EXHIBIT 1
CANADA MORTGAGE AND HOUSING CORPORATION
Unless otherwise indicated, dollar amounts hereafter in this document are
expressed in Canadian dollars. On May 11, 2005 the noon buying rate in New York
City payable in Canadian dollars ("$"), as reported by the Federal Reserve Bank
of New York, was $1.2474 = 1 United States dollars ("U.S.$").
CANADA MORTGAGE AND HOUSING CORPORATION
GENERAL INFORMATION
AGENCY AND CROWN CORPORATION STATUS
Canada Mortgage and Housing Corporation ("CMHC") is an agent of Her Majesty
in right of Canada by virtue of the Canada Mortgage and Housing Corporation Act
(the "CMHC Act") and is a Crown corporation wholly-owned by Canada. Crown
corporations are established by the Parliament of Canada for many purposes,
including use of commercial principles and practices for achieving public policy
objectives. CMHC is accountable for its affairs to Parliament through the
Cabinet Minister designated for CMHC.
All assets and liabilities of agent Crown corporations like CMHC are assets
and liabilities of Canada. Accordingly, as an agent of Her Majesty, the payment
of principal of and any interest or premium on all securities issued by CMHC, or
guaranteed as to timely payment of principal and interest, carries the full
faith and credit of Canada and all such securities, or guarantees, constitute
direct unconditional obligations of and by Canada. Payment of the principal of,
and interest, if any, on securities issued by CMHC, and the guarantee of CMHC,
as to timely payment of principal and interest, constitute a charge on and are
payable out of the Consolidated Revenue Fund of Canada (the "CRF"). The CRF is
the aggregate of all public moneys, such as tax revenues, which are on deposit
at the credit of the Receiver General for Canada, the public officer who
receives or collects public moneys for and on behalf of Canada.
ROLE
The principal role of CMHC is to carry out the provisions of the National
Housing Act (the NHA). CMHC achieves its mandate through the following three
corporate objectives:
Helping Canadians in need
To help the significant number of Canadians who cannot afford adequate or
suitable housing, as Canada's national housing agency, CMHC is committed to:
o contributing to the construction and preservation of affordable
housing with both direct and indirect assistance
o assisting Aboriginal people to improve their housing conditions
through new construction, repair of existing homes and the development
of housing markets and the Aboriginal housing sector
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Facilitating access to more affordable, better quality housing for all Canadians
Most Canadians are well housed thanks to the well-functioning Canadian
housing system. In order to maintain this, CMHC is committed to:
o providing Canadians greater access to mortgage financing and ensuring
an abundant supply of low-cost funds is available in the residential
mortgage market
o ensuring that housing is durable, energy efficient and well-suited to
the needs of Canadians
o helping the Canadian housing sector remain internationally competitive
Ensuring the Canadian housing system remains one of the best in the world
Looking ahead, CMHC wants to ensure that the Canadian housing system
remains one of the best in the world. In order to accomplish this, CMHC is
committed to:
o enhancing the Canadian Housing Framework and nurturing the
partnerships that help provide housing solutions for all Canadians
o sharing our expertise and the benefits of the Canadian housing system
with other countries around the world o building internal capacity and
ensuring CMHC is a strong organization able to fulfil its mandate
OPERATIONS
CMHC's mandate and objectives are carried out through three broad activities:
Lending Activity, Insurance and Securitization, and Housing Programs.
Lending Activity
----------------
CMHC makes loans and investments in housing programs under various
provisions of the NHA, which are funded by borrowings from the capital markets
and the Government of Canada. By providing loans at attractive interest rates,
CMHC helps to lower the cost of social housing. A significant number of these
loans and investments are supported with housing program subsidies.
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Insurance and Securitization
----------------------------
To facilitate access to affordable housing finance options, CMHC provides
mortgage loan insurance against borrower default on residential mortgages. This
gives lenders the security for offering mortgages at the lowest possible rates.
Borrowers benefit by being able to buy a home with as little as 5 per cent down.
CMHC also guarantees the timely payment of principal of and interest on
securities issued on the basis of housing loans, thus increasing the supply of
low-cost mortgage funds through secondary mortgage markets.
Housing Programs
----------------
As Canada's national housing agency, CMHC ensures that federal housing
subsidies address national housing objectives, including the renovation of the
existing housing stock occupied by low income households. CMHC also supports
Aboriginal housing needs through on-reserve assistance and capacity development.
Through long-standing partnerships, the Corporation provides funding to support
and renovate Canada's existing social housing stock, and funds new commitments
under the Affordable Housing Program Agreements. CMHC also facilitates
affordable housing creation through public-private partnerships.
CMHC is the key Canadian source of reliable and objective information on
national and regional housing issues and international housing markets. The
Corporation undertakes research in core theme areas and promotes the uptake of
research results through product development and dissemination, education and
the provision of advice and information. CMHC's Market Analysis Centre supports
the housing market by providing timely analysis and forecasts of economic,
housing, and mortgage market trends and conditions.
CMHC promotes exports and international business for Canada's housing
industry by working to increase the recognition and acceptance of Canada's
housing products, services and expertise in priority markets around the world.
CMHC acts in a consulting capacity to assist other countries in the
establishment of housing finance and other systems required to improve their
housing sectors. The Corporation also receives foreign delegations interested in
housing and represents Canada internationally on housing and human settlements
issues.
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HISTORY
CMHC, the national housing agency of the Government of Canada, was
established in 1946 to promote the construction of new houses, the repair and
modernization of existing houses, and the improvement of housing and living
conditions. CMHC advises the Government of Canada in housing and related matters
and administers national housing policies and programs.
CMHC began in 1946 as a provider of mortgage money, directly and
indirectly. It helped borrowers with limited means obtain housing finance at
more favourable terms and conditions. Beneficiaries included buyers of modest
homes and providers of low-income housing.
In 1954, CMHC introduced insured mortgage financing, which brought banks
and other financial institutions into the mortgage market. Currently, in Canada
mortgage loan insurance provided by CMHC or by the private sector is mandatory
for most lenders if the ratio of loan to lending value is over 75 per cent.
CMHC-insured financing is now a key element in Canada's system of housing
finance. It ensures that borrowers everywhere have access to mortgages with low
downpayment requirements and competitive interest rates.
The need to house the post-war baby boom generation in the 1960s and 1970s
brought CMHC into several new areas. In collaboration with the provinces, the
municipal sector and non-profit organizations, CMHC was behind the creation of a
stock of social housing. CMHC also invested in housing rehabilitation,
inner-city revitalization, urban land assembly, community infrastructure and
energy efficient housing. A sizeable amount of resources was devoted to
assisting first time buyers and assisting the industry to produce affordable
rental housing.
Increased collaboration with the provinces and increased targeting of
assistance began in the mid-1980s. Today, CMHC partners with Canada's Provinces
and Territories in helping those who are most in need. In 1992, CMHC began
direct financing and refinancing of social housing projects previously financed
by the private sector. CMHC raises funds in the capital markets at rates
commensurate with its Crown corporation status for social housing loans at
break-even rates, thereby reducing the cost of housing assistance. CMHC also
facilitates production of affordable housing without ongoing subsidies through
public-private housing partnerships.
Mortgage securitization was introduced by CMHC in 1987 and involves CMHC's
guarantee of timely payment of principal of and interest on securities issued on
the basis of housing loans. Currently these securities include NHA
Mortgage-Backed Securities (NHA MBS) issued by financial institutions in Canada
and Canada Mortgage Bonds (CMB) issued by Canada Housing Trust(TM). The Canada
Mortgage Bonds Program was launched in 2001. Both of these programs provide
alternative funding mechanisms for residential mortgages.
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CMHC's current priorities include stimulating affordable housing supply and
preserving the existing housing stock. CMHC now uses its commercial flexibility
and tools in mortgage insurance and securitization to further housing
affordability and choices and to increase competition and efficiency in the
housing finance system.
CMHC promotes good housing and living conditions and supports the housing
sector by being a major source of reliable and objective housing information.
CMHC's activities in research, market analysis, and information dissemination
cover the technical, economic and social aspects of housing. In collaboration
with partners from the public, private and volunteer sectors, CMHC identifies
priority issues, causes the work to be undertaken, and ensures that the results
are widely shared.
CMHC's national office is located at 700 Montreal Road, Ottawa, Ontario,
K1A 0P7 (telephone: 613-748-2000). During 2004, CMHC consumed 1,814 staff years
at its national office in Ottawa and its five regional business centres and
several local offices across the country.
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FINANCIAL HIGHLIGHTS OF OPERATIONS
Financial highlights for the Corporation's main activities, Lending,
Insurance and Securitization, and Housing Programs are provided below.
LENDING ACTIVITY
Total loans and investments in housing programs at December 31, 2004 were
$13.7 billion.
As at December 31, 2004, CMHC had outstanding borrowings from the
Government of Canada in the amount of $5.0 billion and from the capital markets
in the amount of $9.2 billion.
INSURANCE AND SECURITIZATION
Insurance
---------
Total loan insurance in force as at December 31, 2004 was approximately
$244 billion. Revenues from premiums and fees increased by $180 million to
$1,095 million in 2004. Net claims expense during 2004 was 73 per cent lower
than during 2003.
Securitization
--------------
As at December 31, 2004, there were approximately $81 billion of guarantees
in force of which $26 billion was attributable to guarantees related to NHA MBS
and $55 billion related to CMB. Revenues from guarantee and application fees
increased by $8 million to $40 million in 2004.
HOUSING PROGRAMS
The Government of Canada reimburses CMHC for payments made under the
federal government's assisted housing programs and payments made in support of
research and information transfer and international activities. The Government
also reimburses CMHC for operating expenses related to housing programs.
Payments in 2004 were $2.0 billion.
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CONTROLS AND FINANCING AUTHORITY
BOARD OF DIRECTORS
CMHC's Board of Directors is responsible for managing the affairs of CMHC
and the conduct of its business.
There are four Board Committees: the Corporate Governance Committee, the
Audit Committee, the Human Resources Committee and the Nominating Committee. The
Board of Directors and Principal Officers of CMHC are listed following this
narrative.
LEGISLATION
CMHC's authorities, roles and responsibilities are defined in the Canada
Mortgage and Housing Corporation Act ("CMHC Act"), the National Housing Act
("NHA"), and the Financial Administration Act ("FAA").
CANADA MORTGAGE AND HOUSING CORPORATION ACT
CMHC is incorporated pursuant to the CMHC Act. The CMHC Act establishes
CMHC as an agent of Her Majesty in right of Canada. The CMHC Act delineates the
constitution as well as the general powers of CMHC. These provisions set forth
the requirements for the appointment of CMHC's Board of Directors and officers
as well as the roles of the Board and the President. The borrowing powers of
CMHC, as well as the statutory limits on CMHC's borrowing in the capital
markets, are also set forth in the CMHC Act. CMHC's borrowing limits may also be
increased through an Act of Parliament.
