Federal Government Funding: Understanding the Difference between Grants, Contributions and Loans

In the delivery of its services and programs, the federal government transfers funds to individuals or organizations for the realization of projects and initiatives.  The funding that is provided by the government generally takes one of three forms: grants, contributions and loans. 

Are they really that different?  Yes.  Depending on whether it is a grant, a contribution or a loan, the funding comes with its specific set of strings attached.  Here is how they differ:

Grants

A grant is an amount provided by a federal Department to a recipient who has successfully applied for funding.  In terms of strings attached, this type of funding is the least restrictive because it is a non-conditional transfer of funds.  This means that although the recipient may be required to report on results achieved at the end of a project, there is generally no other administrative accountability which must be completed during the life of the project.   As a result, grants are the most flexible funding option for recipients because they carry the least administrative burden.   

EXAMPLE: ISED’s Indigenous Intellectual Property Program provides up-front non-repayable grants for selected projects. The grants awarded under this program support projects related to intellectual property and the safeguarding of Indigenous knowledge.  As per the program’s authorities, ISED disburses 100% of the grant following the signing of a funding agreement.  Once the project is completed, recipients are required to submit a report using a template provided by ISED.

Contributions

A contribution is also an amount given by the government to a recipient who has successfully applied to a program, but this funding is subject to performance conditions that are specified in a funding agreement.  Contributions allow the recipient to get reimbursed for specific costs incurred during the life of a project if conditions are met. The conditions usually include meeting project objectives and reporting requirements during the project’s roll out.  The majority of federal Indigenous programs offer contribution funding. 

Contribution payments to Indigenous organizations can benefit from the flexibilities set out by the Treasury Board Secretariat in Appendix K of the Directive on Transfer Payments.  According to Appendix K, Departments have the option, in the case of multi-year projects, to provide funding agreements (called fixed or flexible contribution funding) that allow Indigenous organizations to redirect or hold on to unspent funds from one year to the next.

EXAMPLE: Public Safety’s Aboriginal Community Safety Planning Initiative has the option of providing flexible contribution agreements for multi-year projects.    As described in the program’s authorities, contribution payments are paid to recipients in the form of reimbursement of eligible expenditures incurred based upon the receipt by the Department of financial and project reports that outline the activities completed and expenses incurred during the life if the project.  If the department opts to sign a flexible contribution agreement, the recipient can carry over unexpended funding for use in the next fiscal year to advance the project’s objectives.

Loans

Federal programs can also provide loans to recipients, usually at lower interest rates than mainstream banking institutions. For example, CMHC administers the Affordable Housing Fund which provides low-cost loans to housing providers that are working to build or renovate housing units for Indigenous communities. 

Moreover, the government has the capacity to provide loan guarantees for individuals or organizations who seek loans from the private sector.  Through a loan guarantee, the government commits to assuming the debt obligation for borrowers if they default on loans thereby allowing borrower to benefit from the government’s credit ratings to receive a lower interest rate than what they would otherwise be entitled to.  For example, the Indigenous Loan Guarantee Program is open to Indigenous communities seeking government guarantors for loans to participate in major natural resource projects providing them with an opportunity to access to capital which might otherwise not be available through mainstream financial institutions.

Do Loans, Grants and Contributions have to be Repaid?

Loans are always repayable, although they may be forgiven by Departments if the program authorities allow it and certain criteria are met.

You may be surprised to know that both grants and contributions can be either non-repayable or repayable, in whole or in part.  Some contribution agreements require repayments based on agreed-upon annual amounts. In practical terms, however, most government programs for grants and contributions do not ask for repayment from Indigenous recipients unless a relatively high profitability criteria has been met which rarely happens.  In this way, most grants and contributions that are awarded to Indigenous recipients do not end up having to be repaid. The agreement which is signed between the government and the recipient will explain the conditions for the repayment of the funds. 

Receiving funds from the federal government comes with strings attached.  The flexibility in spending those funds will depend on the nature of the agreement signed so it is important to have a clear understanding of the conditions related to the funding before finalizing the agreement.  It is always good to inquire about whether Departments have considered their own Appendix K flexibilities and whether they are considering different types of agreements to allow Indigenous organizations to have as much leeway as possible in spending funds.  Sometimes, Departments need a little push to explore flexible funding possibilities and reminding them of Canada’s Reconciliation objectives can help to get all funding options on the table.