged to the EI Operating Account. Combined, CERB expenses totaled $6,500 million in 2020.

e. Other transfer payments

Other transfer payments totalling $54,405 million ($51,753 million in 2019) include various amounts paid or payable through federal programs which stabilize market prices for commodities, develop new technologies, conduct research, provide international development assistance, support health care and infrastructure of First Nations and Inuit communities, support social housing and families and promote educational and cultural activities. Also included are expenses of other consolidated entities and other miscellaneous payments. The various types of transfer payments are being delivered by departments according to their departmental legislative mandates. Details can be found in Table 3.6 of Section 3 (unaudited) of this volume.

f. Public debt charges

g. Total expenses by segment

The government has defined segments as Ministries which groups the activities of departments, agencies and consolidated Crown corporations and other entities for which a Minister is responsible to Parliament. Additional segmented information is provided in Note 20. The following table presents the total expenses by segment after the elimination of internal transactions:

h. Total expenses by type of resource used in operations

The following table presents the total expenses by main objects of expense:

6. Accumulated deficit

The government includes in its revenues and expenses certain accounts established for specified purposes. Legislation requires that revenues received for purposes specified in the legislation be credited to these accounts and that related payments be charged to these accounts. Any deficiency of revenues over payments must be met through future revenues or transfers credited to these accounts. The following table shows the balance of these consolidated accounts and accumulated other comprehensive income included in the accumulated deficit:

Accumulated other comprehensive income

For enterprise Crown corporations and other government business enterprises recorded under the modified equity method, certain unrealized gains and losses on financial instruments and certain actuarial gains and losses related to pensions and other employee future benefits are recorded in other comprehensive loss or income in accordance with International Financial Reporting Standards (IFRS). The unrealized gains and losses on financial instruments reflect changes in the fair value of financial assets measured at fair value through other comprehensive income, or derivative instruments used in hedging activities and are excluded from the calculation of profit or loss until realized. Actuarial gains and losses related to pensions and other employee future benefits reflect differences between the actual and expected returns on plan assets as well as the difference between actual and expected experience and changes in actuarial assumptions used to determine the present value of the benefit obligations. These actuarial gains and losses are recorded directly to retained earnings without reclassification to profit or loss in a subsequent period.

Other comprehensive loss or income is excluded from the calculation of the government's annual deficit. It is instead recorded directly to the government’s accumulated deficit. Upon realization of the gains and losses on financial instruments, the associated amounts are reclassified to the profit or loss of enterprise Crown corporations and other government business enterprises and then reflected in the government's annual deficit. The actuarial gains and losses related to pensions and other employee future benefits are not reclassified.

The following table presents the different components of other comprehensive income as well as accumulated other comprehensive income included in the government's accumulated deficit:

7. Provision for contingent liabilities

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. Contingent liabilities are potential liabilities which may become actual liabilities when one or more future events not wholly within the government’s control occur or fail to occur.

The following table presents the different components of the provision for contingent liabilities:

a. Claims

The government's estimated provision for claims is determined using relevant historical experience, facts and circumstances. In situations where the estimate of loss is based on a range of amounts, the amount accrued within the range is management’s best estimate of the potential loss which may be at an amount lesser than the maximum of the range. Significant exposure to a liability could exist in excess of what has been accrued. Claims for which the outcome is not determinable and for which an amount has not been accrued are estimated at approximately $4,648 million ($8,528 million in 2019).

Pending and threatened litigation and other claims

There are thousands of pending and threatened litigation cases as well as claims outstanding against the government. These claims include items with pleading amounts and items where an amount is not specified. While the total amount claimed in these actions is significant, their outcomes are not known in all cases. As a result, provisions that are recorded are based on management’s best estimate of the potential loss.

Specific claims

Specific claims deal with the past grievances of First Nations related to Canada’s obligations under historic treaties or the way it managed First Nations’ funds or other assets. The past grievances may be proceeding via the legal system or via the specific claims program. The Government of Canada will pursue a settlement agreement with the First Nation when a claim demonstrates an outstanding lawful obligation. There are currently 593 (567 in 2019) specific claims under negotiation, accepted for negotiation or under review. A liability is estimated and recorded for claims that have progressed to a point where quantification is possible. This estimate also includes projections based on historical rates and costs of settlement for similar claims and includes an estimate for claims which have been filed but not yet assessed.

Comprehensive land claims

Comprehensive land claims arise in areas of the country where Aboriginal rights and title have not been resolved by treaty or by other legal means. There are currently 84 (79 in 2019) comprehensive land claims under negotiation, accepted for negotiation or under review. A liability is estimated and recorded for claims that have progressed to a point where quantification is possible. This estimate also includes projections based on historical rates and costs of settlement for similar claims.

b. Guarantees provided by the government

Guarantees provided by the government include guarantees on the borrowings of enterprise Crown corporations and other government business enterprises, loan guarantees, insurance programs managed by the government or agent enterprise Crown corporations, and other explicit guarantees. At March 31, guarantees provided by the government include:

The authorized limit represents the aggregate total of various types of authorities of government bodies as stipulated in legislation, legal agreements or other documents that may be in force at any one time. The principal amount outstanding represents the total amount of guarantees provided as at the end of the fiscal year.

c. Other

Assessed taxes under appeal

Contingent liabilities include previously assessed federal taxes where amounts are being appealed to the Tax Court of Canada, the Federal Court of Canada, or the Supreme Court of Canada. As of March 31, 2020, an amount of $4,373 million ($4,467 million in 2019) was being appealed to the courts. The government has recorded, in the amounts payable related to tax or in reduction of the amounts receivable from taxpayers, as applicable, the estimated amount of appeals that are considered likely to be lost and that can be reasonably estimated.

