1.1 This guideline takes effect on October 1, 2009.
1.2 It replaces TB Circular 1989-2: Regulations Governing Security for Debts Due to Her Majesty (dated January 11, 1989).
This guideline applies to departments as defined in section 2 of the Financial Administration Act.
3.1 The purpose of these guidelines is to assist departmental officials who are charged with the management of securing repayment of debts due to the Crown by mitigating the risks of non-repayment. The guidelines provide sound management practices for accepting, protecting and discharging security on debts due to the Crown.
3.2 Theseguidelines support the Security for Debts Due to Her Majesty Regulations (hereafter the Regulations).
3.3 Though the guidelines elaborate on the Regulations, they do not present new mandatory requirements. Where the term "must" is used in these guidelines, it does not create a new obligation but rather reflects an existing obligation under either an act, regulations, policy, directive or standard. Where the term "should" is used, it indicates that something is the preferred thing to do.
3.4 Section 156 of the Financial Administration Act provides the authorities for accepting any security for a debt due to the Crown, for realizing on, assigning or selling the Crown's interest in it, and for discharging, releasing or otherwise disposing of the security. In addition to the Financial Administration Act, security for debts due to the Crown may be provided for within specific program legislation (for example, the Income Tax Act and the Excise Tax Act) that sets out the circumstances under which security deposits are to be made and establishes the amount of security required.
3.5 The Security For Debts Due to Her Majesty Regulations allows the government to accept specific guarantees to protect the Crown's interest, but do not oblige debtors to provide security (in other words, the Regulations do not require departments to request security from debtors). These Regulations do not supersede authorities contained in departmental statutes and regulations but provide authority when none exists.
3.6 Security is not to be sought from
3.7 When appropriate, security can be sought from all Crown corporations listed in Schedule III, Part II of the Financial Administration Act and provincial Crown corporations (except Liquor Control Boards).
3.8 Note: The Importation of Intoxicating Liquors Act legally empowers Liquor Control Boards or Commissions to control the importation and sale of intoxicating liquor and wine in each province. The Liquor Control Boards or Commissions and the Minister of National Revenue jointly enforce this Act and the regulations issued pursuant to it. The sole mandate of the Control Boards is the "importation of liquor and alcoholic beverages and spirits" into Canada. It is redundant to demand security deposit on liquor importations by Control Boards in the event they default on the customs duty because the federal government enforces this Act jointly with them.
Definitions of terms used in these guidelines are in Appendix A.
5.1 The following principles and considerations will assist in making decisions and taking appropriate actions in the management of securing repayment of debts due to the Crown:
5.2 The debtor should be charged for any associated out-of-pocket costs, with interest, and should credit any recoveries against these expenditures before reducing the debt(s).
5.3 Legal advice and assistance from Legal Services should be obtained, as required, to mitigate the risk inherent in registering, managing, and releasing security.
This section describes the recommended best practices and considerations in the effective management of security for debts due to the Crown. It covers topics such as when security should be sought, acceptable types, amount, enforceability, valuation, release, realization, and cost of security.
6.1 As a matter of general practice, and without regarding it as a substitute for establishing a debtor's potential credit-worthiness, security should be actively sought, consistent with good business practices, whenever
6.2 The minister responsible for recovering or collecting a particular debt due to Her Majesty may accept as security a charge, such as a pledge, assignment, debenture, mortgage, encumbrance, hypothec or lien, on the assets of a debtor or of a guarantor. Although not specifically mentioned in the Regulations, other forms of security that constitute such a charge may also be accepted (see Appendix B). This does not mean, however, that security should be accepted in lieu of immediate payment when the duly approved terms and conditions of a sale call for immediate payment.
6.3 In accordance with the Regulations, only charges
are deemed to be a security under paragraph 156(b) of the Financial Administration Act.
6.4 While an assignment of the future wages of a debtor can be accepted as security, a department is not authorized under the Regulations to accept an assignment of the future wages of a guarantor. However, a charge on an asset currently owned by either a debtor or a guarantor can be accepted as security.