NATIONAL HOUSING ACT
CMHC was established to carry out the provions of the NHA. CMHC's mandate
as described in the NHA is to promote: housing construction, repair and
modernization; housing affordability and choice; improvements to overall living
conditions; the availability of low-cost financing; and the national well-being
of the housing sector.
FINANCIAL ADMINISTRATION ACT
The basic system of financial and budgetary controls for federal government
departments and Crown corporations is established under the FAA. CMHC is
governed by the CMHC Act and by general provisions of the FAA in respect of
management, books of account, records, auditing and reporting. Under the FAA,
the Governor-in-Council may give directives to Crown corporations when it is in
the public interest to do so, with such directives being implemented promptly
and efficiently.
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Under the FAA, CMHC must annually submit a five-year corporate plan (the
"Corporate Plan") to the Minister Responsible for CMHC, (currently, the Minister
of Labour and Housing) for approval by the Governor-in-Council. Following
approval, a summary is tabled in Parliament by the Minister Responsible for
CMHC, after which time the summary becomes a public document. The Corporate Plan
sets forth information according to the activities of CMHC for the next five
years and includes annual Operating and Capital Budgets for the financial
operations of CMHC.
The FAA also requires that CMHC's annual financial statements be prepared
in accordance with generally accepted accounting principles in Canada and that
an annual auditor's report be prepared in respect of CMHC's financial
statements. The auditors' report is addressed to the Minister Responsible for
CMHC, through whom CMHC is ultimately accountable to Parliament. An annual
report on CMHC's operations for the past year, including the annual financial
statements and auditors' report, must be submitted to the Minister Responsible
for CMHC for presentation to Parliament.
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INDEBTEDNESS AND EQUITY
The following table shows the indebtedness and equity of CMHC's business as
at December 31, 2004.
(in millions of dollars)
------------------------
Short-term indebtedness (1):
Government of Canada .............................. $ 0
Capital Market..................................... 1,287
-------
1,287
Current portion of long-term indebtedness (2):
Government of Canada............................... 197
Capital Market..................................... 2,214
-------
2,411
Long-term indebtedness(2):
Government of Canada............................... 4,848
Capital Market..................................... 5,706
-------
10,554
Equity of Canada
Capital Authorized and Fully Paid.................. 25
Retained Earnings (3).............................. 3,401
-------
3,426
Total.................................................. $17,678
=======
1. CMHC had uncommitted bank lines of credit of $550 million at December
31, 2004.
2. Long-term indebtedness to Government of Canada, due 2005-2038, bears
fixed interest rates from 3.50 per cent to 17.96 per cent, with a
weighted average interest rate of 9.07 per cent. Capital market
long-term borrowings of $7.9 billion due 2005-2013 include bonds and
notes that were issued at fixed coupon rates of 2.75 per cent to 6.70
per cent with a weighted average coupon rate of 5.01 per cent.
Floating rate notes represent $550 million of the long-term
borrowings.
3. Of the total retained earnings, $155 million is unappropriated, $3,112
million is appropriated for Capitalization and $134 million relates to
the Reserve Fund. The Reserve Fund is limited to $175 million.
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CANADA MORTGAGE AND HOUSING CORPORATION FINANCIAL HIGHLIGHTS
The following information has been derived from the Financial Statements of
CMHC. Management has presented the Financial Statements in accordance with
generally accepted accounting principles in Canada. These principles may differ
in some respects from generally accepted accounting principles in the United
States. The following information should be read in conjunction with the
Financial Statements and the Notes to the Financial Statements included
elsewhere herein.
The following financial review provides a historical summary of the
financial results for 2000 through 2004. As of 2001, CMHC's financial statements
are presented on an integrated basis. Accordingly, prior year figures have been
reclassified to conform to this presentation. Effective January 1, 2004, the
Corporation adopted Accounting Guideline 13: Hedging Relationships (AcG-13),
issued by the Canadian Institute of Chartered Accountants. This change in
accounting policy has been applied prospectively.
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BALANCE SHEET
As at 31 December 2004
(in millions of dollars) 2004 2003 2002 2001 2000
- ------------------------ ---- ---- ---- ---- ----
ASSETS
Loans and Investments in Housing Programs 13,669 14,075 14,601 15,239 15,841
Investments in Securities 8,594 7,191 5,585 4,482 4,191
Cash and Cash Equivalents 2,841 2,485 1,272 1,660 631
Accrued Interest Receivable 332 387 372 427 473
Securities Purchased Under Resale Agreements 576 314 1,205 1,466 1,273
Due from the Government of Canada 203 147 106 18 315
Accounts Receivable and Other Assets 179 146 178 287 218
Future Income Tax Assets 111 100 77 103 110
Inventory of Real Estate 87 90 106 140 192
Derivative-Related Amounts 80 -- -- -- --
------ ------ ------ ------ ------
26,672 24,935 23,502 23,822 23,244
------ ------ ------ ------ ------
LIABILITIES
Borrowings from the Capital Markets 9,207 10,193 10,147 10,986 10,984
Borrowings from the Government of Canada 5,045 5,232 5,474 5,692 5,924
Unearned Premiums and Fees 4,355 3,965 3,649 3,141 2,836
Securities Sold Under Repurchase Agreements 2,976 1,554 1,116 1,240 991
Accounts Payable and Other Liabilities 869 709 442 342 362
Provision for Claims 507 622 620 695 694
Accrued Interest Payable 128 182 172 233 247
Securities Sold But Not Yet Purchased 121 2 73 228 286
Derivative-Related Amounts 38 -- -- -- --
------ ------ ------ ------ ------
23,246 22,459 21,693 22,557 22,324
------ ------ ------ ------ ------
EQUITY OF CANADA
Capital Authorized and Fully Paid 25 25 25 25 25
Retained Earnings 3,401 2,451 1,784 1,240 895
------ ------ ------ ------ ------
3,426 2,476 1,809 1,265 920
------ ------ ------ ------ ------
26,672 24,935 23,502 23,822 23,244
====== ====== ====== ====== ======
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INCOME STATEMENT
Year Ended 31 December
(in millions of dollars) 2004 2003 2002 2001 2000
- ------------------------ ---- ---- ---- ---- ----
REVENUES
Interest Earned on Loans and Investments
in Housing Programs 1,011 1,069 1,100 1,184 1,242
Premiums and Fees 1,135 947 822 745 697
Investment Income 408 345 293 278 257
----- ----- ----- ----- -----
2,554 2,361 2,215 2,207 2,196
----- ----- ----- ----- -----
Parliamentary Appropriations for:
Housing Programs 2,006 1,972 1,828 1,789 1,913
Operating Expenses 101 97 81 68 83
----- ----- ----- ----- -----
2,107 2,069 1,909 1,857 1,996
----- ----- ----- ----- -----
4,661 4,430 4,124 4,064 4,192
----- ----- ----- ----- -----
EXPENSES
Housing Program Expenses 2,006 1,972 1,828 1,789 1,913
Interest Expense 937 999 1,042 1,120 1,197
Net Claims 51 188 139 335 307
Operating Expenses 261 255 224 201 208
Other Expenses 7 9 37 55 55
----- ----- ----- ----- -----
3,262 3,423 3,270 3,500 3,680
----- ----- ----- ----- -----
Income before Income Taxes 1,399 1,007 854 564 512
----- ----- ----- ----- -----
Income Taxes
Current 460 383 284 185 159
Future (11) (43) 26 34 (23)
----- ----- ----- ----- -----
449 340 310 219 136
----- ----- ----- ----- -----
NET INCOME 950 667 544 345 376
===== ===== ===== ===== =====
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FUNDING
AUTHORITY TO BORROW
CMHC had, until 1993, borrowed funds from the CRF ("Consolidated Revenue
Fund") for all of its business purposes. The CMHC Act requires that these
borrowings be made in accordance with the terms and conditions approved by the
Governor-in-Council.
CMHC's current CRF borrowing agreement with the Government of Canada was
approved by Order-in-Council P.C. 1991-295 on February 14, 1991. CMHC now
assumes the interest rate risk which was previously borne by the CRF.
Order-in-Council P.C. 1991-295 discontinued CMHC's right of prepayment on such
borrowings without penalty. The effect of such discontinuation is discussed more
fully in Note 16 of the Notes to Financial Statements included elsewhere herein.
Since December 1993, CMHC has not borrowed from the CRF. CMHC may, with the
approval of the Minister of Finance, borrow money in the capital markets,
including issuing and selling bonds, debentures, notes and other evidences of
indebtedness. The FAA requires all borrowing to be consistent with the current
Corporate Plan.
CMHC borrows in the capital markets to satisfy the borrowing requirements
associated with the financing of social housing mortgages. CMHC borrows money in
the capital markets at rates of interest reflecting its Crown corporation status
and finances these social housing loans at break-even rates in order to reduce
the cost of social housing assistance.
BORROWING LIMITS
The CMHC Act sets statutory limits on borrowings by CMHC in the capital
markets. CMHC's capital markets borrowing ceiling is $20 billion. In addition,
the maximum principal amount of capital markets borrowings outstanding at any
time may not exceed the amount outlined in CMHC's Corporate Plan and the amount
approved by the Minister of Finance. The balance outstanding owed on capital
markets borrowings as at December 31, 2004 was $9.2 billion.
The borrowing program, to date, has included Canadian dollar offerings in
the domestic, Euro, and global markets, U.S. dollar offerings in the Euro and
global markets, and the issuance of notes through a domestic and a Euro Medium
Term Note program. In addition, CMHC borrows through a commercial paper program
in the Canadian capital markets and has established uncommitted lines of credit
with several chartered banks.
DEBT RECORD
CMHC has always paid promptly, when due, the full face amount of the
principal of and interest on every direct obligation issued by it and every
indirect obligation on which it has been required to implement its guarantee.
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CASH MANAGEMENT AND INVESTMENT ACTIVITIES
Cash balances are maintained in interest bearing bank deposits. Cash
surpluses are invested in short-term marketable securities, such as high grade
bankers' acceptances, commercial paper and Canada treasury bills. Other
investment activities relate primarily to Insurance and Securitization, with
investments in investment-grade money market and fixed income securities and
equities. As at December 31, 2004, cash and cash equivalents and investments in
securities totaled $11.4 billion. Investments in securities include money market
and fixed income securities and equities.
