Payment Distribution Policy

For questions or comments, please contact us : NC-CFOB-Financial_Policy_Questions_Politique_Financière-GD

Effective date: August 23, 2004

Revised: August 2010

Table of Contents:

1. CONTEXT

2. POLICY OBJECTIVE
3. POLICY STATEMENT
4. APPLICATION
5. POLICY REQUIREMENTS
   • 4.1 Direction from Client on Voluntary Payment
   • 4.2 Non-Voluntary Payments
   • 4.3 Non-Recoverable Debts
   • 4.4 Payment Distribution Order
   • 4.5 Excess Payment and Credit Refund
   • 4.6 Records Retention
6. ROLES AND RESPONSIBILITIES
7. MONITORING AND COMPLIANCE
8. DEFINITIONS
9. REFERENCES

   APPENDIX A - Summary of Recovery Action for Recoverable and Non-recoverable Debt

Context

This policy provides direction for applying a payment to an account when a client has more than one debt under programs administered by the Department. Multiple debts occur when a client owes more than one specific amount within or among programs. For example, a client may have two debts within the Employment Insurance (EI) program, a $200 overpayment and a $100 penalty, plus $500 owing on their Canada Student Loan (CSL), for a total debt owing of $800.

Legal precedent gives debtors who have more than one debt with a creditor the right to direct payment to the debt or debts of their choice. This right has a long-standing history of being applied although there is no legislation in Canada that requires a creditor to allow a debtor to direct their payment. When the client does not direct a payment to any specific debt, the creditor has a choice of where to apply the payment.

1. Policy Objective

To ensure that the distribution order for applying payments to an account with multiple debts maximizes the potential for debt recovery while respecting the debtor's right to direct their payment to the debt of their choice.

2. Policy Statement

It is government policy to offer clients the flexibility to direct their payments to the debt of their choice where reasonable and acceptable. This occurs when the clients have multiple debts within a variety of government programs.

3. Application

This policy does not apply to Canada Student Loans which are managed by a third party. Any reference to Canada Student Loan Program (CSLP) debts in this policy refers to defaulted student loans managed by the department and recorded in the Departmental Accounts Receivable System (DARS).

This policy applies to all other debt repayments received, when the client has more than one debt under programs administered by the Department.

4. Policy Requirements

4.1 Direction from Client on Voluntary Payment

It is the department's policy to apply voluntary payments to debts in the program identified by the client when the client has debts under more than one program.

Voluntary payments are payments made directly by the client. Amounts collected by the department through deduction from benefits, set-off from tax refunds, garnishment, etc., are referred to as non-voluntary payments and cannot be directed by the client to a particular debt.

When a client with multiple program debts does not provide instructions on how to apply a voluntary payment, it is considered to be an undirected payment.

For accounts recorded in DARS, the monthly statement of account (MSA) generated by the system and sent to the client includes check boxes identifying each of the programs under which the client has a debt. The client has the option of directing their payment to a particular program using these check boxes.

The MSA instructs clients to direct their payment to only one program. However, a payment will be split among program debts if sufficient instruction is provided by the client.

EXAMPLE

The client pays $100 towards their outstanding debts and provides instruction with the payment that $75 is to be applied to their EI debt and $25 to their CSLP debt. Or, the client may direct that the payment be split evenly between their EI and CLSP debts. In either of these cases, the department will apply the payment according to the client's instruction. However, if the client indicated that the payment was to be applied to the EI and CSLP debts without indicating the amount or proportion of each payment, the department would treat the payment as an undirected payment.

The client has the right to direct their payment only at the time of making the payment. After the payment has been applied to an account, the department will generally not reverse and reapply the payment to different debts. Redistribution at the client's request would be considered if the department did not apply the payment according to the direction provided by the client at the time of payment.

4.2 Non-Voluntary Payments

It is the department's policy to apply non-voluntary payments which originate from a deduction from a benefit entitlement to debts within the same program as the benefit entitlement. An exception to this policy exists to allow the redistribution of an excess payment to debts in other programs. An excess payment would only occur once in relation to a specific debt and usually results when a different payment type has been received on the account just prior to the benefit deduction. The set-off authority in section 155 of the Financial Administration Act permits reapplication of these amounts to debts in other programs. Amounts payable to the client as a result of a rescinded decision under the Employment Insurance Act may also be redistributed to debts in other programs under the set-off authority.

For Canada Pension Plan (CPP) and Old Age Security (OAS) debts recorded in the Income Security Program (ISP) system, the amount withheld from a benefit is first applied to debts in the same ISP program and is then applied to other ISP debts.

