Policy on the Set-Off of Debts Owed to the Crown

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Please note that this policy will apply to both Service Canada and Human Resources and Social Development Canada (HRSDC) hereinafter referred to as the "Department" or "Departmental".

This policy offers an overview of the subject and was drafted in order to respond to inquiries about current set-off practices. The following topics will be reviewed in the longer term as part of the Harmonization of Accounts Receivables Policies (HARP) initiative:

Legislative authorities administered by the departments will be reviewed to determine if any piece of legislation has precedence over another, and whether this will have an impact on the set-off process or payment algorithm.
Classes of payments that will be included/excluded for set-off will be formally identified, as per Treasury Board requirements.
Automatic set-off between all programs.

Please Note: This policy/document is currently under review and is being updated to reflect new procedures and terminology associated with the implementation of myEMS (SAP)

1. Introduction

Set-off is defined as the withholding of monies from a government refund or other payment due to a person or corporation and applying those monies against debts owing to the Crown by that same person or corporation.

The Treasury Board Directive on Receivables Management, states that government departments should share information and resources where permitted, in order to locate and collect debts owing to the Crown. The policy further states that departments should withhold money from government payments due to a debtor in order to set-off amounts owing by the debtor.

2. Policy Objective

The purpose of this policy is to provide comprehensive guidance for using set-off as a means of recovering amounts owed to the Crown, while ensuring that clients are treated with fairness, that program objectives are respected, and that receivables are managed efficiently, effectively, and in compliance with the appropriate legislation and regulations governing set-off.

3. Policy Statement

The Department will utilize set-off as a means of recovering amounts owed to the department by individual debtors or corporations in order to maximize the recovery of receivables where it is practical and appropriate to do so.

4. Authorities

The authority to set-off debts is found in various pieces of legislation. The table below provides an overview of set-off authorities. Where program legislation does not contain set-off provisions, then the Financial Administration Act (FAA) (which provides the general authority for departments to use set-off as a means of recovering debts), is used.

Table A: Legislative Authorities Governing Set-Off

ACT	DESCRIPTION
Canada Pension Plan (CPP) Act	Subsection 66(2.1) states that where there are monies payable to a debtor, or to a debtor's estate, under the CPP Act or other act or program administered by the Minister, any amount may be withheld to set-off a debt owing to the Crown. The FAA provides the authority for setting off CPP debts between Income Security Programs (ISP) and other programs and other government departments.

Canada Student Financial Assistance (CFA) Act	Subsections 16.1(2) and 16.2(4) provide the authority for setting off amounts owed under the legislation. A debt may be recovered at any time by withholding or setting off any sum of money that may be due or payable to a borrower or the estate of a borrower.

Canada Student Loans (CSL) Act	Subsections 19.1(2) and 19.2(4) state that money owing under a guaranteed student loan may be recovered through the use of set-off. A debt may be recovered at any time by withholding or setting off any sum of money that may be due or payable to a borrower or the estate of a borrower.
Employment Insurance (EI) Act	The EI Act does not prohibit or otherwise exclude set-off under the FAA. The FAA (155(1)) is available along with provisions in the EI Act for recovering amounts owed. Subsection 42(2) of the EI Act states that overpayments may be recovered from benefits. Subsection 42(3) states that where amounts are advanced for social assistance benefits and employment insurance benefits subsequently become payable for that period, then the social assistance benefits issued may be recovered from employment insurance benefits. The Memorandum of Understanding (MOU) (see below) governs the nature of information exchanges between the Canada Revenue Agency (CRA) and the department.

Financial Administration Act (FAA)	Subsection 155(1) of the FAA provides the general authority for departments to request set-off for amounts owing by a debtor against any sum of money payable to that debtor, unless another authority has precedence. Any department can request a set-off from any other department provided the request is authorized by the Minister or delegated authority of the requesting department. No amount may be set-off under section 155 unless the Minister or delegated authority of the department which receives the request consents to the request. The Receiver General may recover amounts owing as a result of overpayments on salaries, wages, and pay and allowances from the person to whom the overpayment was made.

Grants and Contributions (Gs&Cs)	Grants and contributions are subject to the FAA (see above). Recipients applying for contributions of $25,000 or more must complete a declaration on amounts owing in default to the federal government, and project officers must inform recipients that the Department may set-off contribution funding against amounts owed. Please refer to section 5.15 of the Financial and Administrative Services Grants and Contributions Policy, for additional information. See also the Q & A in Appendix A of this policy.