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BOARD OF DIRECTORS AND PRINCIPAL OFFICERS
BOARD OF DIRECTORS PRINCIPAL OFFICERS
(As at December 31, 2004) (As at December 31, 2004)
DINO CHIESA KAREN KINSLEY, CA
Acting Chairman of the Board of Directors President and Chief Executive Officer
KAREN KINSLEY, CA SHARON MATTHEWS
Ottawa, Ontario Vice-President,
President and Chief Executive Officer Insurance and Securitization
Canada Mortgage and Housing Corporation
GILLES PROULX
MICHEL BERUBE Acting, Vice-President,
Charlesbourg, Quebec Risk Management and
Vice-President, Ciment Quebec Inc. Pension Fund
CATHERINE C. CRONIN, CA PIERRE SERRE, CA
Winnipeg, Manitoba Vice-President,
Chartered Accountant Finance and Chief Financial Officer
HUGH HERON MEL SKINNER
Willowdale, Ontario Vice-President,
Principal and Partner, Heron Group of Companies Human Resources
ROBERTA HAYES BILL SMITH
Moncton, New Brunswick Vice-President,
Co-owner, Manager HomeLife Hayes Realty Assisted Housing
SOPHIE JONCAS, CA BERTA ZACCARDI
Saint- Hubert, Quebec Vice-President,
Partner, Lapointe, Gagne, Petrone CA Corporate Services
GRACE KWOK DOUGLAS A. STEWART
Vancouver, British Columbia Vice-President,
Owner and Vice-President Anson Realty Ltd. Policy and Planning
LOUIS RANGER CHARLES D. CHENARD
Ottawa, Ontario General Manager
Deputy Minister, Transport Canada Quebec Region
PETER FRIEDMANN
General Manager
Ontario Region
TREVOR GLOYN
Genral Manager
Prairie, Nunavut and Northwest Territories Region
CAROLYN KAVANAGH
General Manager
Atlantic Region
NELSON MERIZZI
General Manager
British Columbia and Yukon Region
LUC FOURNIER
Corporate Secretary
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MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Year ended 31 December 2004
CMHC management is responsible for the integrity and objectivity of the
financial statements and related financial information presented in this annual
report. The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles, and, where necessary, include amounts
which are based on the best estimates and judgement of management. The financial
information contained elsewhere in this annual report is consistent with that in
the financial statements.
In carrying out its responsibilities, management maintains appropriate financial
systems and related internal controls to provide reasonable assurance that
financial information is reliable, assets are safeguarded, transactions are
properly authorized and are in accordance with the relevant legislation and
by-laws of the Corporation, resources are managed efficiently and economically,
and operations are carried out effectively. The system of internal controls is
supported by internal audit, which conducts periodic audits of different aspects
of CMHC's operations.
The Board of Directors, acting through the Audit Committee whose members are not
officers of the Corporation, oversees management's responsibilities for
financial reporting and internal control systems. The Board of Directors, upon
the recommendation of the Audit Committee, has approved the financial
statements.
Raymond Chabot Grant Thornton, LLP, and Sheila Fraser, FCA, Auditor General of
Canada, have audited the financial statements. The independent auditors have
full access to, and meet periodically with, the Audit Committee to discuss their
audit and related matters.
/s/ Karen Kinsley /s/ Pierre Serre
- ----------------------- --------------------------
Karen Kinsley Pierre Serre
President and Vice-President,Finance and
Chief Executive Officer Chief Financial Officer
8 March 2005
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(LOGO) AUDITOR GENERAL OF CANADA (LOGO) RAYMOND CHABOT GRANT THORNTON
Verificatrice generale du Canada
AUDITORS' REPORT
To the Minister of Labour and Housing
We have audited the balance sheet of the Canada Mortgage and Housing Corporation
as at 31 December 2004 and the statements of income, retained earnings and cash
flows for the year then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Corporation as at 31 December 2004 and
the results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles. As required
by the Financial Administration Act, we report that, in our opinion, these
principles have been applied, except for the changes in the method of
accounting for derivative financial instruments, investments in securities
related to the management of interest risk associated with funding activities,
and securities sold but not yet purchased as explained in Note 3 to the
financial statements, on a basis consistent with that of the preceding year.
Further, in our opinion, the transactions of the Corporation that have come to
our notice during our audit of the financial statements have, in all
significant respects, been in accordance with Part X of the Financial
Administration Act and regulations, the Canada Mortgage and Housing Corporation
Act, the National Housing Act and the by-laws of the Corporation.
The financial statements for the year ended December 31, 2003, shown for
comparative purposes, were audited by the Auditor General of Canada and other
auditors.
/s/ Sheila Fraser /s/ Raymond Chabot Grant Thornton, LLP
- ----------------- --------------------------------------
Sheila Fraser, FCA Raymond Chabot Grant Thornton, LLP
Auditor General of Canada
Ottawa, Canada Montreal, Canada
8 March 2005
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F I N A N C I A L S T A T E M E N T S
BALANCE SHEET
As at 31 December
NOTES 2004 2003
----- ---- ----
(in millions of dollars)
- ------------------------
ASSETS
Loans and Investments in Housing Programs 4 13,669 14,075
Investments in Securities 5 8,594 7,191
Cash and Cash Equivalents 2,841 2,485
Securities Purchased Under Resale Agreements 576 314
Accrued Interest Receivable 332 387
Due from the Government of Canada 203 147
Accounts Receivable and Other Assets 179 146
Future Income Tax Assets 6 111 100
Inventory of Real Estate 87 90
Derivative-Related Amounts 3 80 --
------ ------
26,672 24,935
====== ======
LIABILITIES
Borrowings from the Capital Markets 7 9,207 10,193
Borrowings from the Government of Canada 7 5,045 5,232
Unearned Premiums and Fees 8 4,355 3,965
Securities Sold Under Repurchase Agreements 2,976 1,554
Accounts Payable and Other Liabilities 9 869 709
Provision for Claims 8 507 622
Accrued Interest Payable 128 182
Securities Sold But Not Yet Purchased 121 2
Derivative-Related Amounts 3 38 --
------ ------
23,246 22,459
EQUITY OF CANADA
Capital Authorized and Fully Paid 25 25
Retained Earnings 12 3,401 2,451
------ ------
3,426 2,476
26,672 24,935
====== ======
See accompanying notes to the financial statements.
Approved by the Board of Directors:
/s/ Dino Chiesa /s/ Sophie Joncas
- ----------------------- --------------------------
Dino Chiesa Sophie Joncas
Acting Chair, Board of Directors Chair, Audit Committee
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F I N A N C I A L S T A T E M E N T S
INCOME STATEMENT
Year ended 31 December
NOTES 2004 2003 2002
----- ---- ---- ----
(in millions of dollars)
- ------------------------
REVENUES
Interest Earned on Loans and Investments in Housing Programs 13 1,011 1,069 1,100
Premiums and Fees 8 1,135 947 822
Investment Income 408 345 293
----- ----- -----
2,554 2,361 2,215
Parliamentary Appropriations for: 13
Housing Programs 2,006 1,972 1,828
Operating Expenses 101 97 81
----- ----- -----
2,107 2,069 1,909
4,661 4,430 4,124
===== ===== =====
EXPENSES
Housing Programs 13 2,006 1,972 1,828
Interest Expense 937 999 1,042
Operating Expenses 261 255 224
Net Claims 51 188 139
Other Expenses 14 7 9 37
----- ----- -----
3,262 3,423 3,270
INCOME BEFORE INCOME TAXES 1,399 1,007 854
===== ===== =====
INCOME TAXES 6
Current 460 383 284
Future (11) (43) 26
----- ----- -----
449 340 310
NET INCOME 950 667 544
===== ===== =====
See accompanying notes to the financial statements.
-20-
F I N A N C I A L S T A T E M E N T S
STATEMENT OF RETAINED EARNINGS
(NOTE 12)
UNAPPROPRIATED EARNINGS SET RESERVE FOR
RETAINED ASIDE FOR LENDING
EARNINGS CAPITALIZATION ACTIVITY TOTAL
-------------- -------------- ----------- -----
(in millions of dollars)
- ------------------------
Balance 31 December 2001 260 938 42 1,240
Net Income 530 -- 14 544
Set Aside for Capitalization (442) 442 -- --
---- ----- --- -----
Balance 31 December 2002 348 1,380 56 1,784
Net Income 632 -- 35 667
Set Aside for Capitalization (857) 857 -- --
---- ----- --- -----
Balance 31 December 2003 123 2,237 91 2,451
Net Income 907 -- 43 950
Set Aside for Capitalization (875) 875 -- --
---- ----- --- -----
BALANCE 31 DECEMBER 2004 155 3,112 134 3,401
==== ===== === =====
See accompanying notes to the financial statements.
-21-
F I N A N C I A L S T A T E M E N T S
STATEMENT OF CASH FLOWS
Year ended 31 December
2004 2003 2002
---- ---- ----
(in millions of dollars)
- ------------------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net Income 950 667 544
Items Not Affecting Cash or Cash Equivalents
Amortization of Premiums and Discounts 12 23 27
Future Income Taxes (11) (43) 26
Market Value Adjustment for Equities (32) (5) 3
Gain on Sale of Securities (79) (58) (24)
Net Change in Non-cash Operating Assets and Liabilities 155 394 458
------ ------ ------
995 978 1,034
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Loans and Investments in Housing Programs
Repayments 673 715 1,100
Disbursements (267) (204) (447)
Investments in Securities
Sales and Maturities 8,106 8,252 5,126
Purchases (9,355) (9,778) (6,256)
Change in Securities Purchased Under Resale Agreements (262) 891 261
------ ------ ------
(1,105) (124) (216)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Medium-term Borrowings from the Capital Markets
Issuances 850 2,290 1,561
Repayments (2,350) (1,890) (2,123)
Change in Short-term Borrowings from the Capital Markets 612 (166) (147)
Repayment of Borrowings from the Government of Canada (187) (242) (218)
Change in Securities Sold Under Repurchase Agreements 1,422 438 (124)
Change in Securities Sold But Not Yet Purchased 119 (71) (155)
------ ------ ------
466 359 (1,206)
Increase (Decrease) in Cash and Cash Equivalents 356 1,213 (388)
CASH AND CASH EQUIVALENTS
Beginning of year 2,485 1,272 1,660
------ ------ ------
End of year 2,841 2,485 1,272
REPRESENTED BY:
Cash 4 6 (13)
Temporary Investments 2,837 2,479 1,285
------ ------ ------
2,841 2,485 1,272
====== ====== ======
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Amount of Interest Paid During the Year 960 989 1,103
Amount of Income Taxes Paid During the Year 476 390 188
====== ====== ======
See accompanying notes to the financial statements.
-22-
F I N A N C I A L S T A T E M E N T S
NOTES TO FINANCIAL STATEMENTS
Year ended 31 December 2004
1. CORPORATE MANDATE AND ACTIVITIES
Canada Mortgage and Housing Corporation (CMHC) was established as a Crown
corporation in 1946 by the Canada Mortgage and Housing Corporation Act (the
"CMHC Act") to carry out the provisions of the National Housing Act (the "NHA").
It is also governed by the Financial Administration Act (the "FAA"), and is
wholly-owned by the Government of Canada.
Within the Public Accounts of Canada,CMHC's annual Net Income increases the
Government's annual surplus; its Capital and Retained Earnings reduce the
Government's accumulated deficit.
CMHC's mandate is to promote the construction,repair and modernization of
housing,the improvement of housing and living conditions,housing affordability
and choice, the availability of low-cost financing for housing and the national
well-being of the housing sector. The mandate is carried out through three broad
activities:Insurance and Securitization, Housing Programs and Lending.
INSURANCE AND SECURITIZATION:
The Corporation provides insurance against borrower default on residential
mortgages and guarantees the timely payment of principal and interest for
investors in securities based on insured mortgages.