International organizations

The government has callable share capital whereby certain international organizations have the ability to require payments. As at March 31, 2020, the callable share capital amounts to $36,533 million ($34,750 million in 2019). No payments (nil in 2019) have been requested by international organizations or paid by the government in the year related to the callable share capital.

Insurance programs of agent enterprise Crown corporations

Four agent enterprise Crown corporations operate insurance programs for the government. In the event that the corporations have insufficient funds, the government will have to provide financing. The Canada Deposit Insurance Corporation operates the Deposit Insurance Fund which provides basic protection coverage to depositors for up to $100,000 of eligible deposits with each member bank, trust or loan company; the Canada Mortgage and Housing Corporation operates the Mortgage Insurance Fund which provides insurance for mortgage lending on Canadian housing by private institutions and the Mortgage-Backed Securities Guarantee Fund which guarantees the timely payment of the principal and interest for investors of securities based on the National Housing Act through the Mortgage-Backed Securities program and the bonds issued by the Canada Housing Trust through the Canada Mortgage Bond program; Export Development Canada provides export and foreign investment insurance to help with export trade; and Farm Credit Canada sells group creditor life and accident insurance to its customers through a program administered by a major insurance provider. At March 31, 2020, total insurance in force amounts to $1,802,143 million ($1,772,785 million in 2019). The government expects that all four corporations will cover the cost of both current claims and possible future claims.

8. Environmental liabilities and asset retirement obligations

Environmental liabilities represent the amount required to remediate contaminated sites to current minimum environmental standards.

Asset retirement obligations represent the amount required to retire tangible capital assets at the end of their useful lives.

Environmental liabilities and asset retirement obligations include:

a. Remediation of contaminated sites

The government's “Federal Approach to Contaminated Sites” sets out a framework for management of contaminated sites using a risk-based approach. Under this approach the government has inventoried the contaminated sites identified on federal lands or on lands where the government has assumed responsibility for the clean-up, allowing them to be classified, managed and recorded in a consistent manner. This systematic approach aids in the identification of the high risk sites in order to allocate limited resources to those sites which pose the highest risk to human health and the environment.

The government has identified 6,860 sites (7,011 sites in 2019) where contamination may exist and assessment, remediation and monitoring may be required. Of these, the government has identified 2,444 sites (2,433 sites in 2019), where action is required and for which a gross liability of $7,117 million ($6,230 million in 2019) has been recorded. This liability estimate has been determined based on site assessments performed by environmental experts. In addition, a statistical model based upon a projection of the number of sites that will proceed to remediation and upon which current and historical costs are applied is used to estimate the liability for a group of unassessed sites. This group includes 3,562 unassessed sites (3,673 sites in 2019), of which 1,464 sites (1,478 sites in 2019) are projected to proceed to remediation and for which an estimated liability of $258 million ($248 million in 2019) has been recorded. These two estimates combined, totalling $7,375 million ($6,478 million in 2019), represents management's best estimate of the costs required to remediate sites to the current minimum environmental standard for its use prior to contamination, based on information available on March 31.

For the remaining 854 sites (905 sites in 2019), no liability for remediation has been recognized. Some of these sites are at various stages of testing and evaluation and if remediation is required, liabilities will be reported as soon as a reasonable estimate can be determined. For other sites, the government does not expect to give up any future economic benefits (there is likely no significant environmental impact or human health threats). These sites will be re-examined and a liability for remediation will be recognized if future economic benefits will be given up.

When the liability estimate is based on a future cash requirement, the amount is adjusted for inflation using a forecast CPI rate of 2.0% (2.2% in 2019). Inflation is included in the undiscounted amount. The Government of Canada's cost of borrowing by reference to the actual zero-coupon yield curve for Government of Canada bonds has been used to discount the estimated future expenditures. March 2020 discount rates range from 0.37% (1.55% in 2019) for a 1-year term to 1.37% (1.92% in 2019) for a 30 or greater year term.

Also, during the year, 386 sites (589 sites in 2019) were closed as they were either remediated or assessed to confirm that they no longer meet all the criteria required to record a liability for contaminated sites.

b. Other environmental liabilities

The government has identified approximately 484 unexploded explosive ordnance (UXO) suspected sites (532 in 2019) for which clearance action may be necessary. Of these sites, 43 (43 in 2019) are confirmed UXO affected sites. Based on management's best estimates, a liability of $110 million ($115 million in 2019) has been recorded for clearance action on 9 of the confirmed UXO sites (9 in 2019). Remediation has not been completed for any sites during the year (1 in 2019). The remaining 475 suspect sites (523 in 2019) are currently in the assessment stage and a reasonable estimate cannot yet be determined. Of these sites, the obligation for clearance action is likely for 23 of them, indeterminable for 50 and unlikely for the 402 remaining.

c. Asset retirement obligations

The asset retirement obligation is $7,186 million ($6,622 million in 2019) of which Atomic Energy of Canada Ltd. has recorded $7,185 million ($6,614 million in 2019) for nuclear facility decommissioning.

The changes in the asset retirement obligations during the year are as follows:

The undiscounted future expenditures, adjusted for inflation, for the planned projects comprising the liability are $16,263 million ($15,901 million at March 31, 2019).

Key assumptions used in determining the provision are as follows:

The government's ongoing efforts to assess contaminated sites, UXO affected sites and asset retirement obligations may result in additional environmental liabilities.

9. Unmatured debt

Unmatured debt consists of market debt, cross currency swap revaluations, capital lease obligations and the obligation under public-private partnerships.