Income Tax Act (ITA)	Section 224.1 of the ITA provides the authority under which CRA can request a set-off to recover an amount owing under that Act. The ITA takes precedence over the FAA. This means that CRA requests have priority over other departments and agencies to recover outstanding debts through set-off, where the debt owed to the CRA is for income tax or source deductions. Notwithstanding the ITA, SDC and HRSDC set off their program debts through recoupment or withhold before setting off debts to other organizations or departments, including the CRA.

Memorandum of Understanding (MOU)	The MOU (1995), signed with the Canada Customs and Revenue Agency, outlines the conditions and procedures for the release of information regarding: The Unemployment Insurance Act; The Canada Pension Plan; The Old Age Security Act; Employment programs; The Children's Special Allowances Act; and Information obtained under the Income Tax Act. The MOU also outlines the conditions and procedures for the set-off of monies pursuant to debts owed to the Crown. Note: The Canada Customs and Revenue Agency (CCRA) has been renamed the Canada Revenue Agency (CRA).

Old Age Security (OAS) Act	Subsection 37(2.1) states that where there are monies payable to a debtor, or to a debtor's estate, under the OAS Act or other act or program administered by the Minister, any amount may be withheld to set-off a debt owing to the Crown. The FAA provides the authority for setting off OAS debts between other programs and other government departments.

Operations and Maintenance (O&M)	Operations and maintenance debts are subject to the FAA (see above).

5. Current Set-Off Practices

5.1 General Practices

Set-off is considered to be a routine action, and is included as part of the standard collection process.

Set-off, when it takes place within a program, is referred to as recoupment or withhold. In legal terms, a recoupment or withhold is a set-off. Recoupment is routinely carried out within a program, for example recouping Employment Insurance debts from employment insurance benefits.
Set-off between programs is not currently carried out automatically by the departments. ISP is the exception. Within ISP, recoupment takes place within a specific program, but benefits from one program may be used to set-off debts in another program within ISP: both CPP and OAS benefits are automatically available for set-off against both CPP and OAS receivables.
A debtor may request that a benefit or payment from one program or program area be used to set-off a debt within another program or program area within the department. Excluding debts within the ISP program area, where such requests are accommodated, the transaction must be done manually.

5.2 Excess Credits

Where excess credits remain following payment, such credits may be applied to other amounts owed by a debtor. Please see the Payment Distribution Policy for details on payment distribution order. You may also refer to the HARP Committee Record of Decision of June 11, 2003.

5.3 Priorities

Set-offs are typically with the CRA, whereby the department requests set-off from a debtor's income tax refund under section 155 of the FAA or the CRA requests a set-off from monies payable to a debtor by the Department under section 224.1 of the ITA.

Table B lists the general order of priority for set-off requests.

Table B: Priority Requests

Priority Order: When the department receives set-off requests from the CRA or other government departments	Priority Order: When the department requests set-off from the CRA
1. The Department will first recoup monies from debtors for amounts owing to the department. Recoupment is routinely carried out within a program, for example recouping Employment Insurance debts from employment insurance benefits. Note: For additional details regarding payment distribution order, please refer to the Payment Distribution Policy.	1. CRA will recoup monies owing to the CRA before considering other set-off requests. Note: A set-off from a CRA refund or other payables may be applied to any departmental debt, according to the payment algorithm that has been approved by the Department.
2. The Department will recover amounts owing to the CRA from benefits or other payables due to a debtor.	2. The CRA will recover amounts owing as a result of legislative or other legal obligations, such as Federal Court orders or family orders agreements.
3. The Department will pursue set-off when required by legal or legislative obligations, including Federal Court orders and family orders agreements.	3. The CRA will then respond to requests received from other government departments.
4. The departments will then process requests from all other government departments (OGDs). Note:: If the departments receive a request from another government department, and there is no money owing by a debtor the Department, or to the CRA, and there are no legislative or legal requests, then the departments will process the request from the OGD. Please note also that where there are multiple requests for set-off, multiple deductions may be made.

5.4 Exceptions and Exclusions

There are some restrictions on the use of set-off as a method of debt recovery.

Set-off can be used only to recoup monies from a person or corporation which owes a debt to the government:
- A child benefit cannot be used to set-off a debt owed by a parent.
- A department or agency cannot request the set-off of personal benefit due to an individual to set-off the debt of the corporate entity of which that individual is a shareholder.
Set-off will not be undertaken when:
- The use of set-off will knowingly cause undue financial hardship. Additionally, if a debtor's family income is below the low-income threshold, GST tax credits cannot be used to set-off amounts owing to the Crown.*
- A debt is under appeal or other litigation.
- A debt is legally unenforceable (for example, the limitation period has passed).
- The total recoverable amount of a debt, including applicable interest charges, is below $20.00 (please refer to the Minimum Balance Policy for additional details).
- There are classes of benefits of payments, which have been identified for exclusion from set-off. Currently there are no specific classes of debts which have been identified by the departments for exclusion from set-off.