HOUSING PROGRAMS:
The Corporation receives Parliamentary appropriations which are used to fund
housing programs.
LENDING ACTIVITY:
The Corporation makes loans and investments in housing programs which are funded
by borrowings. A significant number of these loans and investments are supported
with housing program subsidies.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements are prepared in accordance with Canadian generally
accepted accounting principles (GAAP). GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and related disclosures. Actual results could differ from those
estimates.
LOANS AND INVESTMENTS IN HOUSING PROGRAMS
The Corporation,independently or jointly with the Provinces,Territories,and
Municipalities,funds Loans and Investments in Housing Programs.
Loans are carried at cost. Where loans contain forgiveness clauses, they are
recorded net of the forgiveness which is reimbursed through Parliamentary
appropriations when the loans are advanced.
Loans made under certain programs contain interest rate clauses that are lower
than the interest cost on the related borrowings. Such interest losses are
reimbursed through Parliamentary appropriations.
Investments in Housing Programs represent the Corporation's ownership interest
in various housing projects. They are carried at cost, less accumulated
amortization. Amortization is calculated on a straight-line basis over the life
of the investment. The Corporation's portion of net operating losses and
disposal losses is reimbursed through Parliamentary appropriations.
Interest Earned on Loans and Investments in Housing Programs is recorded on an
accrual basis.
The Corporation is assured full collection of principal and accrued interest on
the majority of the Loans and Investments in Housing Programs as described in
Note 4. The remainder of the portfolio is underwritten through the Corporation's
Insurance activity. Provision for losses on these loans is included in the
determination of Provision for Claims and Unearned Premiums.
-23-
F I N A N C I A L S T A T E M E N T S
CASH EQUIVALENTS AND INVESTMENTS IN SECURITIES
The Corporation holds Cash Equivalents and Investments in Securities for its
Insurance and Securitization, and Lending Activities. Accounting policies are
described in the table below.
RECOGNITION OF
REALIZED GAINS RECOGNITION OF
CARRYING VALUE AND LOSSES IMPAIRMENT
-------------- -------------- --------------
INSURANCE, SECURITIZATION Lower of cost and market Gains and losses are Not applicable.
AND LENDING ACTIVITIES -- value. included in income at the
Cash Equivalents represent time of sale.
short-term, highly liquid
investments with terms to
maturity of three months
or less that are readily
convertible to known
amounts of cash and
which are subject to
an insignificant risk of
changes in value.
LENDING ACTIVITY -- Amortized cost. Premiums Gains and losses are Specific securities are written
Investments in Securities and discounts are deferred included in Interest Earned down to their market value
held for cash management and amortized on a constant on Loans and Investments when the decline in the
purposes. yield basis over the term in Housing Programs at value of the security is other
of the related investments. the time of sale. than temporary. The resulting
loss is recorded in the year
in which the impairment
occurs.
LENDING ACTIVITY --
Investments in Securities Amortized cost. Premiums Gains and losses are Specific securities are written
related to managing interest and discounts are deferred included in income at the down to their market value
rate risk associated with and amortized on a constant time of sale. when the decline in the
funding activities. yield basis over the term of value of the security is
the related investments. other than temporary. The
resulting loss is recorded
in the year in which the
impairment occurs.
INSURANCE AND Amortized cost. Premiums Gains and losses are deferred Specific securities are written
SECURITIZATION -- and discounts are deferred and amortized to Investment down to their market value
Fixed Income Securities and amortized on a constant Income, on a straight-line when the decline in the
generally purchased with the yield basis over the term of basis, over the remaining life value of the security is
intention to hold them to the related investments. of the original investment. other than temporary. The
maturity to meet long-term resulting loss is recorded
obligations. in the year in which the
impairment occurs.
INSURANCE AND Cost, plus a moving average Net gains and losses are Written down to their
SECURITIZATION -- market value adjustment of deferred and amortized to market value when the
Equities 5% per quarter. Investment Income at 5% decline in the value of the
per quarter on a declining portfolio is other than
balance basis. temporary. The resulting loss
is recorded in the year in
which the impairment occurs.
-24-
F I N A N C I A L S T A T E M E N T S
SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SOLD UNDER REPURCHASE
AGREEMENTS
Securities Purchased Under Resale Agreements (Reverse Repurchase Agreements)
consist of the purchase of securities, typically government treasury bills or
bonds, with the commitment by the Corporation to resell the securities to the
original seller at a specified price and date. Securities Sold Under Repurchase
Agreements (Repurchase Agreements) consist of the sale of securities with the
commitment by the Corporation to repurchase the securities from the original
buyer at a specified price and date. These items are carried at cost, plus
accrued interest. Proceeds from securities sold under repurchase agreements are
invested for the purpose of generating additional income for the
Corporation. Such transactions are entered into simultaneously with matching
terms to maturity. As a result, the associated interest earned and interest
expense are netted and included in income on an accrual basis.
SECURITIES SOLD BUT NOT YET PURCHASED
Securities Sold But Not Yet Purchased represent the Corporation's obligation to
deliver securities which it did not own at the time of sale. These obligations
are recorded at fair value. Realized and unrealized gains and losses are
included in income.
INVENTORY OF REAL ESTATE
Inventory of Real Estate is carried at the lower of cost or fair value. Cost is
determined as the acquisition cost, plus modernization and improvement costs
where applicable. Fair value is calculated as the current market value of the
property, as determined by the Corporation, less the discounted value of
estimated holding and disposal costs.
For certain properties, net operating losses and disposal losses are reimbursed
through Parliamentary appropriations while net operating profits and disposal
gains are returned to the Government of Canada.
BORROWINGS FROM THE CAPITAL MARKETS
Issuance costs on borrowings from the capital markets are deferred and amortized
on a straight-line basis over the term of the debt issue.
Premiums and discounts on borrowings from the capital markets are deferred and
amortized on a constant yield basis over the term of the debt issue.
PREMIUMS AND FEES
Mortgage insurance premiums from CMHC's Insurance business are due at the
inception of the mortgage being insured at which time they are deferred and then
recognized as income over the period covered by the insurance contract using
actuarially determined factors. These factors reflect the long-term pattern for
default risk by age of a mortgage insurance policy.
Unearned premiums represent the portion of the premiums written that relates to
the unexpired portion of the policy at the Balance Sheet date and therefore
relate to claims that may occur from the Balance Sheet date to the termination
of the insurance policies. Annually, the unearned premiums are compared to the
Corporation's estimate of total future claims on a discounted basis to ensure
the amount is sufficient.
Guarantee fees from the Securitization business are received at the inception of
the related security issue at which time they are deferred and then recognized
as income over the term of the security issue (typically five years) on a
straight-line basis.
Application fees are recorded on an accrual basis.
Costs associated with issuing mortgage insurance policies and timely payment
guarantees are recorded on an accrual basis.
PROVISION FOR CLAIMS
The Provision for Claims represents an estimate for expected claims and the
related settlement expenses, net of the related expected mortgage foreclosure
proceeds, for defaults from the Insurance business that have occurred on or
before the Balance Sheet date. The provision takes into consideration the
estimate of losses on defaults that have been incurred but not reported, the
time value of money and in accordance with accepted actuarial practice, includes
an explicit provision for adverse deviation.
-25-
F I N A N C I A L S T A T E M E N T S
The establishment of the Provision for Claims involves estimates, which are
based upon historical trends, prevailing legal, economic, social and regulatory
trends, and expectations as to future developments. The process of determining
the provision necessarily involves risks that the actual results will deviate,
perhaps significantly, from the estimates made.
The loss on actual mortgage defaults and the change in estimate for the
Provision for Claims are recorded in Net Claims in the year in which they occur.
HOUSING PROGRAMS
Parliamentary appropriations for Housing Programs, and the related expenses, are
recorded on an accrual basis. Those expenses incurred but not yet reimbursed are
recorded as Due from the Government of Canada.
EMPLOYEE FUTURE BENEFITS
The Corporation provides a defined benefit pension plan, a supplemental pension
plan, and other post-employment benefits consisting of severance pay, life
insurance and medical insurance.
Pension benefits are based on length of service and average earnings of the best
five-year period as classified under defined benefit pension arrangements. The
pension benefits are adjusted annually by a percentage equivalent to the
increase in the average Consumer Price Index during the previous year. The
Corporation accrues its obligations under employee benefit plans and the related
costs, net of plan assets.
The cost of pension and other post-employment benefits earned by employees is
actuarially determined using the projected benefit method prorated on service
and management's best estimate of expected long-term pension plan investment
performance, salary increases, retirement ages of employees, mortality of
members and expected health care costs. These assumptions are of a long-term
nature, which is consistent with the nature of employee future benefits. Actual
results could differ from these estimates.
Costs are determined as the cost of employee benefits for the current year's
service, interest cost on the accrued benefit obligation, expected investment
return on the fair value of plan assets and the amortization of the transitional
asset / obligation, the deferred actuarial gains / losses and the deferred past
service costs.
The transitional asset / obligation, and past service costs are amortized over
the average remaining service period of active employees under the plans. The
excess of the net actuarial gain / loss over 10% of the greater of the benefit
obligation or the fair value of the plan assets is amortized over the average
remaining service period of active employees under the plans.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into derivative financial instruments such as interest
rate swaps and foreign currency swaps in order to manage its exposures to market
risks. The derivative financial instruments mitigate market risks, both at
inception and over the term of the instrument. The Corporation does not use
freestanding derivative financial instruments for trading or speculative
purposes.
In order for a derivative financial instrument to qualify as an eligible hedge
for accounting purposes, the hedge relationship must be designated and formally
documented at its inception. The Corporation formally documents the particular
risk management objective and strategy for the hedge, the specific asset,
liability or cash flow being hedged, and how effectiveness is measured. The
Corporation also formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivative is highly effective in offsetting either
changes in fair value or future cash flows of hedged items.
For derivative financial instruments that qualify as eligible hedges,
income / expenses are recorded as adjustments to Interest Expense on an accrual
basis. The related amount payable to, or receivable from, counterparties is
included in accrued interest. Translation gains / losses arising on foreign
currency swaps that qualify as eligible hedges are offset by translation gains /
losses on the related debt.
Hedge accounting is discontinued prospectively if the hedge relationship is no
longer effective, the derivative financial instrument is no longer designated as
an eligible hedge, or if the designated hedged item matures, is sold or is
terminated.The derivative financial instrument is then carried at fair value on
the Balance Sheet as of the date that hedge accounting is discontinued and
subsequent changes in fair value are recognized in Other Expenses.
-26-
F I N A N C I A L S T A T E M E N T S
Derivative financial instruments that do not qualify, or have not been
designated, as eligible hedges for accounting purposes are carried at fair value
on the Balance Sheet as Derivative -- Related Amounts. Subsequent changes in
fair value are recorded in Other Expenses.
FOREIGN CURRENCY TRANSLATION
All monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at exchange rates prevailing at the Balance
Sheet date. Exchange gains and losses resulting from the translation of foreign
denominated balances are included in Interest Expense.