Unmatured debt includes:

Unamortized discounts result from Treasury bills and Canada bills which are issued at a discount in lieu of interest. Discounts or premiums also result from the government's bond buyback program and from issuance of market debt when the face value of the instrument issued differs from the proceeds received. The unamortized portion represents the amount of premium and discount that has not yet been recorded to public debt charges.

At March 31, 2020, the fair value of market debt including unamortized discounts and premiums is $823,221 million ($757,260 million in 2019). For marketable bonds denominated in Canadian dollars and foreign currencies, treasury bills issued in Canadian dollars, retail debt, Canada bills and medium-term notes issued in US dollars and Euros, fair values are established using market quotes or the discounted cash flow calculated using year-end market interest and exchange rates.

The government has entered into individual cross-currency swap contracts with various counterparties. Terms and conditions associated with these outstanding contracts are established using International Swaps and Derivatives Association (ISDA) master agreements, which are in place with each counterparty. Cross-currency swaps are used primarily to fund foreign-denominated asset levels in the foreign exchange accounts.

Included in Cross-currency swap revaluations is $702 million ($988 million at March 31, 2019) related to individual cross-currency swap contracts that have a net foreign-exchange asset value to the government upon revaluation and $11,294 million ($8,262 million at March 31, 2019) relating to individual cross-currency swap contracts that have a net foreign-exchange liability value, resulting in an overall cross-currency swap net liability revaluation of $10,592 million ($7,274 million at March 31, 2019).

a. Market debt

The following table presents the contractual maturity of debt issues and interest rates by currency and type of instrument at gross value (in Canadian dollars) and the effective weighted average annual interest rates as at March 31, 2020:

b. Obligation related to capital leases

The total obligation related to capital leases as at March 31, 2020, is $2,913 million ($2,893 million in 2019). Interest on this obligation of $165 million ($175 million in 2019) is reported in the Consolidated Statement of Operations and Accumulated Deficit as part of public debt charges. At March 31, future minimum lease payments are summarized as follows:

A significant number of leases have a duration from inception that falls within the range of 10 to 25 years.

10. Public sector pensions and other employee and veteran future benefits

The accrued benefit obligations in respect of public sector pensions and other employee and veteran future benefits are presented net of pension assets, unrecognized net actuarial gains or losses and valuation allowance, as well as contributions and benefits paid by some of the consolidated Crown corporations and other entities after their measurement date of December 31 up to March 31, in the Consolidated Statement of Financial Position.

a. Overview of benefits

i. Pension benefits

The government sponsors a number of defined benefit pension plans covering substantially all the employees of the federal public service, as well as certain Public Service corporations as defined in the Public Service Superannuation Act, territorial governments, members of the Canadian Forces (including the Reserve Force), members of the Royal Canadian Mounted Police, federally appointed judges and Members of Parliament, including Senators. The public service, Canadian Forces—Regular Force and Royal Canadian Mounted Police pension plans represent the three main public sector pension plans sponsored by the government. In addition, some of the consolidated Crown corporations and other entities maintain their own defined benefit pension plans covering substantially all of their employees. In this note, the term "employees" is used in a general manner to apply to plan members of the different groups.

The defined benefit pension plans are designed to provide employees with a retirement income during their lifetime and, in the case of government-sponsored plans, are indexed to inflation. The indexation for Crown corporations and other entities pension plans varies depending on the specific plan. In the event of death, the pension plans also provide an income for a plan member's eligible survivors and dependants.

Pension benefits generally accrue as follows:

• For the three main public sector pension plans, pension benefits generally accrue based on a member's average earnings during the best five consecutive years of earnings and years of pensionable service. Plan members can accrue up to a maximum of 35 years at a rate of 2% per year of pensionable service. Pension benefits are coordinated with the Canada and the Quebec Pension Plan benefits at age 65.
• For the Canadian Forces—Reserve Force pension plan, pension benefits accrue at a rate of 1.5% per year up to a maximum of 35 years based on total pensionable service and pensionable earnings over the service period, and are coordinated with the Canada and the Quebec Pension Plan benefits at age 65.
• For the Members of Parliament retiring allowance plan, basic allowances accrue at a rate of 3% per year of pensionable service multiplied by the average of the best five consecutive years of sessional indemnity and/or pensionable earnings up to a maximum of 75% of the plan member's average sessional indemnity and/or pensionable earnings as applicable. For service after December 31, 2015, retiring allowance benefits are coordinated with the Canada and the Quebec Pension Plan benefits at age 60. Members of Parliament are entitled to benefits after they have contributed to the plan for at least six years.
• For federally appointed judges, pension benefits do not have an explicit accrual rate. Instead, federally appointed judges may retire with a pension equivalent to two thirds of the salary annexed to their office, once the member has completed 15 years of pensionable service and the sum of the member's age and years of service equals 80 or more.
• For the consolidated Crown corporations and other entities pension plans, pension benefits accrue depending on the terms of the plans; generally based on a combination of an accrual rate per year of pensionable service and pensionable earnings average as per plan terms. Some plans are closed to new entrants.

ii. Other future benefits

In addition to pension plans, the government and the consolidated Crown corporations and other entities sponsor different types of future benefit plans, with varying terms and conditions. The benefits are available to employees during or after employment or upon retirement. Other future benefits include disability and associated benefits available to war veterans, current and retired members of the Canadian Forces and the Royal Canadian Mounted Police, their survivors and dependants, health care and dental benefits available to retired employees and their dependants, accumulated sick leave entitlements, severance benefits and workers’ compensation benefits.

b. Financing arrangements

The government has a statutory obligation to pay the pension benefits it sponsors. Pursuant to pension legislation, the transactions for funded and unfunded pension benefits are tracked in the pension accounts within the accounts of Canada. The details (unaudited) of the pension accounts can be found in Section 6 of this volume.

i. Funded pension benefits

Pension benefits are generally financed from employee and employer contributions, as well as investment earnings. Pension benefits funded by the government relate to post March 2000 service that falls within the Income Tax Act limits for the three main public sector pension plans and all service for the Canadian Forces—Reserve Force pension plan. An amount equal to contributions less benefit payments and other charges is invested by the PSPIB. Funded pension benefits also relate to consolidated Crown corporations and other entities where pension plans' assets are held in external trusts that are legally separate from Crown corporations and other entities.

ii. Unfunded pension benefits

For unfunded pension benefits, separate invested funds are not maintained. These relate to all pre April 2000 service, and only to post March 2000 service that falls above the Income Tax Act limits for the three main public sector pension plans, all service periods for the pension plans of the federally appointed judges and Members of Parliament, and some of the consolidated Crown corporations and other entities' pension plans. Employee and employer contributions for unfunded pension benefits sponsored by the government are part of general government funds. Contributions amounted to $1,152 million ($3,254 million in 2019) of which $127 million ($86 million in 2019) represents regular employer contributions, $956 million ($3,107 million in 2019) represents special employer contributions, and $69 million ($61 million in 2019) represents employee contributions.

iii. Other future benefits

Other employee and veteran future benefits sponsored by the government and almost all of the other employee future benefits sponsored by the consolidated Crown corporations and other entities are unfunded. The health care and dental plans for retired employees are contributory plans, whereby contributions by retired plan members are made to obtain coverage. These contributions amounted to $473 million ($456 million in 2019). The cost of benefits earned and benefits paid are presented net of these contributions. Additional details can be found in Section 6 (unaudited) of this volume.

c. Actuarial valuations

i. For funding purposes

Pursuant to the Public Pensions Reporting Act, actuarial valuations of the pension plans sponsored by the government are performed at least every three years to determine the state of the pension plans, as well as to assist in making informed decisions regarding the financing of the government's pension benefit obligations. The actuarial assumptions underlying the valuations are based on the actuary's best estimates.

The most recent triennial actuarial valuations were conducted as at March 31, 2016, for the Canadian Forces—Regular Force and Canadian Forces—Reserve Force; as at March 31, 2017, for the public service pension plan; and as at March 31, 2018, for the Royal Canadian Mounted Police pension plan. For the Members of Parliament and the federally appointed judges pension plans, the valuations as at March 31, 2019, are currently in progress.

Federally regulated private pension plans sponsored by consolidated Crown corporations and other entities are governed by the provisions of the Pension Benefits Standards Act, 1985 and are required to adhere to the directives of the Superintendent of Financial Institutions. The actuarial valuations are conducted at least every three years, or more often depending on the financial situation of the plan.

ii. For accounting purposes

Actuarial valuations of the public sector pensions and other employee and veteran future benefits are performed every year to measure and report the obligations and to attribute the costs of the benefits to the period. Actuarial valuations are conducted as at March 31, except for some of the consolidated Crown corporations and other entities for which the actuarial valuations are conducted as at December 31. The actuarial valuations are based on the most recent or in-progress actuarial valuation for funding purposes, as applicable, in regards to the majority of the demographic assumptions. The other assumptions underlying the valuations are based on best estimates of the government or of the management of the consolidated Crown corporations and other entities.

d. Changes to benefits

Curtailments

No curtailments occurred this year.

In 2019, former employees of Atomic Energy of Canada Limited working at Canadian Nuclear Laboratories ceased active participation in the public service pension plan. The impact of this curtailment resulted in a one-time past service cost reduction of $124 million and the immediate recognition of a previously unrecognized net actuarial gain of $111 million for the public service pension plan. As well, there was a one-time past service cost reduction of $28 million and the immediate recognition of a previously unrecognized net actuarial loss of $16 million in regards to retirement benefits under the public service health care plan.

e. Net future benefit liabilities and assets

The net future benefit liabilities and assets are comprised of different components. The details are as follows:

i. Accrued benefit obligations

The changes in the accrued benefit obligations during the year are as follows:

ii. Pension and other future benefit assets

Pension and other future benefit assets include investments held by the PSPIB and external trusts of consolidated Crown corporations and other entities and contributions receivable from employees for past service buyback elections.

The changes in pension and other future benefit assets during the year are as follows:

As at March 31, the market value of the investments is $181,190 million ($179,263 million in 2019). the actual loss on investments is $632 million (return of $11,794 million in 2019) and the actual net rate of return on investments calculated on a time-weighted basis is –0.3% (7.1% in 2019) for the year.

iii. Net future benefit liabilities and assets

A reconciliation of the accrued benefit obligations to the amounts of net future benefit liabilities and assets follows:

f. Benefit and interest expenses

The components of public sector pension and other employee and veteran future benefit expenses are as follows:

Net actuarial losses of $10,609 million ($8,361 million in 2019) are presented in the Consolidated Statement of Operations and Accumulated Deficit. The net actuarial losses are comprised of actuarial gains of $1,273 million ($1,167 million in 2019) on funded pension benefits, actuarial losses of $5,246 million ($4,734 million in 2019) on unfunded pension benefits and actuarial losses of $6,636 million ($4,794 million in 2019) on other future benefits.

g. Actuarial assumptions

The assumptions used in the actuarial valuations for accounting purposes are based on the government's or the consolidated Crown corporations and other entities management's best estimates of expected long-term experience and short-term forecasts, as well as the majority of the demographic assumptions underlying the most recent or in-progress actuarial valuations for funding purposes, as applicable. The assumptions include estimates of discount rates, future inflation, returns on investments, general wage increases, workforce composition, retirement rates and mortality rates.

