Capital and Dividend Policy Framework for Financial Crown Corporations

Section 15, Part I of the Financial Administration Act (FAA) states that the Minister of Finance is responsible for “the supervision, control and direction of all matters relating to the financial affairs of Canada not by law assigned to the Treasury Board or to any other minister.” Prudent financial risk and capital management is also supported by various pieces of federal legislation, including Part X of the FAA for most Crown corporations.

Budget 2024 announced changes to Financial Crown corporations to maximize productivity and support economic growth objectives. This amended Framework supports this announcement and supersedes the previous one published in 2017. Amendments were made to support a more efficient capital structure at financial Crown corporations, increase alignment with output based metrics such as economic growth, ensure they are following best practices of peer organizations in similar international jurisdictions, and to introduce a target solvency rating.

Consistent with this overarching responsibility, the Minister of Finance, in consultation with the President of the Treasury Board and ministers responsible for each financial Crown, has provided the financial Crown corporations (the Business Development Bank of Canada, Canada Housing and Mortgage Corporation, Export Development Canada and Farm Credit Canada) with the following principles to govern their capital management and dividend policies. These principles are informed by leading practices for similar private sector financial intermediaries and other comparable sovereign entities, where applicable, and by applicable Canadian and international regulatory standards, as they evolve.

To ensure that the financial Crown corporations have appropriate methodologies in place to determine their capital adequacy requirements; that they are maximizing economic growth objectives; that they effectively manage their capital in relation to risk; and, that dividends are paid to the shareholder when capital exceeds determined levels required to deliver on their mandates.

1. Financial Crown corporations should have a Board-approved capital management framework and supporting policies.
2. Financial Crown corporation levels of capital should reflect their respective mandates and objectives, associated risks, status as agents of the Government of Canada and the different commercial segments in which they operate. The methodologies used to assess levels of capital should be broadly consistent with those provided in the Office of the Superintendent of Financial Institutions (OSFI) guidelines (i.e., Internal Capital Adequacy Assessment Process for banks and Own Risk and Solvency Assessment for insurers). 
   • For financial Crown corporations, where OSFI has no legislative supervisory authority, financial Crown corporations should not benchmark themselves against private actors or systemically important banks. Target capital adequacy levels for these financial Crown corporations should be clearly identified, and they should not hold capital levels above an A solvency rating or equivalent.
   • Capital retention policies of financial Crown corporations should protect against reasonable risks that could adversely impact their ability to deliver on their public policy mandates through a complete business cycle.
   • Capital in excess of required capital should be returned to the shareholder in the form of dividends over the course of the planning horizon.
   • Financial Crown corporations will be assessed on their need for capital using internal capital adequacy models. For informational purposes, they should report capital adequacy using both internal and OSFI regulatory approaches.
3. Financial Crown corporations should use financial and output based performance metrics consistent with relevant best practices of peer organizations in similar international jurisdictions. Metrics related to economic growth and return on capital should be considered, while recognizing factors such as differing mandates and objectives, their access to the Consolidated Revenue Fund and the explicit backing of the Government of Canada. The concept that capital has a cost and should be no less than the Government’s cost of borrowing, should be embedded in these performance measures.
4. Capital and dividend strategies, accompanying financial performance and economic growth objectives and outcomes, should be submitted for approval through Corporate Plan submissions to Treasury Board ministers. These strategies, objectives, and outcomes will be reviewed by the Minister of Finance, pursuant to their responsibility over the capital, dividend, and risk management policies of Crown corporations.
   • Capital deployment plans should be submitted as part of the Corporate Plan approval process, with associated capital requirements and risks segmented to demonstrate the drivers of capital demand. Capital deployment should target market segments underserved by the private sector.
   • Financial metrics, including capital, dividend, financial performance and output based metrics such as economic growth should be reported in annual reports against past projections.
   • Boards of directors of financial Crown corporations should declare dividends at their Board meeting immediately following the finalization of their fiscal year-end financial results, or at such earlier occasion as may be appropriate.
5. The Government would stand prepared to inject capital into a financial Crown corporation should it be demonstrated that additional capital is needed to deliver on the corporation’s public policy mandate. Risk tolerance and capital management and dividend policies should reflect this, and corporate plans should outline potential scenarios that could require recapitalization and expected timelines for Government to inject new capital.