Payments which result from a garnishment under a program-specific authority may only be applied to debts in that program (EI, CPP, OAS). Payments which result from a garnishment under a provincial authority may only be applied to the program debts which were identified in the court documents used to obtain the garnishment. The debtor should be reminded to stop the garnishment once the specified amount has been paid in the event the debtor has neglected to do this. Any excess amounts received by the department, i.e. more than the amount required to fully repay the debt, are refundable to the debtor. Amounts that are refundable for this reason may first be set-off against any other outstanding debts under the authority of section 155 of the Financial Administration Act.

Dividend payments from a bankruptcy trustee or payments from a trustee under a consumer proposal may only be applied to debts involved in that particular bankruptcy or consumer proposal.

Set-offs from Canada Revenue Agency (CRA) tax refunds or other CRA payments due to the client may be applied to any debt amount included in the set-off request to CRA.

4.3 Non-Recoverable Debts

It is the department's policy to apply payments to recoverable debts before non-recoverable debts. Undirected payments will be applied first to outstanding recoverable debts in all programs before non-recoverable debts. Directed payments will be applied to outstanding recoverable debts in the program to which the payment was directed and then to recoverable debts in other programs before being applied to non-recoverable debts.

Non-recoverable debts are debts which are considered uncollectible, either for legal reasons or because the debtor is unable to pay or has not paid and continued recovery activity is not cost effective. The debt may be expected to remain non-recoverable, in which case it may eventually be written off, or recovery may be expected in the future such as in the case of a debtor who is temporarily unable to make payments.

Non-recoverable debts fall into these main categories:

• Debts which are still legally enforceable, meaning that recovery action is still possible, but which are considered uncollectible because of the client's circumstances. Although most recovery activities are suspended, any payments received may be applied to these debts.
• Debts which are legally unenforceable, meaning that recovery action cannot be taken on the debt, but which still exist in law so that voluntary payments and excess payments on other debts can be applied to them. This category includes debts which have passed the statute bar for recovery in all provinces and territories except Newfoundland, British Columbia and Quebec. This also includes debts which are temporarily unenforceable because they are in dispute, appeal, under an orderly payment of debt, or in bankruptcy proceedings.
• Debts which have been extinguished by law, i.e., which no longer exist, meaning that no payments of any type can be applied to them. Some debts which may not have been extinguished by law are in this category because law prevents receiving any future payments on them. This category includes:
• • Debts which have passed the statute bar for recovery in Newfoundland, British Columbia and Quebec as well as under the Employment Insurance legislation, except where the debtor has waived the EI limitation period.
  • The portion of a debt remaining after a compromise settlement, provided the debtor has complied with the terms of the settlement.
  • Debts discharged through bankruptcy.
  • Debts remitted under the Canada Pension Plan Act, the Old Age Security Act or the Financial Administration Act.

  Should the client want to make a moral or conscience payment in relation to these debts, it is considered a gift to the Crown, or a gift to the Canada Pension Plan (CPP) if it is received under Section 107.1 of the CPP.

  (See summary chart in Appendix A.)

Non-recoverable debts are not included on the client's monthly statement of account and non-voluntary payments are discontinued. As noted above, there is a legal requirement in some cases to stop recovery activity and, in other cases, it is suspended because the debt is determined to be uncollectible though it is still legally enforceable. CSLP debts are an exception in that set-offs from amounts payable to the borrower by the government may continue after other recovery action is statute barred by program legislation.

The writing-off of a debt is an accounting action which removes the debt from the books of account. The action of writing-off an account does not in itself cause a debt to no longer exist. A non-recoverable debt which has been written off may be reinstated for the purposes of recording a voluntary payment provided it is not in the last category of debts noted above, i.e. debts which are extinguished by law or where law prevents a payment from being received.

4.4 Payment Distribution Order

It is the department's policy to apply payments according to an established payment distribution order which is fair to the client and which maximizes, to the extent possible, the potential for full debt recovery.

Accrued interest, other administrative charges and penalties will be recovered before the principal amount of the debt. Misrepresentative debts incurring interest charges will be recovered before non-misrepresentative debts which do not incur interest charges. Older debts will be recovered before newer debts.

The DARS payment distribution algorithm automatically applies payments to accounts recorded in DARS. This includes defaulted student loans and certain Income Security Program debts.

Payments are applied in the following order:

1. Oldest recoverable debt:
   
   • Among debts in all programs for undirected voluntary payments;
   • Among debts in program client directs payment to for directed voluntary payments, until these debts are paid, then among debts in all programs;
   • Among debts in program(s) initiating non-voluntary payment (see section 4.2) until these debts are paid, then among all programs;
2. Non-taxable debt (payment does not require income tax reporting);
3. Taxable debt (payment reported for tax purposes and provides client with tax credit);
4. Misrepresentative debt;
5. Non-misrepresentative debt;
6. Other debt subject to interest charges;
7. Steps 1 to 6 are repeated until all recoverable debts are paid. Any excess amount is then applied to non-recoverable debts which can have payments applied (see section 4.3) following the order in steps 8 to 11.
8. To non-recoverable debts in any program for undirected payments and, for directed payments, to non-recoverable debts in the program to which the client directs payment;
9. In the following order of priority:
   