2005 ACCOUNTING CHANGE
Accounting Guideline 15: Consolidation of Variable Interest Entities (AcG-15),
issued by the Canadian Institute of Chartered Accountants, comes into effect for
CMHC's fiscal year beginning 1 January 2005. This guideline sets out criteria
for the application of consolidation principles to certain entities that are
subject to control on a basis other than ownership of voting interests. These
entities are referred to as variable interest entities (VIE's). Under AcG-15, an
enterprise must consolidate a VIE when that enterprise has a variable interest
that will absorb a majority of the VIE's expected losses, receive a majority of
a VIE's expected residual returns, or both. CMHC is currently analysing AcG-15,
particularly in the context of its relationship with the Canada Housing Trust
(CHT).
3. CHANGE IN ACCOUNTING POLICIES
Effective 1 January 2004, the Corporation adopted Accounting Guideline 13:
Hedging Relationships (AcG-13), issued by the Canadian Institute of Chartered
Accountants. This change in accounting policy has been applied prospectively.
The Corporation determined that many of its hedging relationships do not meet
the new criteria for the use of hedge accounting. Consequently, these derivative
financial instruments were recorded at fair value on the Balance Sheet resulting
in an increase in assets and liabilities of $74 million and $42 million
respectively as at 1 January 2004. This transitional gain of $32 million has
been deferred in Accounts Payable and Other Liabilities and is being recognized
in income over the remaining term of the underlying instruments. During 2004,
$12 million of this transitional gain has been recorded in income.
The Corporation also changed its accounting policies for investments in
securities related to the management of interest rate risk associated with
funding activities, and Securities Sold But Not Yet Purchased. Gains and losses
resulting from these items are now included in income in the year in which they
occur. Prior to the implementation of AcG-13, these gains and losses were
deferred and amortized to income on a straight-line basis over the remaining
term of the related debt issue.
In total, including the recognition of the transitional gain, the implementation
of AcG-13 resulted in $24 million of Income before Taxes ($16 million of Net
Income after Income Taxes).
4. LOANS AND INVESTMENTS IN HOUSING PROGRAMS
The Corporation makes loans and investments in housing programs either
independently or jointly with provincial, territorial, and municipal
authorities. These loans and investments were issued for terms up to 50 years.
Of the total portfolio, $13,450 million, or 98% (2003 -- $13,866 million or 99%)
are due and payable beyond five years.
Approximately $12,916 million, representing 95% (2003 -- $13,261 million,
or 94%) of the loans and investments in housing programs, are supported with
housing program subsidies.
At 31 December 2004, the Corporation is assured full collection of principal and
accrued interest on the majority of the portfolio from the Provinces and
Territories through provisions in social housing agreements (40%), the
Government of Canada through provisions in the NHA (25%), and Indian and
Northern Affairs Canada through Ministerial loan guarantees (4%). Default losses
on the remainder of the portfolio (31%) are accounted for in the Corporation's
Insurance activity.
-27-
F I N A N C I A L S T A T E M E N T S
5. INVESTMENTS IN SECURITIES
The following table shows the maturity structure and average yield of
Investments in Securities.
TERM TO MATURITY
----------------
WITHIN 1 TO 3 3 TO 5 OVER 5
1 YEAR YEARS YEARS YEARS 2004 2003
------ ----- ----- ----- ---- ----
(in millions of dollars)
- ------------------------
FIXED INCOME SECURITIES
Issued or Guaranteed by:
Government of Canada 878 476 688 1,014 3,056 2,974
Provinces/Municipalities 26 151 282 1,203 1,662 1,364
Corporate/Other Entities 328 612 410 1,109 2,459 2,147
----- ----- ----- ----- ----- -----
Total Fixed Income 1,232 1,239 1,380 3,326 7,177 6,485
Yield 3.00% 4.04% 4.49% 5.53% 4.64% 4.90%
EQUITIES (no specific maturity)
Canadian Equities 827 706
U.S. Equities 296 --
Foreign Equities 294 --
----- ----- ----- ----- ----- -----
TOTAL 1,232 1,239 1,380 3,326 8,594 7,191
===== ===== ===== ===== ===== =====
Sales of investments during 2004 resulted in a net gain of $80 million (2003 --
$54 million,2002 -- $33 million) of which $58 million (2003 -- $44 million) has
been deferred. Cumulative deferred gains now totaling $109 million (2003 -- $83
million) are included in Accounts Payable and Other Liabilities and will be
brought into income in accordance with accounting policies described in Note 2.
6. INCOME TAXES
The Corporation is subject to federal income tax. It is not subject to
provincial income tax. The Corporation's statutory tax rate consists of basic
tax, surtax, and large corporations tax.
Taxes at the statutory tax rate and at the effective tax rate are:
2004 2003 2002
---- ---- ----
(in millions of dollars)
- ------------------------
Statutory Tax Rate 33% 35% 37%
---- ---- ----
Income Taxes Based on Statutory Tax Rate 454 349 311
Impact on Future Income Tax Assets Resulting from
Reduction in Tax Rates (2) (8) 3
Other (3) (1) (4)
---- ---- ----
Income Tax Expense 449 340 310
---- ---- ----
Effective Tax Rate 32% 34% 36%
==== ==== ====
-28-
F I N A N C I A L S T A T E M E N T S
Future Income Tax Assets consist of the following temporary differences between
the tax basis of assets and liabilities and their carrying amount on the Balance
Sheet.
2004 2003
---- ----
(in millions of dollars)
- ------------------------
Provisions (10) 16
Deferred Revenue 35 32
Deferred Expenses 12 10
Expenses Incurred But Not Yet Disbursed 8 10
Appreciation in Value of Equities 65 31
Other 1 1
--- ---
Future Income Tax Assets 111 100
=== ===
7. BORROWINGS
Prior to 1993, Loans and Investments in Housing Programs were funded by
Borrowings from the Government of Canada. Since that time, the Corporation has
borrowed solely from capital markets as an agent of the Crown.
BORROWINGS FROM THE GOVERNMENT OF CANADA
The table below summarizes the principal repayments and the average interest
rate on Borrowings from the Government of Canada.
(in millions of dollars)
- ------------------------
2005 197 8.79%
2006 196 8.79%
2007 206 8.86%
2008 211 8.90%
2009 210 8.88%
2010-2014 1,063 8.58%
Thereafter 2,962 9.33%
----- ----
5,045 9.07%
===== ====
The interest expense related to Borrowings from the Government of Canada is $469
million (2003 -- $488 million, 2002 -- $506 million).
-29-
F I N A N C I A L S T A T E M E N T S
BORROWINGS FROM THE CAPITAL MARKETS
The following table summarizes the carrying value and the average interest rate
for the Borrowings from the Capital Markets based on term to maturity.
SHORT-TERM MEDIUM-TERM
(in millions of dollars) BORROWINGS BORROWINGS TOTAL
- ----------------------- -------------- -------------- ------
2005 1,287 2.51% 2,214 5.95% 3,501
2006 1,453 4.78% 1,453
2007 1,257 4.95% 1,257
2008 1,201 4.48% 1,201
2009 1,049 3.80% 1,049
2010-2014 746 5.31% 746
----- ----- ----- ---- -----
1,287 2.51% 7,920 5.01% 9,207
===== ===== ===== ==== =====
The Corporation has authority to borrow a maximum of $20 billion from capital
markets.
Short-term borrowings are comprised of commercial paper and have a term to
maturity less than 365 days. Medium-term borrowings include bonds, floating rate
and fixed rate medium-term notes, with a term to maturity ranging from two to
ten years. Floating rate notes represent $550 million (2003 -- $150 million) of
the medium-term borrowings.
Capital market borrowings include U.S.denominated debt. This debt is translated
to Canadian dollars at the exchange rate prevailing on the Balance Sheet
date. Foreign currency principal and interest payments are fully swapped to
Canadian dollar obligations.
The foreign denominated borrowings are:
2004 2003
(in millions of dollars) ---- ----
- -----------------------
Foreign Denominated Obligations in U.S. Dollars 1,500 1,530
Foreign Denominated Obligations Translated to Canadian Dollars
Based on Rate in Effect on 31 December 1,802 1,986
Based on Rate Established Under Currency Swap Agreements 2,119 2,160
LINES OF CREDIT
At 31 December 2004, the Corporation has $450 million (2003 -- $450 million) in
unused, uncommitted lines of credit. The Corporation also has $100 million (2003
- -- $100 million) of overnight overdraft facility with its major banker that has
not been drawn.
-30-
F I N A N C I A L S T A T E M E N T S
8. INSURANCE
ROLE OF THE APPOINTED ACTUARY
The actuary is appointed by the Corporation's management. With respect to
preparation of these statements, the actuary is required to carry out a
valuation of the policy liabilities of the mortgage insurance activity and to
provide an opinion to the Corporation's management regarding their
appropriateness at the valuation date. The factors and techniques used in the
valuation are in accordance with accepted actuarial practice, applicable
legislation, and associated regulations. The scope of the valuation encompasses
the policy liabilities that consist of a Provision for Claims on the expired
portion of policies and of future obligations on the unexpired portion of
policies (Unearned Premiums). In performing the valuation of the liabilities for
these contingent future events, which are by their very nature inherently
variable, the actuary makes assumptions as to future claim rates,average loss on
claims, trends, expenses and other contingencies, taking into consideration the
circumstances of the Corporation and the nature of the insurance policies.
The valuation is based on projections of future losses on claims and related
expenses. The actual future claims may not develop exactly as projected and may
in fact vary significantly from the projections. Further, the projections make
no provision for new classes of claims categories not sufficiently recognized in
the claims database.
PROJECTION OF SEPTEMBER VALUATION
The actuarial valuation is produced as of 30 September each year. The
Corporation determines Provisions for Claims and Unearned Premiums at 31
December using valuation factors taking into account premiums received and
claims paid in the intervening period.
NATURE OF PROVISION FOR CLAIMS
The establishment of the Provision for Claims for mortgage insurance is based on
known facts and interpretation of circumstances, and is therefore a complex and
dynamic process, influenced by a large variety of factors. These factors affect
the key actuarial assumptions as follows:
CLAIM EMERGENCE: Claim emergence encompasses claim frequency and claim
occurrence patterns. It is based on historical trends in claims reporting and
payment delays.
CLAIM SEVERITY: Claim severity, or average loss on claims, is dependent on the
dollar value of claims,losses on sales of real estate properties, administrative
expenses, and sales delays. These factors are based on historical experience.
ECONOMIC CONDITIONS: Recent past and projected economic factors, such as
unemployment rates, mortgage rates, and changes in housing prices, affect the
forecast of future claim levels.
The factors affecting these assumptions are continually evolving and changing as
they are affected by underwriting and claim settlement procedures, actuarial
studies, professional experience, the quality of data utilized for projection
purposes, economic conditions, and general credit behaviour. Consequently, the
establishment of the Provision for Claims necessarily involves risks that the
actual results will deviate, perhaps significantly, from the best estimates
made.
All provisions are periodically reviewed and evaluated in light of emerging
claim experience and changing circumstances. The resulting changes in estimates
of the Provision for Claims are recorded in Net Claims in the year in which they
are determined.