The discount rates used to measure the present value of the accrued obligations for public sector pensions and other employee and veteran future benefits sponsored by the government are as follows:

• For funded pension benefits, the streamed expected rates of return on invested funds.
• For unfunded pension and other future benefits, the government's cost of borrowing derived from the yields on the actual zero-coupon yield curve for Government of Canada bonds which reflect the timing of the expected future cash flows.

The principal actuarial assumptions used in measuring the accrued benefit obligations as at March 31 for government‒sponsored benefits, as well as the related benefit and interest expenses for the year, are as follows:

The discount rates used to measure the significant classes of pensions and other employee future benefits sponsored by the consolidated Crown corporations and other entities are based on a variety of methodologies. To measure the present value of their accrued benefit obligations, these consolidated Crown corporations and other entities used expected rates of return on invested funds ranging from 5.0% to 6.1% (5.3% to 6.3% in 2019) for the funded pension benefits, discount rates ranging from 1.8% to 3.8% (2.2% to 3.3% in 2019) for the unfunded pension benefits and discount rates ranging from 1.3% to 3.8% (2.1% to 3.5% in 2019) for the other employee future benefits. The long-term general wage increase ranged from 2.8% to 3.8% (2.8% to 3.8% in 2019). The long-term inflation rate has remained consistent at 2.0% (2.0% in 2019).

The expected average remaining service life (EARSL) of the employees represent periods ranging from 5 to 23 years (4 to 23 years in 2019) according to the plan in question; more specifically, from 12 to 15 years (12 to 15 years in 2019) for the three main public sector pension plans. The average remaining life expectancy (ARLE) of the benefit recipients under wartime veteran plans represent periods ranging from 6 to 7 years (6 to 7 years in 2019).

h. Sensitivity analysis

Changes in assumptions can result in significantly higher or lower estimates of the accrued benefit obligations. The table below illustrates the possible impact of a 1% change in the principal actuarial assumptions.

11. Other liabilities

Other liabilities include:

a. Canada Pension Plan Accounts

As explained in Note 1, the financial activities of the Canada Pension Plan (CPP) are not included in these consolidated financial statements.

The CPP is a federal/provincial social insurance program established by an Act of Parliament. It is compulsory and in operation in all parts of Canada, except for the Province of Quebec. The objective of the program is to provide a measure of protection to workers and their families against the loss of earnings due to retirement, disability or death. The CPP is financed from employees, employers and self-employed workers contributions, as well as investments earnings. The CPP's investments are held and managed by the Canada Pension Plan Investment Board (CPPIB). As administrator of the CPP, the government's authority to provide benefits is limited to the consolidated net assets of the CPP. As at March 31, the fair value of the CPP's consolidated net assets is $413,022 million ($396,480 million in 2019) for the CPP Account and $2,615 million ($536 million in 2019) for the Additional CPP Account.

Pursuant to the Canada Pension Plan Act, the transactions of the CPP are recorded in the Canada Pension Plan Accounts (the Accounts) within the accounts of Canada. The Accounts also record the amounts transferred to or received from the CPPIB. The $279 million ($163 million in 2019) balance in the Accounts represents the CPP's deposit with the Receiver General for Canada and, therefore, is reported as a liability. The CPP's deposit with the Receiver General for Canada is comprised of the CPP Account balance of $260 million ($152 million in 2019) and the Additional CPP Account balance of $19 million ($11 million in 2019).

b. Others

Deposit and trust accounts are a group of liabilities representing the government's financial obligations in its role as administrator of certain funds that it has received or collected for specified purposes and that it will pay out accordingly. The net liability of the government is presented after reducing applicable accounts for securities held in trust. Certain accounts earn interest which is charged to interest on the public debt. One of the largest deposit and trust accounts is the Indian band funds account in the amount of $544 million ($580 million in 2019). This account was established to record funds belonging to Indian bands throughout Canada pursuant to the Indian Act.

Other specified purpose accounts are liability accounts that are used to record transactions made under authorities obtained from Parliament through either the Financial Administration Act or other specific legislation. Certain accounts earn interest which is charged to interest on the public debt. The largest other specified purpose account is the Public Service Death Benefit Account totalling $3,880 million ($3,800 million in 2019). This account was established under the Public Service Superannuation Act to provide life insurance to contributing members of the public service.

12. Cash and cash equivalents

Cash consists of public moneys on deposit and cash in transit less outstanding cheques and warrants. Cash equivalents consist mainly of term deposits usually not exceeding 31 days.

Cash and cash equivalents are as follows:

13. Taxes and other accounts receivable

Taxes receivable include taxes, interest, penalties, and other revenues assessed or estimated but not yet collected as at March 31. They also include other receivables for amounts collectible through the tax system such as provincial and territorial taxes, Employment Insurance premiums and Canada Pension Plan contributions receivable from individuals and employers as applicable.

Other accounts receivable represent billed or accrued financial claims arising from amounts owed to the government at year end, and cash collateral pledged to counterparties.

a. Taxes receivable

The government has established an allowance for doubtful accounts of $15,658 million ($14,559 million in 2019) and has recorded a bad debt expense of $4,265 million ($3,766 million in 2019).

The details of the taxes receivable and allowance for doubtful accounts are as follows:

b. Other accounts receivable

Billed or accrued financial claims arising from amounts owed to the government total $6,927 million ($6,136 million in 2019) and are presented net of an allowance for doubtful accounts of $1,527 million ($1,454 million in 2019). Further details can be found in Section 7 (unaudited) of this volume.