   • Debts where collection has been deferred,
   • Debts in dispute or appeal,
   • Debts in bankruptcy proceedings,
   • Debts which have reached time limitation (provided payment permitted),
   • Debts with an Orderly Payment of Debt in effect,
   • Bad debts,
   • Debts previously written-off (provided payment permitted);
10. In the following order when there are two debts with the same priority:
    
    • Oldest debt,
    • Non-taxable before taxable,
    • Misrepresentative before non-misrepresentative,
    • Interest-bearing before debts not incurring interest charges.
11. A credit is established for any unused amount when all the debts to which the payment can be applied are paid.

Once the algorithm selects a debt for payment, the payment is applied to the accrued interest portion of that debt, if any, and then to the principal portion of the debt.

The oldest date is based on the DARS occurrence date. If two or more debts have the same date, the payment will be applied to the oldest debt based on the DARS time stamp.

The DARS payment distribution algorithm does not currently redistribute excess payment amounts to the extent permitted by this policy. Credits may be redistributed manually in accordance with the above order.

4.5 Excess Payment and Credit Refund

It is HRDC policy to refund an excess payment that has resulted in a credit balance to the client. Small amounts are not automatically refunded but will be paid at the request of the client. Refunds will be made to the client when the credit amount is $5.00 or more for accounts recorded in DARS and managed by the department.

Credit amounts remaining in a client's account will be applied periodically to the client's new debts, if any. Accounts with a credit balance will be cleared after a reasonable period of time. However, a credit amount that is not refunded will be reinstated later at the client's request.

An excess payment is retained in the account for four weeks to ensure the client's cheque has cleared and to ensure that all interest accruals are posted. Interest accruals from the date of the last statement to the date the payment was received are recovered before a credit refund is made to the client.

Depending on the amount, a credit balance relating to an ISP overpayment recorded in the ISP system is either returned to the client or included with the next benefit payment.

4.6 Records Retention

In accordance with the Financial Records Retention Policy, financial records relating to accounts receivable are generally retained for six years (exceptions do apply, see the policy for details). In addition, privacy legislation requires personal information used for an administrative purpose to be retained for a minimum of two years from the last administrative action.

The use of personal information for an administrative purpose includes the client's direction regarding the distribution of a payment provided in the check boxes on the monthly statement of account returned with a payment.

5. Roles and Responsibilities

Collection Services is responsible for initiating court action for the recovery of a debt and for obtaining a waiver of the time limitation relating to an EI debt.

Collection Services is responsible for handling enquiries regarding the application of a payment to a client's account, including refunds and adjustments, for accounts recorded in DARS.

NHQ Loans and Accounts Receivable and Statutory Accounting Services or their regional counterparts are responsible for posting and adjusting the client's account and for refunding a credit balance to the client.

NHQ Student Loans Accounting is responsible for providing guidelines on payment distribution for CSL debts managed by a third party.

6. Monitoring and Compliance

The CFO will monitor the implementation of this policy in the Department. Any significant deviations resulting from non-compliance with this policy will be investigated and corrective steps recommended.

7. Definitions

Voluntary payment: Voluntary payments are payments made directly by the client and are not collected by the department through deduction from benefits, set-off from tax refunds, or garnishment.

Non-voluntary payment: Non-voluntary payments are amounts collected by the department through deduction from benefits, set-off from tax refunds, or garnishment.

Non-recoverable debt: Non-recoverable debts are debts which are considered uncollectible, either for legal reasons or because the debtor is unable to pay or has not paid and continued recovery activity is not cost effective.

Misrepresentative debt: A misrepresentative debt occurs when payments are made as a result of fraud, falsification, wilful misrepresentation, or any other offense, or otherwise associated with actions which are illegal and are prosecuted in a court of law.

8. References

Financial Administration Act
Debt Write-Off Regulations, 1994
Bankruptcy and Insolvency Act
Old Age Security Act, s. 37(2)
Canada Pension Plan Act, s. 66(2)
Employment Insurance Act, s. 47(3), (4), 65.2(3)
Canada Student Financial Assistance Act, s. 16.1, 16.2
Canada Student Loans Act, s. 19.1, 19.2
Crown Liability and Proceedings Act
DARS Specifications Manual, Appendix K
Financial Records Retention Policy
Privacy, Access to Information and Human Rights Manual, Chapter 5

9. Appendix A

Summary of Recovery Action
For Recoverable and Non-Recoverable Debt

VOLUNTARY PAYMENTS: Client initiates payment by cash/cheque etc.

NON-VOLUNTARY PAYMENTS: We initiate payment through: CRA set-off, deduction from benefit (recoupment, withhold), garnishment, and other forms of set-off (reapplication of credit in account, set-off from other program payments).