PREMIUMS
Mortgage insurance premiums are recognized as revenue over the period covered by
the insurance contracts using actuarially determined factors that are reviewed
annually. Effective 1 January 2004, these factors were changed to better reflect
the emerging nature of the claim occurrence experience. Revenue from premiums
and fees in 2004 is $88 million higher than it would have been had this change
not been implemented.
INSURANCE IN FORCE
Under Section 11 of the NHA, the aggregate outstanding amount of mortgage
insurance policies may not exceed $300 billion. At 31 December 2004, insurance
policies in force totaled $244 billion (2003 -- $230 billion).
-31-
F I N A N C I A L S T A T E M E N T S
9. ACCOUNTS PAYABLE AND OTHER LIABILITIES
The following table presents the composition of Accounts Payable and Other
Liabilities.
2004 2003
(in millions of dollars) ---- ----
- -----------------------
Foreign Exchange Adjustment on Foreign Currency Swaps 317 174
Accrued Housing Program Expenses 166 178
Deferred Gains on Disposals of Investments in Securities 109 83
Accrued Benefit Liability for Supplemental Pension Plan and
Other Post-employment Benefits 67 57
Income Taxes Payable 62 81
Government of Canada Fees Payable 25 31
Unamortized Transitional Gain Arising from the Implementation
of AcG-13 20 --
Other Miscellaneous Liabilities 103 105
--- ---
TOTAL 869 709
=== ===
10. SECURITIZATION
The Corporation guarantees the timely payment of principal and interest for
investors in securities based on insured mortgages through the NHA
Mortgage-Backed Securities (NHA MBS) program and the Canada Mortgage Bonds (CMB)
program.
Securities under the NHA MBS program are issued by Approved Issuers (primarily
lending institutions). CMBs are issued by the Canada Housing Trust (CHT) as
described in Note 11.
The Corporation has determined that a provision for claims on these programs is
not required. This is based on historical results and program design whereby
only insured mortgages are eligible for securitization. In addition, CMHC
requires that CHT only transact with swap counterparties of high
creditworthiness, that collateralization occurs in the event that counterparty
credit ratings fall, and that all investments are rated R-1 (High) or AAA.
SECURITIZATION IN FORCE
Under Section 15 of the NHA, the aggregate outstanding amount of principal
guarantees may not exceed $300 billion. At 31 December 2004, guarantees in force
totaled $81 billion (2003 -- $60 billion) which includes $26 billion of NHA MBS
(2003 -- $25 billion) and $55 billion of CMBs (2003 -- $35 billion).
11. CANADA HOUSING TRUST
Canada Housing Trust (CHT) purchases, from Approved Sellers, ownership interests
in eligible housing loans, primarily NHA MBS, and issues Canada Mortgage Bonds
(CMBs).
The Trustee of CHT has entered into agreements with a number of parties to
provide various services to CHT, including CMHC. Under one such agreement, CMHC
has guaranteed the timely payment of the interest payments and the principal at
maturity on all CMBs issued by CHT to date. Once provided, the CMHC guarantee
becomes an obligation of the Government of Canada and is irrevocable until full
repayment of the CMBs at maturity (typically within five years of issuance).
-32-
F I N A N C I A L S T A T E M E N T S
In addition, under a Financial Services Advisor (FSA) Agreement, CMHC performs a
number of other services for CHT, including gauging market demand for bond
issuance and assessing the potential supply of housing loans available to be
packaged for sale to CHT.
12. RETAINED EARNINGS
Retained Earnings include Earnings Set Aside for Capitalization, Unappropriated
Retained Earnings and Reserve for Lending Activity.
Earnings Set Aside for Capitalization represent the portion of cumulative net
income generated by the Insurance and Securitization Activity that has been set
aside for the purposes of being consistent with capitalization guidelines
developed by the Office of the Superintendent of Financial Institutions (OSFI).
Earnings Set Aside for Capitalization currently represent approximately 83% of
the levels recommended by OSFI. The amount of earnings to be set aside for
capitalization is determined annually through the approval of CMHC's Corporate
Plan. Since 2003, 100% of the Insurance retained earnings have been set aside
for this purpose. Unappropriated Retained Earnings represent Net Income
generated by the Insurance and Securitization Activity that has not been set
aside for capitalization purposes.
The Corporation places all lending-related retained earnings in its Reserve for
Lending Activity. The components of this Reserve are outlined in the following
table.
2004 2003
----------------------------- --------------------------
AUTHORIZED BALANCE AUTHORIZED BALANCE
LIMIT 31 DECEMBER LIMIT 31 DECEMBER
(in millions of dollars) ---------- ----------- ---------- -----------
- ------------------------
Reserve for Fluctuations in Net
Income Arising from AcG-13:
Hedging Relationships 50 16 -- --
Reserve for All Other
Lending-Related Items 125 118 100 91
--- --- --- --
Reserve for Lending Activity 175 134 100 91
=== === === ==
-33-
F I N A N C I A L S T A T E M E N T S
13. HOUSING PROGRAMS
The Corporation provides payments to support housing programs which are funded
by Parliamentary appropriations.
The following table shows the distribution of expenses by major housing program.
2004 2003 2002
(in millions of dollars) ---- ---- ----
- -----------------------
Programs Transferred to Provinces/Territories under Social Housing Agreements 957 961 964
Non-Transferred Programs
Non-Profit 250 242 252
Public Housing 141 130 129
On Reserve 92 92 89
Co-operatives 80 83 86
Rent Assistance 74 78 71
Urban Native 55 54 49
Rural and Native Housing 24 27 24
Limited Dividend 12 12 13
----- ----- -----
Sub-total 728 718 713
Affordable Housing 173 166 19
Renovation Programs 114 88 105
Research and Information Transfer 8 9 9
Other 26 30 18
----- ----- -----
TOTAL 2,006 1,972 1,828
===== ===== =====
This table includes program expenses incurred wholly by the Corporation and the
federal share of program expenses incurred under cost-sharing agreements with
the Provinces/Territories. Delivery and administration of these programs vary
based on arrangements made between the Corporation and the
Provinces/Territories.
Included in Housing Program Expenses are reimbursements to the Corporation of:
o interest rate losses resulting from certain loans containing interest rate
clauses lower than the interest cost on the related borrowings;
o net operating losses on certain investments in housing programs and real
estate properties; and
o net default losses on certain loans and net disposal losses on certain
investments in housing programs and real estate properties.
-34-
F I N A N C I A L S T A T E M E N T S
The following table summarizes these expenses.
2004 2003 2002
(in millions of dollars) ----- ---- ----
- -----------------------
Interest Losses:
incurred in the current year 97 99 77
incurred in prior years -- -- 21
---- ---- ----
Sub-total 97 99 98
Net Operating Losses 4 11 18
Net Default and Disposal Losses 1 2 4
---- ---- ----
TOTAL 102 112 120
==== ==== ====
The total reimbursements for interest losses includes $35 million (2003 -- $33
million, 2002 -- $27 million) towards the losses incurred by the Corporation as
a result of the prepayment and repricing activity described in Note 16.
The total reimbursement for interest losses is also included in Interest Earned
on Loans and Investments in Housing Programs. Net operating, default and
disposal losses are recorded as Due from the Government of Canada and Housing
Program Expenses on an accrual basis.
In addition, the Corporation is reimbursed for operating costs associated with
the delivery of housing programs. The reimbursement of operating expenses for
2004 of $101 million (2003 -- $97 million, 2002 -- $81 million) is shown in the
Income Statement as Parliamentary Appropriations for Operating Expenses.
14. OTHER EXPENSES
The following table presents the composition of Other Expenses.
2004 2003 2002
(in millions of dollars) ---- ---- ----
- -----------------------
Government of Canada Fees 21 29 38
Change in Fair Value of Derivative-Related Amounts (10) -- --
Other (4) (20) (1)
---- ---- ----
TOTAL 7 9 37
==== ==== ====
The Government of Canada Fees are incurred in recognition of the Government's
financial backing of CMHC's Insurance and Securitization Activity and are
recorded at the exchange amount, which is the amount agreed to by the related
parties.
The change in fair value of derivative-related amounts pertains solely to those
derivatives that are not treated as hedges for accounting purposes, as described
in Note 2.
-35-
F I N A N C I A L S T A T E M E N T S
15. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are financial contracts whose value is derived
from price movements in one or more underlying securities, indices or other
instruments or derivatives. The Corporation uses derivatives in connection with
its risk management activities.
These financial contracts are used to manage exposures to market risks as
follows:
o Interest rate swaps to manage reinvestment risk, refinancing risk, or
mismatches in the timing of receipts on assets versus payments on
liabilities. Interest rate swaps are transactions in which two parties
exchange interest cash flows on a specified notional amount for a
predetermined period based on agreed-upon fixed and floating rates.
Notional amounts are not exchanged.
o Foreign currency swaps to manage foreign exchange risk arising from foreign
denominated debt. Foreign currency swaps are transactions in which two
parties exchange currencies and interest cash flows on a specified notional
amount for a predetermined period. The notional amount is exchanged at
inception and at maturity.
The table below provides the notional amounts of the Corporation's derivative
transactions. Notional amounts, which are off-balance sheet, serve as a point of
reference for calculating payments and do not represent the fair value, or the
potential gain or loss associated with the credit or market risk of such
instruments.
2004 2003
(in millions of dollars) ------ ------
- -----------------------
DERIVATIVE FINANCIAL INSTRUMENTS (INELIGIBLE FOR HEDGE ACCOUNTING)
Interest Rate Swaps 15,562 --
Foreign Currency Swaps -- --
------ ------
NOTIONAL 15,562 --
DERIVATIVE FINANCIAL INSTRUMENTS (ELIGIBLE FOR HEDGE ACCOUNTING)
Interest Rate Swaps 300 17,316
Foreign Currency Swaps 2,119 2,160
------ ------
NOTIONAL 2,419 19,476
====== ======
16. MARKET RISK
Market risk is the risk of adverse financial impact arising from changes in
underlying market factors, including interest rates, foreign exchange rates, and
equity prices.
INTEREST RATE RISK
The Corporation manages interest rate risk through the implementation of
policies which include risk limits for the Insurance and Securitization
investment activities and for the Lending Activity.
CMHC's Insurance and Securitization investment portfolios are managed taking
into consideration the liability profile and by limiting price sensitivity to
interest rate changes relative to benchmark indices and by appropriate asset
diversification.
Interest rate risk associated with the Lending Activity is managed through asset
and liability matching, hedging and capital market strategies.
-36-
F I N A N C I A L S T A T E M E N T S
The following table provides details regarding the Corporation's exposure to
interest rate risk. On- and off-balance sheet financial instruments are reported
based on the earlier of their contractual repricing dates or maturity
dates. Effective interest rates are disclosed where applicable. The effective
rates shown represent historical rates for fixed rate instruments and rates to
reset for floating rate instruments.