Cash collateral pledged to counterparties of $9,975 million ($7,163 million in 2019) represents collateral support under International Swaps and Derivatives Association (ISDA) master agreements in respect of outstanding cross-currency swap arrangements. Further details can be found in Note 18.

14. Foreign exchange accounts

Foreign exchange accounts represent financial claims and obligations of the government as a result of Canada's foreign exchange operations. The investments held in the Exchange Fund Account are to provide general liquidity and to promote orderly conditions in the foreign exchange market for the Canadian dollar.

As at March 31, 2020, the fair value of the marketable securities held in the Exchange Fund Account is $98,338 million ($91,051 million in 2019), established using market quotes or other available market information. Further details on these investments are provided in the unaudited financial statements of the Exchange Fund Account in Section 8 of this volume.

Subscriptions and loans to the International Monetary Fund (IMF) and special drawing rights allocations are denominated in special drawing rights (SDR). The SDR serves as the unit of account for the IMF and its value is based on a basket of key international currencies (US dollar, Euro, Japanese yen, British pound sterling and Chinese renminbi). Canada participates in two lending arrangements with the IMF along with a group of other member countries. Collectively, maximum direct lending under these arrangements is limited to no more than the equivalent of SDR 12,074 million ($23,195 million) at March 31, 2020.

The following table presents the balances of the foreign exchange accounts:

15. Enterprise Crown corporations and other government business enterprises

The net assets and liabilities of enterprise Crown corporations and other government business enterprises are recognized as an investment by the government. In addition, the government has loans and advances receivable from these entities.

a. Enterprise Crown corporations and other government business enterprises

The following table presents the government's recorded loans, investments and advances in significant enterprise Crown corporations and other government business enterprises:

The following table presents the summary financial position and results of enterprise Crown corporations and other government business enterprises:

b. Non-public property

Non-public property (NPP), as defined under the National Defence Act, consists of money and property contributed to or by Canadian Forces members and is administered for their benefit and welfare by the Canadian Forces Morale and Welfare Services (CFMWS). The CFMWS is responsible for delivering selected morale and welfare programs, services and activities through three operational divisions, Canadian Forces Exchange System (CANEX), Personnel Support Programs and Service Income Security Insurance Plan (SISIP) Financial Services. Under the National Defence Act, NPP is explicitly excluded from the Financial Administration Act. The government provides some services related to NPP activities such as accommodation and security for which no amount is charged. The cost of providing these services is included in the consolidated financial statements of the Government of Canada. In 2020, CFMWS administered estimated revenues and expenses of $377 million ($410 million in 2019) and $410 million ($405 million in 2019) respectively and had net equity of $764 million at March 31, 2020 ($784 million at March 31, 2019). These amounts are excluded from the consolidated financial statements of the Government of Canada.

16. Other loans, investments and advances

Other loans, investments and advances are financial claims to debt instruments held by others that are owing to the government and ownership interests acquired through the use of parliamentary appropriations, excluding investment in enterprise Crown corporations and other government business enterprises.

The following table presents a summary of the balances of other loans, investments and advances by category:

The following table presents a summary of the balances of other loans, investments and advances by currency:

Loans to national governments consist mainly of loans for financial assistance totalling nil ($400 million in 2019), international development assistance to developing countries totalling $71 million ($85 million in 2019), and development of export trade totalling $379 million ($397 million in 2019) which are administered by Export Development Canada. Certain loans are non-interest bearing and others bear interest at rates varying from 0.1% to 10.3%. These loans are repayable over 1 to 28 years, with final instalments due in 2045.

Loans, investments and advances to international organizations include subscriptions to the share capital of international banks totalling $15,602 million ($15,098 million in 2019) as well as loans and advances to associations and other international organizations totalling $9,323 million ($8,644 million in 2019). These subscriptions are composed of both paid-in and callable capital. The majority of these investments are treated as concessionary as they do not provide a return on investment, but are repayable on termination of the organization or withdrawal from it. Most loans and advances to international organizations are made to banks and associations that use these funds to make loans to developing countries at significantly concessionary terms.

Loans for the development of export trade are either non-interest bearing or bear interest at rates varying from 1.0% to 9.0% and are administered by Export Development Canada. Collateral of $199 million ($189 million in 2019) is held on these loans and they are repayable over 1 to 4 years with final instalments due in 2022.

Loans to provinces and territories include loans made under relief acts and other legislation. Loans totalling $343 million ($403 million in 2019) are non-interest bearing and will be repaid by reducing transfer payments over 1 to 8 years.

Unconditionally repayable contributions are in substance loans aimed at stimulating economic development or for assistance. They bear various interest rates, some of which have concessional terms, and are repayable at various due dates with final instalments due within 4 to 25 years of initial disbursement.

Other loans, investments and advances include loans under the Canada Student Loans Program, and other investments in bonds, market funds and fixed income securities. Loans under the Canada Student Loans Program of $22,081 million ($21,164 million in 2019) are provided interest-free to full-time students and afterward bear interest at either a variable prime rate plus 2.5% or a fixed prime rate plus 5.0%. Following Budget 2019 announcement, interest rates were changed so that as of November 1, 2019, the loans bear interest at either a variable rate (prime rate) or a fixed rate (prime rate plus 2.0%). The repayment period is generally 10 years. To support borrowers during the COVID–19 pandemic the Government of Canada suspended repayments of Canada Student Loans and Canada Apprentice Loans for the period of March 30, 2020, to September 30, 2020. During this time, no interest will accrue on these loans. Other investments were $2,423 million ($2,289 million in 2019).