* Note: Below, please find Web sites with information about low-income cutoffs and surplus income. Hardship is determined on the basis of the client's financial ability to repay an amount owing. Please contact National Accounts Receivable for more information about the process of assessing hardship.

"Low Income Cutoffs for 2002," The Daily, February 5, 2003. Statistics Canada.
"Low income cutoffs from 1991 to 2000 and low income measures from 1990 to 1999," (Income research paper series). Statistics Canada, (November) 2001.
For information on surplus monthly income, please refer to "Directive No. 11R - Surplus Income", Appendix A. Office of the Superintendent of Bankruptcy Canada.

6. Responsibilites

When initiating a request for set-off, or when a request for set-off is received, the appropriate program or recovery officer must notify a debtor that set-off action is being considered as a recovery option and must also ensure that debts are eligible for set-off.
Approval of requests for set-off must adhere to delegated authorities and departmental recovery priorities.
The appropriate program or recovery officer must obtain the necessary departmental and/or program concurrence for set-off.
When a request for set-off is received from another program or department, or from the CRA, the departments will be responsible for ensuring that the initiating department and the debtor are kept up-to-date on the status of recovery activity.
- Where an income tax refund is used to set-off a departmental debt, the CRA will advise the debtor of the actual transfer of the income tax refund to the Department and the departments will inform the debtor of the status of his account.

7. Retention of Records

Detailed financial records are required to be maintained for a minimum period of six fiscal years, following the end of the fiscal year in which they were posted. Please refer to the Financial Records Retention Policy for additional information on this topic.

Privacy and Access Legislation requires that personal information that is used for an administrative purpose must be retained for a minimum of two years after the last administrative action.

8. Compliance

8.1 Duty to Accommodate

This policy is compliant with the Treasury Board Secretariat Policy on the Duty to Accommodate Persons with Disabilities in the Federal Public Service.

9. References

9.1 Legislation

9.2 Treasury Board Publications

Directive on Receivables Management, Treasury Board Secretariat, October 2009
Policy on the Duty to Accommodate Persons with Disabilities in the Federal Public Service, Treasury Board Secretariat, June 2002
Policy on Transfer Payments - Treasury Board Secretariat

9.3 Other References

(Employment Insurance) Benefit Manual, Chapter 12, section 12 (12.12), Department of Human Resources and Skills Development Canada
Chief Financial Officer Grants and Contributions Policy, Department of Social Development, January 2004
Financial Records Retention Policy, Department of Social Development, 2002
Operations Guide (Grants and Contributions), departments of Social Development and Human Resources and Skills Development
Privacy, Access to Information and Human Rights Manual, Part I: Privacy, Chapter 5: Retention and Disposition of Personal Information, Department of Social Development.

Appendix A - Frequently Asked Questions

Question: Can the ministers or appropriate delegated authority refuse set-off requests from the Canada Revenue Agency under subsection 155(4) of the FAA?

Answer: No.

Subsection 155 (1) of the FAA is the general authority under which departments request set-off as a means of recovering debts. Subsection 155(4) of the FAA states that monies cannot be set-off without the consent of the Minister(s) or delegated authorities to whom the set-off request was made, provided that the request was made under the FAA. Where it is deemed appropriate to do so, the departments try to comply with set-off requests.

When the CRA requests that monies be withheld or set-off from a debtor's departmental benefits, the request is not made under the FAA, but under the ITA (section 224.1). Therefore, subsection 155(4) of the FAA does not apply.

The ITA takes precedence over the FAA, which means that the Department's ministers or delegated authorities cannot refuse to comply with a request made under the ITA.

However, it should be noted that the ITA notwithstanding, the department may set off program debts through recoupment or withhold before setting off debts to other organizations or departments, including the CRA. Where there are multiple requests for set-off, multiple deductions may be made from a debtor's benefits.

A debtor may ask the CRA to reconsider a request for set-off. If the Department considers that set-off will jeopardize funding objectives, then they may provide documentation to a debtor to support the debtor's request for re-consideration by the CRA. While the departments may submit supporting documentation to indicate that set-off will jeopardize funding objectives, the CRA will not communicate directly with the department about a particular case, but only with the debtor, given issues of privacy and confidentiality. Note: The CRA is less likely to reconsider where the amount owing is for source deductions.

Additional information about overpayments and recoupment or set-off of employment benefits and support measures is provided in Chapter 12, section 12 (12.12), of the (Employment Insurance) Benefit Manual.

Appendix B - Summary of Memorandum of Understanding Between the Department and CRA*

When the Department requests a set-off from CCRA, the latter will only set-off monies if the following conditions are met:

A debt is owed to Her Majesty.
The debt is legally enforceable.
The amount owing, if contested by the debtor, has been verified and the issue resolved prior to the request being made to CRA.