NO NON
WITHIN 1 TO 5 OVER 5 SPECIFIC INTEREST
1 YEAR YEARS YEARS MATURITY SENSITIVE 2004 2003
(in millions of dollars) ------ ------ ------ --------- --------- ------ ------
- -----------------------
ASSETS
Loans and Investments
in Housing Programs 2,581 6,399 4,632 -- 57 13,669 14,075
Effective Interest Rate 6.40% 5.40% 8.30% -- -- -- --
Investments in Securities 1,232 2,619 3,326 1,417 -- 8,594 7,191
Effective Interest Rate 3.02% 4.26% 5.55% -- -- -- --
Cash and Cash Equivalents 2,841 -- -- -- -- 2,841 2,485
Effective Interest Rate 2.59% -- -- -- -- -- --
Securities Purchased Under
Resale Agreements 576 -- -- -- -- 576 314
Effective Interest Rate 2.55% -- -- -- -- -- --
LIABILITIES
Borrowings from the
Capital Markets 3,501 4,960 746 -- -- 9,207 10,193
Effective Interest Rate 4.69% 4.54% 5.31% -- -- -- --
Borrowings from the Government
of Canada 197 823 4,025 -- -- 5,045 5,232
Effective Interest Rate 8.79% 8.86% 9.13% -- -- -- --
Securities Sold Under
Repurchase Agreements 2,976 -- -- -- -- 2,976 1,554
Effective Interest Rate 2.53% -- -- -- -- -- --
Securities Sold But Not Yet
Purchased -- -- 121 -- -- 121 2
Effective Interest Rate -- -- 4.56% -- -- -- --
DERIVATIVE FINANCIAL INSTRUMENTS (notional)
Ineligible for Hedge Accounting
Current
Receivable Position 3,690 5,455 969 -- -- 10,114 --
Effective Interest Rate 4.12% 4.84% 5.41% -- -- -- --
Payable Position 4,112 5,244 758 -- -- 10,114 --
Effective Interest Rate 4.60% 4.73% 5.15% -- -- -- --
Future-Dated
Receivable Position -- Fixed 571 2,450 241 -- -- 3,262 --
Effective Interest Rate 6.15% 5.87% 6.65% -- -- -- --
Payable Position -- Floating 571 2,450 241 -- -- 3,262 --
Effective Interest Rate N/A N/A N/A -- -- -- --
Receivable Position -- Floating 369 1,569 248 -- -- 2,186 --
Effective Interest Rate N/A N/A N/A -- -- -- --
Payable Position -- Fixed 369 1,569 248 -- -- 2,186 --
Effective Interest Rate 6.68% 5.96% 6.64% -- -- -- --
Eligible for Hedge Accounting
Current
Receivable Position 1,026 1,393 -- -- -- 2,419 19,476
Effective Interest Rate 5.85% 3.15% -- -- -- -- --
Payable Position 726 1,693 -- -- -- 2,419 19,476
Effective Interest Rate 6.70% 4.41% -- -- -- -- --
-37-
F I N A N C I A L S T A T E M E N T S
Some of the Corporation's Loans and Investments in Housing Programs contain
prepayment and/or repricing options. As the Corporation does not have the right
to prepay its borrowings from the Government of Canada without penalty, the
Corporation is exposed to interest rate risk. While it is difficult to predict
prepayment activity, CMHC has estimated the potential impact of prepayment
activity on earnings using a range of scenarios. Although unlikely given
historical levels,the worst case scenario on future prepayment / repricing
activities suggests that the Corporation could be subject to a decrease in
earnings of as much as $718 million over a 25-year time horizon, or an average
decline of $29 million per year.
FOREIGN EXCHANGE RISK
All currency exposure arising from foreign denominated debt issuance is hedged
in accordance with the Corporation's policy.
In 2004, the Corporation began investing in externally managed U.S. and foreign
equities. The fair value of the foreign currency exposure relating to these
equity investments (in Canadian dollars) amounts to $609 million (2003 -- nil).
17. CREDIT RISK
Credit risk is the risk of loss arising from a counterparty's inability to
fulfill its contractual obligations. Credit risk includes default risk,
settlement risk, and downgrade risk and encompasses both the probability of loss
and the probable size of the loss, net of recoveries and collateral, over
appropriate time horizons. CMHC is exposed to credit risk from various sources
directly and indirectly, including directly from its investment, lending and
hedging transactions and indirectly from potential claims arising from the
Corporation's Insurance and Securitization Activity.
The Corporation manages credit risk associated with investments and derivatives
through the implementation of policies which include counterparty credit limits
and diversification of credit risk.
CASH EQUIVALENTS AND INVESTMENTS IN SECURITIES
The following table presents the distribution of credit exposure. The exposure
is divided into short-term (less than one year) and long-term (greater than one
year). The majority of the short-term exposure, 87%, is rated "R-1 high" or
equivalent, and 66% of long-term exposure is to "AAA" and "AA" rated
counterparties.
The credit risk arising from cash equivalents and investments in securities is
considered to be the fair value of these positions, including accrued
interest. Where legally enforceable through contractual repurchase/reverse
repurchase agreements, transaction exposures to counterparties are netted
against collateral to derive the overall net credit exposure to counterparties
for repurchase/reverse repurchase transacting.
CASH INVESTMENTS
EQUIVALENTS IN SECURITIES 2004 2003
----------- ------------- ---- ----
(in millions of dollars)
- ------------------------
FIXED INCOME SECURITIES
Short-term 2,842 1,244 4,086 2,935
Long-term -- 6,150 6,150 6,316
----- ----- ------ ------
Total Fixed Income 2,842 7,394 10,236 9,251
EQUITIES -- 1,619 1,619 809
----- ----- ------ ------
TOTAL 2,842 9,013 11,855 10,060
===== ===== ====== ======
-38-
F I N A N C I A L S T A T E M E N T S
The Corporation's credit risk related to concentration of investments is
diversified across sectors as follows:
CASH INVESTMENTS
EQUIVALENTS IN SECURITIES 2004 2003
----------- ------------- ---- ----
(in millions of dollars)
- ------------------------
FIXED INCOME SECURITIES
Issued or Guaranteed by:
Government of Canada 28 2,996 3,024 3,392
Provinces/Municipalities 2 1,778 1,780 1,468
Corporate/Other Entities 2,812 2,620 5,432 4,391
----- ----- ------ ------
Total Fixed Income 2,842 7,394 10,236 9,251
EQUITIES
Canadian Equities -- 1,010 1,010 809
U.S. Equities -- 293 293 --
Foreign Equities -- 316 316 --
----- ----- ------ ------
TOTAL 2,842 9,013 11,855 10,060
===== ===== ====== ======
DERIVATIVE FINANCIAL INSTRUMENTS
The following table presents the credit exposure of the Corporation's
derivatives by term to maturity.
REPLACEMENT VALUE (1) POTENTIAL TOTAL CREDIT
FUTURE CREDIT EXPOSURE
EXPOSURE (2)
WITHIN 1 TO 3 3 TO 5 OVER
1 YEAR YEARS YEARS 5 YEARS 2004 2003
------ ----- ----- ------- ---- ----
(in millions of dollars)
- ------------------------
Interest Rate Swaps 8 35 12 25 208 288 310
Foreign Currency Swaps -- -- -- -- -- -- 9
-- -- -- -- --- --- ---
TOTAL 8 35 12 25 208 288 319
== == == == === === ===
(1) Represents the total current replacement value of all outstanding contracts
with a positive fair value, before factoring in the impact of master netting
agreements.
(2) Represents an add-on that is an estimate of the potential change in the
market value of the transaction up to maturity.
The Corporation limits its credit risk associated with derivative transacting by
dealing with counterparties whose credit ratings are in accordance with
Department of Finance guidelines, and through the use of master netting
agreements which have been entered into with all counterparties. The credit
exposure associated with derivative contracts is measured as the total of
positive replacement values plus an estimate of potential future credit exposure
which is calculated in relation to the notional principal of the contracts by
applying factors consistent with guidelines issued by the Office of the
Superintendent of Financial Institutions. The following table presents the
credit exposure of the Corporation's derivatives by counterparty credit rating.
AAA AA 2004 2003
--- -- ---- ----
(in millions of dollars)
- ------------------------
TOTAL CREDIT EXPOSURE 268 20 288 319
=== == === ===
-39-
F I N A N C I A L S T A T E M E N T S
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts set out below represent the fair values of on- and off-balance sheet
financial instruments using the valuation methods and assumptions referred to
below. Fair value amounts are designed to represent estimates of the amounts at
which instruments could be exchanged in a current transaction between willing
parties.
As many of the Corporation's financial instruments lack an available trading
market, fair values are based on estimates using present value and other
valuation techniques. These techniques are significantly affected by the
assumptions used concerning the amount and timing of estimated future cash flows
and discount rates which reflect varying degrees of risk. Due to the use of
subjective judgment and uncertainties, the fair value amounts should not be
interpreted as being realizable in an immediate settlement of the instruments.
2004 2003
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(in millions of dollars)
- ------------------------
ASSETS
Loans and Investments in Housing Programs 13,669 15,959 14,075 16,140
Investments in Securities 8,594 9,062 7,191 7,507
Cash and Cash Equivalents 2,841 2,841 2,485 2,485
Securities Purchased Under Resale Agreements 576 576 314 314
Accrued Interest Receivable 332 332 387 387
Due from the Government of Canada 203 203 147 147
Accounts Receivable and Other Assets 179 179 146 146
Derivative-Related Amounts 80 80 -- --
LIABILITIES
Borrowings from the Capital Markets 9,207 9,769 10,193 10,491
Borrowings from the Government of Canada 5,045 7,056 5,232 7,182
Securities Sold Under Repurchase Agreements 2,976 2,976 1,554 1,554
Accounts Payable and Other Liabilities 869 869 709 709
Accrued Interest Payable 128 128 182 182
Securities Sold But Not Yet Purchased 121 121 2 2
Derivative-Related Amounts 38 38 -- --
DERIVATIVE FINANCIAL INSTRUMENTS
Eligible for Hedge Accounting
In a Net Receivable Position -- -- -- 74
In a Net Payable Position -- 378 -- 242
===== ===== ===== =====
Fair values of the following financial instruments are determined by reference
to quoted market prices:
Investments in Securities
Cash and Cash Equivalents
Borrowings from the Capital Markets (Medium-term)
Fair values of the following financial instruments are estimated using net
present value analysis:
Loans and Investments in Housing Programs
Borrowings from the Government of Canada
Derivative-Related Amounts
Derivative Financial Instruments (eligible for hedge accounting)
The fair values of all other financial instruments are equal to carrying values
due to their short-term nature.
-40-
F I N A N C I A L S T A T E M E N T S
19. EMPLOYEE FUTURE BENEFITS
The Corporation has a defined benefit pension plan and a supplemental pension
plan. The Corporation also provides other post-employment benefits.
The accrued benefit asset for the defined benefit pension plan is included in
Accounts Receivable and Other Assets. The total accrued benefit liability for
the supplemental pension plan and for the other post-employment benefits is
included in Accounts Payable and Other Liabilities. The net benefit plan cost
recognized is included in Operating Expenses.