17. Tangible capital assets and inventories

Tangible capital assets consist of acquired, built, developed or improved tangible assets whose useful lives extend beyond the fiscal year and which are intended to be used on an ongoing basis for producing goods or delivering services, including military activities. Tangible capital assets include: land; buildings; works and infrastructure; machinery and equipment including computer hardware and software; vehicles including ships, aircraft and others; leasehold improvements; and assets under construction. Tangible capital assets also include assets under capital lease. Renewal options for assets under capital leases are typically for periods of 3 to 5 years and are exercisable at the discretion of the lessee. Detailed information on tangible capital assets is provided in Section 10 (unaudited) of this volume.

Inventories are comprised of spare parts and supplies held for future program delivery and are not primarily intended for resale.

Except for land, the cost of tangible capital assets used in government operations is generally amortized on a straight-line basis over the estimated useful life of the asset as follows:

The following table presents a summary of the transactions and balances for the main categories of tangible capital assets:

18. Financial instruments

The government uses various financial instruments to manage financial risks associated with its financial assets and liabilities. The government does not hold or use derivative instruments for trading or speculative purposes.

a. Derivative financial instruments

i. Swap agreements

Government debt is issued at both fixed and variable interest rates and is denominated in Canadian dollars, US dollars and Euros. The government has entered into cross currency swap agreements to facilitate management of its debt structure. Using cross currency swap agreements, Canadian dollar and other foreign currency debt has been converted into US dollars or other foreign currencies with either fixed interest rates or variable interest rates. As a normal practice, the government's swap positions are held to maturity.

The interest paid or payable and the interest received or receivable on all swap transactions are recorded as part of public debt charges. Unrealized gains or losses due to fluctuations in the foreign exchange value of the swaps are presented in the cross currency swap revaluation account and are recognized as part of net foreign exchange revenues in the Consolidated Statement of Operations and Accumulated Deficit.

The government enters into two-way Credit Support Annex agreements for cross currency swaps with certain counterparties pursuant to International Swaps and Derivatives Association (ISDA) master agreements. Under the terms of those agreements, the government may be required to pledge and/or receive eligible collateral relating to obligations to the counterparties. In the normal course of business, these pledged collateral amounts (which may include cash and/or securities) will be returned to the pledgor when there are no longer any outstanding obligations. At March 31, 2020, cash collateral pledged of $9,975 million ($7,163 million in 2019) is recorded in other accounts receivable, and cash collateral received of $152 million ($165 million in 2019) is recorded in other liabilities. In addition, the government holds collateral in securities from counterparties with a nominal amount of $2,384 million and fair value of $2,776 million (nominal amount of $2,207 million and fair value of $2,602 million in 2019), which has not been recognized in the statement of financial position as the government does not obtain economic ownership unless the pledgor defaults.

Cross currency swaps with contractual principal amounts outstanding at March 31, stated in Canadian dollars, are as follows:

ii. Foreign-exchange forward agreements

The government's lending arrangements with the International Monetary Fund (IMF), included in the foreign exchange accounts, are denominated in special drawing rights (SDR). However, the government typically funds these loans with US dollars. Consequently, since the value of the SDR is based upon a basket of key international currencies (US dollar, Euro, Japanese yen, British pound sterling and Chinese renminbi), a currency mismatch results, whereby fluctuations in the value of the loan asset are not equally offset by fluctuations in the value of the related funding liability. Therefore, the government enters into forward agreements to hedge this foreign exchange risk.

Unrealized gains or losses due to fluctuations in the foreign exchange value of these agreements are recorded in accounts payable and accrued liabilities and are recognized as part of the net foreign exchange revenues in the Consolidated Statement of Operations and Accumulated Deficit.

The notional principal amount of a foreign-exchange forward agreement refers to the principal amount used to calculate contractual cash flows. This amount does not represent an asset or liability, and is not included in the Consolidated Statement of Financial Position. Foreign-exchange forward agreements outstanding at March 31, with notional principal amounts in Canadian dollars of $3,074 million ($2,065 million at March 31, 2019), mature during the next fiscal year.

iii. Credit risk related to swap and foreign-exchange forward agreements

The government manages its exposure to credit risk by dealing principally with financial institutions having acceptable credit ratings, based on external credit ratings and internal credit analysis, in accordance with the Statement of Investment Policy for the Government of Canada.

Credit risk is also managed through collateral provisions in swap and foreign-exchange forward agreements. Collateral pledged by counterparties to the government may be liquidated in the event of default to mitigate credit losses.

The government does not have a significant concentration of credit risk with any individual institution and does not anticipate any counterparty credit loss with respect to its swap and foreign-exchange forward agreements.

The following table presents the contractual or notional principal amounts of the swap and foreign-exchange forward agreements organized by credit ratings based on published Standard & Poor's credit ratings and stand-alone credit profiles at year end:

b. Managing foreign currency and interest rate risks and sensitivity analysis to foreign currency exposures

Foreign currency and interest rate risks are managed using a strategy of matching the duration and the currency of the foreign exchange accounts assets and the related foreign currency borrowings of the government. At March 31, 2020, assets within the foreign exchange accounts and their related foreign currency borrowings substantially offset each other on a market value basis. Accordingly, the impact of price changes affecting these assets and the liabilities funding these assets naturally offset each other, resulting in no significant impact to the government's net debt.

Assets related to the IMF are only partially matched by related foreign currency borrowings as they are denominated in SDRs, however, foreign-exchange risks relating to loans to the IMF have been managed through entering into various foreign-exchange forward agreements.

The majority of the government foreign currency assets and related liabilities are held in four currency portfolios: the US dollar, the Euro, the British pound sterling and the Japanese yen. At March 31, 2020, a 1% appreciation in the Canadian dollar as compared to the US dollar, the Euro, the British pound sterling and the Japanese yen would result in a foreign exchange gain of $2 million due to the exposure of the US dollar portfolio, a foreign exchange gain of $3 million due to the exposure of the Euro portfolio, a foreign exchange gain of $1 million due to the exposure of the Japanese yen portfolio and a foreign exchange loss of $2 million due to the exposure of the British pound sterling portfolio.

The net foreign exchange gain included in net foreign exchange revenues, other revenues and other expenses on the Consolidated Statement of Operations and Accumulated Deficit amounts to $135 million (net foreign exchange gain of $31 million in 2019).

c. Fair value information

The carrying values of other accounts payable and accrued liabilities, interest and matured debt, cash and cash equivalents, other accounts receivable and other loans, investments and advances are assumed to approximate their fair values due to their short-term to maturity or allowances recorded to reduce their carrying values to amounts that approximate their estimated realizable values.

The following table presents the fair value of derivative financial instruments with contractual or notional principal amounts outstanding at March 31:

Fair values of the swap and foreign-exchange forward agreements are the estimated amount that the government would receive or pay, based on market factors, if the agreements were terminated on March 31. They are established by discounting the expected cash flows of the swap and foreign-exchange forward agreements, calculated from the contractual or notional principal amounts, using year-end market interest and exchange rates. A positive (negative) fair value indicates that the government would receive (make) a payment if the agreements were terminated on March 31.

19. Contractual obligations and contractual rights

a. Contractual obligations

The nature of government activities results in large multi-year contracts and agreements, including international treaties, protocols and agreements of various size and importance. Detailed information on contractual obligations is provided in Section 11 (unaudited) of this volume.

Major contractual obligations that will generate expenditures in future years and that can be reasonably estimated are summarized as follows:

b. Contractual rights

The activities of government sometimes involve the negotiation of contracts or agreements with outside parties that result in the government having rights to both assets and revenues in the future. They principally involve sales of goods and services, leases of property, and royalties and revenue/profit-sharing arrangements while all other contractual rights are combined for reporting purposes. The government has agreements that provide contractual rights to future revenue based on a percentage of revenue or profits of the other party to the agreement, or based on receiving an amount for each unit of goods sold. The terms of these contracts or agreements may not allow for a reasonable estimate of future revenues.

Where the terms of contracts and agreements allow for a reasonable estimate, the major contractual rights are summarized in the table presented below. Detailed information on contractual rights is provided in Section 11 (unaudited) of this volume.

20. Segmented information

The government segmented information is based on the ministry structure, which groups the activities of departments, agencies and consolidated Crown corporations and other entities for which a Minister is responsible, and the enterprise Crown corporations and other government business enterprises as described in Note 1 and Note 15.

In the table below, the five main ministries are reported separately and the Other ministries column includes amounts for all other ministries as well as the provision for valuation and other items. The following tables present the segmented information by Ministry and enterprise Crown corporations and other government business enterprises before the elimination of internal transactions that are eliminated in the adjustments column before arriving at the total for the year ended March 31:

21.Subsequent events

COVID–19 pandemic

In March 2020, the World Health Organization classified the outbreak of COVID–19 disease as a global pandemic. In response, the government enacted emergency measures to combat the spread of the virus and announced the COVID–19 Economic Response Plan to help stabilize the economy during the pandemic.

The emergency measures introduced by the government are intended to protect the health and safety of Canadians and provide direct support to Canadian workers and businesses. The impact of the measures for which accounting recognition criteria were met prior to March 31, 2020, are recognized in the government’s 2020 consolidated financial statements. Since most of the measures were implemented subsequent to year-end, the government's 2021 consolidated financial statements will be more significantly impacted.

Funding was provided to protect the health and safety of Canadians to prevent, control and stop the spread of COVID–19 as well as respond to the critical health needs of Canadians. The support to individuals has been provided through various programs to replace lost income, such as the Canada Emergency Response Benefit, and to provide one-time payments to groups of individuals determined to be most in need of direct financial support like the additional GST credit.

Support to businesses has primarily been focused on providing bridge financing for businesses of all sizes and helping them deal with their fixed costs during this crisis, including the Canada Emergency Wage Subsidy and the Canada Emergency Business Account. This also includes loan and guarantee programs which have resulted in increasing the government’s market debt and can result in additional credit risk to the government if businesses continue to experience reduced ability to repay their debts.

The government is also providing other credit and liquidity supports and capital relief, under the Economic Response Plan, to support financial sector liquidity and market functioning to facilitate and continue lending to individuals and businesses.

Legislation was enacted to provide the government additional borrowing authority to fund the crisis without the amounts counting towards the maximum amounts set out in the Borrowing Authority Act. This authority expired September 30, 2020, and the Minister of Finance is required to provide a report to Parliament detailing money that has been borrowed within 30 sitting days. Between April 1 and July 31, 2020, the government had increased its unmatured debt by $323 billion to meet the government’s projected financial requirements under the Economic Response Plan up to that date.

Federal revenues are projected to be lower in 2021 as compared to 2020, largely due to the economic impacts of the COVID–19 crisis on both employment levels and business activity.

Major government announcements including the Speech from the Throne in September 2020, and legislation introduced in Parliament authorizing new spending measures from April 1, 2020 onward will have a significant impact on the 2021 consolidated financial statements. As this pandemic is ongoing and the government response is continuing to evolve, the government is unable to reliably estimate at this time the full impact on the unmatured debt or financial results of future years. The effects of the pandemic will continue into the foreseeable future, and the government continues to assess and monitor the effects on its financial condition, and provide regular updates on its financial results through regular reporting processes and periodic economic and fiscal updates.

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