CRA will advise a debtor of the transfer to the Department of any refundable amounts, and the Department will provide information to a debtor regarding the status of the debtor's account.

CRA will not attempt to recover, from the debtor, any monies refunded in error, where the refund should have been transferred to the Department by way of set-off.
The Department will reimburse CRA in cases where refunds were set-off as a result of an error made by the Department.
Generally, competing departmental claims will be processed by CRA on a first-in-first-out (FIFO) basis according to the order in which the claims are placed against an individual account at CRA.

Appendix C - Delegations of Authority

Section 155 of the Financial Administration Act provides the general authority for set-off "against any sum of money," provided specific program or other legislation does not override this authority. Financial authorities are in place for set-off between programs within the departments and between the departments and other government departments (please see the Delegations of Authority.

Appendix D - Definition of Technical or Special Terms

TERM	DESCRIPTION
Debt	Amounts or services owed to an entity (individual or organization), for which there is usually documentary evidence (bill, invoice, statement or assessment), with a specified payment date. Where no payment date has been specified, the standard payment date or date due is considered to be thirty (30) days after the day on which a demand for payment is issued. A debt can also arise from an oral agreement. A debt is a legal obligation, whether or not it stems from a written or oral agreement.

Debtor	An individual or institution having a debt with the Department. A debtor is an entity, which has a legal obligation to pay money (or provide services) to another entity.

Forgiveness	When an amount of money has been forgiven, that amount may not thereafter be collected. A debt may be forgiven provided that forgiveness would not result in a charge to an appropriation, unless the amount to be forgiven is included as a budgetary expenditure in an appropriation act or any other act of Parliament. Forgiveness may be in full or in part, conditional or unconditional. Any amount forgiven during a fiscal year must be reported in the Public Accounts..

Hardship	Undue hardship exists when the debtor's personal and financial situation prevents him from making payments on amounts owed to the Department without being deprived of the necessities of life. Canada Student Loans Program (CSLP): exceptional hardship Employment Insurance Program (EI): undue hardship Old Age Security Programs (OAS): undue hardship Treasury Board: Consider the financial situation and any other special circumstances regarding a debtor are considered when collecting a debt Note: Please see also the Policy on Hardship

Minimum Balance	The lower limit for an inactive account receivable below which the administrative costs of collecting the account are likely to equal or exceed the amount to be collected. The departments shall automatically write-off debts at or below minimum balance, which has been set at 20 dollars.

Misrepresentative Overpayment	A misrepresentative debt occurs when overpayments are made as a result of fraud, falsification, willful misrepresentation, or any other offense, or otherwise associated with actions which are illegal and are prosecuted in a court of law. Misrepresentation under the Employment Insurance Act is associated with actions for which an offender can be punished (warnings, penalties, etc.) under program legislation

Overdue Payment	An amount owed to the Crown that is repaid by the due date.

Overpayment	An overpayment occurs when the department makes a payment to which a client is not entitled. An overpayment is considered to be a debt due to the Crown. An overpayment may be non-misrepresentative or misrepresentative.

Public Accounts	The Public Accounts, which include the financial statements and details of the financial operations of the Government of Canada, are prepared by the Receiver General and tabled in the House of Commons.

Remission	Remission is a form of forgiveness. A debt may be remitted in cases where the collection of a debt is considered unreasonable or unjust or not in the public interest to collect. Remission may be full or partial, conditional or unconditional. When an amount of money has been remitted, that amount may not thereafter be collected. Remissions granted during a fiscal year must be reported in the Public Accounts for that year.

Set-off	Set-off is the act of withholding a government refund, benefit, or payment due to a person or corporation and applying that payment against a debt due to the Crown that is owed by that same person or corporation.

Time Limitation	In the absence of federal legislation regarding limitation, the Federal Court Act stipulates that the limitation period is as described by provincial statute. In most of the provinces, the expiration of the limitation period means that no further court action can be taken to enforce the debt, although an acknowledgement of debt may reactivate an account in some provinces and territories.

Waiver	A waiver may be granted in certain circumstances. For example, where the cost of collecting interest would exceed the amount of interest to be collected, the departments may waive the interest entirely or in part. This is not the same as writing off interest.

Write-off	Writing-off a debt is an accounting action that recognizes that a debt or a portion of a debt is uncollectible now or in the foreseeable future, and is therefore removed from the books of account. A debt written-off in recognition of its uncollectibility may still be subject to recovery, depending upon the circumstances and the legal status of the debt. Debts written-off during a fiscal year must be reported in the Public Accounts for that year.