Total cash payments for employee future benefits were $14 million (2003 -- $3
million). They include contributions by the Corporation to its funded pension
plan and payments for the unfunded supplemental pension plan. Also therein are
disbursements for other post-employment benefits, which consist of payments to a
third-party service provider on behalf of the Corporation's retired employees
and payments made directly to employees, their beneficiaries or estates.
Information about the employee future benefits is as follows:
OTHER
POST-EMPLOYMENT
PENSION PLANS BENEFITS
------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
(in millions of dollars)
- ------------------------
ACCRUED BENEFIT OBLIGATION
Balance, Beginning of Year 947 874 96 82
Current Service Cost 17 15 2 1
Employees' Contributions 4 2 -- --
Interest Cost 57 59 6 6
Benefits Paid (49) (47) (3) (2)
Actuarial Loss (Gain) 8 44 (3) 9
----- ---- --- ---
Balance, End of Year 984 947 98 96
FAIR VALUE OF PLAN ASSETS
Balance, Beginning of Year 960 872 -- --
Actual Return on Plan Assets 116 132 -- --
Employer's Contributions 11 1 3 2
Employees' Contributions 4 2 -- --
Benefits Paid (49) (47) (3) (2)
----- ---- --- ---
Balance, End of Year 1,042 960 -- --
----- ---- --- ---
Funded Status -- Plan Surplus (Deficit) 58 13 (98) (96)
Unamortized Net Actuarial Loss 102 158 15 18
Unamortized Past Service Costs 61 70 -- --
Unamortized Transitional Obligation (Asset) (180) (210) 31 35
----- ---- --- ---
Accrued Benefit Asset (Liability) 41 31 (52) (43)
===== ==== === ===
-41-
F I N A N C I A L S T A T E M E N T S
Included in pension plans are amounts in respect of an unfunded supplemental
pension plan as follows:
SUPPLEMENTAL
PENSION PLAN
------------
2004 2003
---- ----
(in millions of dollars)
- ------------------------
Fair Value of Plan Assets -- --
Accrued Benefit Obligation 27 23
-- --
Funded Status -- Plan Deficit 27 23
== ==
The plan assets and the accrued benefit obligation were measured for accounting
purposes as at 31 December 2004. The most recent actuarial valuation for funding
purposes was done 30 June 2003, and the next valuation will be as of 31 December
2005. In performing the actuarial valuations of the pension plans and the other
post-employment benefits, the following assumptions were adopted:
2004 2003
---- ----
ACCRUED BENEFIT OBLIGATION:
Discount rate 6% 7%
Rate of compensation increase 3% 4%
BENEFIT COSTS:
Discount rate 6% 7%
Rate of compensation increase 3% 4%
Long term rate of return on plan assets 6% 7%
Average remaining service period for Pension Plans 11 YEARS 11 years
Average remaining service period for Other Post-employment Benefits 13 YEARS 12 years
======== ========
An 8.8% (2003 -- 10%) increase in health care costs was assumed for 2004, with
0.4% (2003 -- 1.3%) average decreases per year thereafter to an ultimate trend
rate of 5.1% which is expected to be achieved by 2014. A one-percentage-point
fluctuation in the assumed health care cost trend rates would have the following
effects on the items listed below:
INCREASE DECREASE
-------- --------
(in millions of dollars)
- ------------------------
Total of Service and Interest Cost 1 (1)
Accrued Benefit Obligation, End of Year 11 (9)
== ==
-42-
F I N A N C I A L S T A T E M E N T S
The Corporation's defined benefit costs recognized in the year are as follows:
OTHER
POST-EMPLOYMENT
PENSION PLANS BENEFITS
------------- --------
2004 2003 2004 2003
---- ---- ---- ----
(in millions of dollars)
- ------------------------
COSTS INCURRED DURING THE YEAR
Current Service Cost,
Net of Employees' Contributions 17 15 2 1
Interest Cost 57 59 6 6
Actual Return on Plan Assets (116) (132) -- --
---- ---- --- ---
Actuarial (Gain) Loss on Accrued
Benefit Obligation 8 44 (3) 9
Total Costs before Adjustments (34) (14) 5 16
ADJUSTMENTS TO RECOGNIZE THE LONG-TERM NATURE OF EMPLOYEE FUTURE
BENEFITS COSTS
Difference between Expected and Actual
Return on Plan Assets 59 75 -- --
Difference between Actuarial (Gain) Loss
Recognized and Actual Actuarial (Gain) Loss
on Accrued Benefit Obligation (3) (34) 4 (9)
Amortization of Past Service Costs 9 9 -- --
Amortization of the Transitional Obligation (30) (30) 3 3
---- ---- --- ---
Total Adjustments 35 20 7 (6)
---- ---- --- ---
Net Benefit Plan Cost Recognized 1 6 12 10
==== ==== === ===
Information on the defined benefit pension plan assets is as follows:
PERCENTAGE OF FAIR VALUE
CATEGORY OF PLAN ASSETS OF TOTAL PLAN ASSETS
- ----------------------- ------------------------
2004 2003
---- ----
Short-term Investments 1.6% 0.9%
Bonds and Debentures 19.1% 21.2%
Equities 65.1% 64.1%
Real Return Securities 4.9% 4.7%
Real Estate 9.3% 9.1%
---- ----
TOTAL 100% 100%
==== ====
At 31 December 2004, plan assets include $76 million of investments in CMHC
related parties (2003 -- $89 million).
-43-
F I N A N C I A L S T A T E M E N T S
20. SEGMENTED INFORMATION
As described in Note 1, the Corporation carries out its mandate through three
activities: Insurance and Securitization, Housing Programs, and the Lending
Activity. For segmented information purposes, the Insurance and Securitization
Activity is separated into its two components. The financial results of each
activity are determined using the accounting policies described in Note 2.
The Lending Activity includes certain Corporate items that are not allocated to
each activity. The Housing Program activity includes reimbursements to the
Lending Activity as described in Note 13. These reimbursements are not
eliminated in the table below.
INSURANCE SECURITIZATION HOUSING LENDING ELIMINATION OF TOTAL
PROGRAMS ACTIVITY INTER-SEGMENT
ITEMS
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
(in millions of dollars) ---- ---- ---- --- ---- ---- ---- ---- ---- ---- ---- ----
- -----------------------
REVENUES
Interest Earned -- -- -- -- -- -- 1,011 1,069 -- -- 1,011 1,069
Investment Income 397 341 13 9 -- -- -- -- (2) (5) 408 345
Premiums, Fees and Parliamentary Appropriations 1,095 915 40 32 2,107 2,069 -- -- -- -- 3,242 3,016
------ ----- --- --- --- ----- ------ ------ --- --- ------ -----
1,492 1,256 53 41 2,107 2,069 1,011 1,069 (2) (5) 4,661 4,430
EXPENSES
Interest Expense -- -- -- -- -- -- 939 1,004 (2) (5) 937 999
Operating Expenses 136 128 5 5 101 97 19 25 -- -- 261 255
Housing Programs, Net Claims and Other Expenses 70 214 (1) (4) 2,006 1,972 (11) (13) -- -- 2,064 2,169
------ ----- --- --- --- ----- ------ ------ --- --- ------ ------
206 342 4 1 2,107 2,069 947 1,016 (2) (5) 3,262 3,423
Income Taxes 411 312 17 10 -- -- 21 18 -- -- 449 340
------ ----- --- --- --- ----- ------ ------ --- --- ------ ------
NET INCOME 875 602 32 30 -- -- 43 35 -- -- 950 667
====== ===== === === ===== ===== ====== ====== === === ====== ======
ASSETS
Direct Lending Loans -- -- -- -- -- -- 8,556 8,724 -- -- 8,556 8,724
Other Loans and Investments in Housing -- -- -- -- -- -- 5,113 5,351 -- -- 5,113 5,351
Programs
Investments in Securities 7,707 6,245 262 185 -- -- 630 812 (5) (51) 8,594 7,191
Other Assets 3,171 1,935 18 31 -- -- 1,244 1,725 (24) (22) 4,409 3,669
------ ----- --- --- --- ----- ------ ------ --- --- ------ ------
10,878 8,180 280 216 -- -- 15,543 16,612 (29) (73) 26,672 24,935
------ ----- --- --- --- ----- ------ ------ --- --- ------ ------
LIABILITIES
Borrowings from the Capital Markets -- -- -- -- -- -- 9,212 10,244 (5) (51) 9,207 10,193
Borrowings from the Government of Canada -- -- -- -- -- -- 5,045 5,232 -- -- 5,045 5,232
Unearned Premiums and Fees 4,227 3,863 128 102 -- -- -- -- -- -- 4,355 3,965
Other Liabilities 3,539 2,080 (3) (9) -- -- 1,127 1,020 (24) (22) 4,639 3,069
------ ----- --- --- --- ----- ------ ------ --- --- ------ ------
7,766 5,943 125 93 -- -- 15,384 16,496 (29) (73) 23,246 22,459
------ ----- --- --- --- ----- ------ ------ --- --- ------ ------
EQUITY 3,112 2,237 155 123 -- -- 159 116 -- -- 3,426 2,476
====== ===== === === ===== ===== ====== ====== === === ===== ======
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F I N A N C I A L S T A T E M E N T S
21. RELATED PARTY TRANSACTIONS
The Corporation is related in terms of common ownership to all Government of
Canada departments, agencies and Crown corporations. The Corporation enters into
transactions with certain of these entities in the normal course of business.
All material related party transactions are either disclosed below or in
relevant notes.
In exchange for real estate transferred to Canada Lands Company CLC Limited in
1998 and 1999, the Corporation holds notes receivable at 7.35% due by 2014. The
amount due to the Corporation is $41 million (2003 -- $38 million) including
accrued interest.
22. COMMITMENTS AND CONTINGENT LIABILITIES
a) Commitments outstanding for Loans and Investments in Housing Programs, net of
forgiveness, amounted to $48 million at 31 December 2004 (2003 -- $53
million) and are normally advanced within a two-year period. Commitments
outstanding for advances to insured assisted housing projects in financial
difficulty amounted to $56 million at 31 December 2004 (2003 -- $35 million)
and are normally advanced within a ten-year period.
b) Total remaining contractual financial obligations for Housing Programs extend
for periods up to 34 years.
Estimated obligations are as follows:
2010 AND
(in millions of dollars) 2005 2006 2007 2008 2009 THEREAFTER
- ------------------------ ---- ---- ---- ---- ---- ----------
1,761 1,744 1,701 1,711 1,716 22,449
===== ===== ===== ===== ===== ======
c) The Corporation has $50 million (2003 -- $50 million) of credit facility
available for letters of credit. At 31 December 2004, $40 million (2003 --
$38 million) in letters of credit were outstanding against this facility.
d) There are legal claims of $14 million (2003 -- $22 million) against the
Corporation. Due to the uncertainty of the outcome of these claims, no
provision for loss has been recorded.
23. COMPARATIVE FIGURES
Comparative figures have been reclassified to conform to the 2004 financial
statement presentation.
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