6.5 Situations should be avoided where it becomes more attractive for the debtor to give up the security than to discharge the debt. This is especially important when the asset being considered as security is used to generate the revenue that would discharge the debt (for example, shares in a privately held business or special-purpose buildings or equipment for which, in fact, there is a limited market, if any). The objective of taking security is to ensure the payment of a debt, not to liquidate or acquire assets.
6.6 When considering offers of security, security deposits or guarantees provided by banks or other financial institutions are preferable, followed by unencumbered assets that are expected to maintain their value or appreciate in value. Although less desirable, a second or subordinate charge on an asset may be accepted as security when the sum of this charge and all other higher-priority charges does not exceed the estimated realizable value of the asset, net of realization costs.
6.7 Only enough security to commit the debtor to discharge the debt should be taken. When establishing security requirements, a determination should be made concerning whether insurance should be maintained, at the debtor's expense, on the asset given as security and whether the insurance should be made payable to the Crown.
6.8 Security that currently covers only part of the debt may be accepted when no other security is available or less than full security is required. Such action may be appropriate, for example, when
6.9 When the Crown has authority to substitute one asset held in security for another, the net realizable value of the replacement asset should at least equal
6.10 Legal advice should be obtained to ensure the validity and future enforceability of the Crown's claim to the security being accepted and, when security has been accepted, to register the Crown's interest in accordance with the applicable provincial or territorial laws. Consideration should be given to the following:
6.11 The above considerations (section 5.10, 3rd and 4th bullets) are particularly important where family assets are involved and giving security may require the consent of both spouses.
6.12 When considering whether to accept security from a surety or guarantor who is the spouse or an elderly relative of the debtor, evidence should be obtained that the person has received independent legal advice before providing security. Defences based on the premise that the person was unduly taken advantage of could preclude enforcing the Crown's claim.
6.13 To take into account the risk of future devaluations, the maximum value of any asset should be established in accordance with Appendix B. The valuation should be based on the lowest value of the asset. For example, the current value of a piece of real estate should be used, not an appreciated future value. If there is reason to expect that the asset may depreciate to less than the attached schedule indicates, its security value should be discounted accordingly.
6.14 A valuation from an accredited appraiser should be obtained when:
6.15 To ensure that the security they hold continues to provide the required protection, portfolios should be assessed at least once a year and the appropriate action taken. As specified in Note 2 of the Appendix B, certain types of security, however, require more stringent control.
6.16 In accordance with paragraphs 3(a) and (b) of the Regulations, the minister responsible for recovering or collecting a debt due to Her Majesty may execute and deliver any instrument that will effectively release or discharge any security
6.17 Appropriate legal advice should be sought when the release of part of the security is anticipated. In addition, specific provisions should be made in the security instrument(s) to address the release or discharge of a portion of the security accepted. This could be done, for example, by relating specific assets to specific portions of the debt(s). From a legal perspective, it may also be preferable to execute a separate security instrument for each portion of the debt.
6.18 Security may also be released or discharged when, as a result of another form of settlement such as forgiveness, remission or a duly authorized compromise, the debt has, in the opinion of legal counsel, been extinguished.
6.19 When releasing or discharging a portion of the security, the Crown's claim to the remaining security should not be impaired in any way or the priority of its claim reduced.
6.20 All reasonable actions should be carried out and all available recovery possibilities exhausted before realizing on a security, including, where possible and appropriate, set-off actions as outlined in the Directive on Receivables Management.
6.21 When all collection and recovery actions are unsuccessful, a prompt attempt to realize on the security should be made, under legal advice. All actions taken should be based on principles of fairness to the debtor or guarantor. Attempts to realize on the security should not be made if, after close scrutiny, senior departmental officials determine that legislative, administrative, humanitarian, or other special circumstances make it unsuitable for such action.
6.22 Subject to subsection 5.23 of these guidelines, if a debtor commits an act of bankruptcy without having filed for bankruptcy or been petitioned into bankruptcy, under legal advice and with the written authority of the deputy head or of a person authorized by the deputy head in writing for this purpose, recovery responsibilities should be pursued in accordance with the provisions of the Bankruptcy and Insolvency Act and in a manner consistent with these guidelines and the objectives of the program under which the debt was incurred.
6.23 Except where legal counsel advises otherwise, filing a petition for a receiving order against a debtor should not be sought when a department holds adequate security, unless
In such circumstances, however, prompt action may prevent the disappearance of other assets that are required either to retire the debt or reduce the subsequent loss.
