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Audits and Evaluations

Monetary Appraisal of Acquisitions

Introduction

Background

The LAC 2011-14 Risk-Based Audit Plan identified the need for an audit to be conducted to assess the adequacy of the control environment over the monetary appraisal of acquisitions and the issuance of tax receipts following a donation of collection items.

LAC is an organization within the Canadian Heritage portfolio whose mandate includes the acquisition of documentary heritage that best presents an accurate and representative portrait of Canadian society.

In order to achieve this mandate, LAC acquires archival items from three primary sources:

  1. Publishers - which have a legal obligation to provide copies of all works published in Canada to LAC (Published Heritage Branch);
  2. The Government of Canada's departments and agencies - required to transfer documents that have operational or archival value (Government Records Branch); and
  3. Private Collections - donations and purchases (Canadian Archives and Special Collections Branch).

As stated in the Income Tax Act, donors of documentary heritage are eligible for tax credits for the fair market value (FMV) of the donation. Tax receipts allow the donors (for individuals) to claim a federal tax credit equal to 15% for donations of less than $200 and 29% for donations of that amount and over. The receipts also allow donors to claim provincial tax credits which vary depending on the province of residence of the donor.

In addition to the above tax credits, the Cultural Property Export and Import Act, allows additional tax incentives for donations of movable cultural property. The Act, which is administered by the Canadian Cultural Property Export Review Board (CCPERB), was established to regulate the import and export of cultural property and provide special tax incentives to encourage Canadians to donate or sell such objects to Canadian public institutions. The tax incentive exempts the donor of any assessment of related capital gains based on the attestation of cultural property by the CCPERB.

LAC's policies require that donations estimated up to a FMV of $1,000 be appraised internally. Donations with an estimated FMV above $1,000 must be evaluated by a third party. The National Archival Appraisal Board (NAAB), an independent appraisal society, has been selected as LAC's primary appraiser based on a competitive selection process. In instances where the NAAB does not have the competencies or resources to appraise the donation, LAC may call upon an independent appraiser to perform the appraisal. In addition, all donations above $5,000 are also presented to the CCPERB for attestation of cultural goods.

The table below provides a summary of the volume of monetary appraisals completed for donations during the fiscal years 2005-06 to 2010-11.

MONETARY APPRAISALS OF DONATIONS
Fiscal Year Total Number of Appraisals and Tax Receipts Issued Source of Appraisal Application for Cultural Certification (CCPERB) Value in $ Millions
Internally by LAC ($ 1,000 or less) NAAB Other Private Source
2005-06 99 26 55 18 0 $6.2
2006-07 114 20 65 12 55 $4.8
2007-08 85 17 60 14 65 $3.1
2008-09 107 20 58 8 60 $3.6
2009-10 94 16 71 7 58 $3.1
2010-11 1*   1      
Total 500 99 310 59 238 $20.8

* Note – Appraisal activities ceased during fiscal 2010-11. No tax receipt was issued for this item.

Risk Assessment

A risk assessment was conducted during the planning phase of the audit to ensure the audit focused on the areas of most significance. The following main risks were identified:

  • Risk that tax receipts are issued fraudulently and/or not in compliance with the Income Tax Act, causing penalties or revocation of LAC's registered status under the Income Tax Act;
  • Risk that appraisals of collection items are unreasonable, leading to large differences between initial and final valuations which may create reputational damage and/or result in disputes between the donor and LAC as to the valuation of the acquisition;
  • Risk that monetary valuations are performed and tax receipts are issued for items acquired that are not within LAC's mandate;
  • Risk that tax receipts are not issued within the regulated timeframe due to delays in the appraisal process, which may result in potential lawsuit and reputational damage to LAC; and
  • Risk that appraisals are incorrect due to lack of specialized knowledge and the nature of the archives.

Objective and Criteria

The objective of this audit was to determine if LAC had policies, systems, and controls in place that were communicated and followed in practice to enable transparent and effective monetary appraisals of acquisitions and subsequent issuance of tax receipts for donations, as per the requirements identified in the Income Tax Act.

The audit criteria for this audit were:

  • Policies and procedures have been documented and are designed to be in compliance with relevant federal legislation.
  • Controls over the appraisal of donations are effectively designed to ensure that appraisals are performed in accordance with relevant legislation.
  • Controls over the safeguarding and issuance of tax receipts are effectively designed to ensure that receipts are issued in a timely manner and in accordance with relevant legislation.
  • Policies and procedures are communicated to key stakeholders in a timely manner.
  • Policies and procedures are understood by key stakeholders and key controls are operating effectively in practice.
  • Monitoring is performed to ensure that appraisals are accurate and completed in a timely manner.

Scope

The audit field work was carried out from January to March 2012. The audit focused on the assessment of LAC's policies, procedures, processes and controls over the monetary appraisal of acquisitions and subsequent issuance of tax receipts as per the Canadian Income Tax Act and the Cultural Property Export and Import Act. The audit covered acquisition transactions (donations and purchases) for fiscal years 2005-2006 through 2010-2011.

Methodology

The audit field work was conducted in accordance with the Government of Canada's Policy on Internal Audit and with the auditing standards established by the Institute of Internal Auditors. These standards require that the audit be planned and performed in such a way as to obtain reasonable assurance that the audit objective is achieved.

The audit included various audit procedures as considered necessary to provide such assurance. These included but were not limited to the following:

  • Review of documentation including policies, procedures, and work plans related to the monetary appraisal process and issuance of tax receipts;
  • Review and mapping of business processes and related internal controls;
  • Interviews with key process owners and related personnel to obtain an in-depth view of the strengths and weaknesses of the appraisal process; and
  • Review and examination of ninety (90) acquisition files, selected from the MIKAN1 system for fiscal years 2005-2006 through 2010-2011. All transactions related to "Publisher" and "Government" collections were excluded from the population.

1 LAC's collection management system

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