6.24 If the court has already issued a receiving order against a debtor, consideration should be given, after obtaining legal advice, to executing the department's right to realize on its security independently of other creditors and to file with the trustee a priority claim for any shortfalls.
6.25 Unless legal counsel advises that it is prohibited by law, the appraisal, registration, realization and any associated legal costs should be charged with interest to the debtor pursuant to the Interest and Administrative Charges Regulations. The interest should be calculated from the time the costs are incurred until they have been recovered. Any proceeds received should be applied as follows:
6.26 To provide authority for charging interest and to avoid disputes and litigation, the guidance of legal counsel should be sought to ensure that these considerations are reflected in the documents that establish the debt and the security. Also, refer to the Interest and Administrative Charges Regulations.
For additional information regarding legislative and policy aspects of managing security for debts due to the Crown, the following may be consulted.
Please direct enquiries concerning these guidelines to your departmental headquarters. For interpretation of these guidelines, departmental headquarters should contact:
Financial Management Policy Division
Financial Management and Analysis Sector
Office of the Comptroller General
Treasury Board Secretariat
Ottawa ON K1A 0R5
E-mail: fin-www@tbs-sct.gc.ca
Telephone: 613-957-7233
Fax: 613-952-9613
Is an amount owing to the Crown. Debts due to the Crown include the following:
Involve the following:
Maximum security value assigned to an asset accepted as security for debts due to the Crown (pursuant to Section 13 of these guidelines and subject to the notes in this appendix)
Type of Asset | Canadian Dollar Maximum Security Value Equivalent (per cent of current market value) |
---|---|
Unconditional documentary credit (i.e., letter of credit) | 100% |
Cash (e.g., certified bill of exchange or cheque) or collateral deposit in a financial institution | 100% |
Government debt or government guaranteed debt (i.e., foreign) | |
Treasury Bill and other short-term paper | 95% |
Bond | |
maturity less than 5 years | 95% |
maturity from 5 years to 10 years | 90% |
maturity greater than 10 years | 85% |
Other securities | |
Short-term paper | |
rated at least A-2, P-2 (or equivalent) | 90% |
rated A-3, P-3 (or equivalent) | 80% |
rated below A-3, P-3 | 55% |
Bond rated AA or higher | |
maturity less than 5 years | 90% |
maturity from 5 years to 10 years | 85% |
maturity greater than 10 years | 95% |
Bond rated A to BBB | |
maturity less than 5 years | 85% |
maturity from 5 years to 10 years | 75% |
maturity greater than 10 years | 70% |
Bond rated below BBB | 50% |
Unrated bond | (see Note 4) |
Shares | |
listed and worth more than prescribed minimum value (see Note 3) | 50% |
not listed or below prescribed maximum value | (see Note 4) |
Precious metals and gems-Other | 50% |
Real Property | |
agricultural land and buildings, undeveloped land, principal residence, commercial rental or industrial-general purpose | 75% |
industrial-special purpose | 60% |
other residence (e.g., cottage) | 50% |
Equipment, other goods and chattels | |
general purpose item | 75% |
special purpose item (other than collector's item) | 50% |
recognized generally as a collector's item | 75% |
Insurance policy | |
Net cash surrender value | 100% |
Performance bond | 100% |
An insurance policy covering risks that could reduce the value of property being accepted as security does not constitute a security. The same applies to an insurance policy on the life of the debtor. Only the net cash surrender value can be considered as security. Appropriately, any such policies should be made payable to the Crown. | |
Future wages | |
Subject to the Regulations' restriction on accepting future assets as security, an assignment of (future) wages by the debtor can be accepted as security. The maximum security value of future wages, however, should be assessed in relation to the degree that periodic wages will cover future periodic payments. Therefore, only the debtor's current net income, less the sum of the payments the debtor is currently expected to make to all other creditors as well as reasonable living expenses, should be considered as security. The maximum percentages of the debtor's gross income allowable as security are as follows: | |
| 35% |
| 20% |
NOTES
Example:
Other forms of acceptable security
Security deposits or guarantees provided by banks and other financial institutions are acceptable when in the form of: