Order Calling in Certain Notes: SOR/2019-146
Canada Gazette, Part II, Volume 153, Number 11
SOR/2019-146 May 22, 2019
P.C. 2019-572 May 21, 2019
Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to paragraph 9(1)(b) footnote a of the Currency Act footnote b, makes the annexed Order Calling in Certain Notes.
Order Calling in Certain Notes
Notes called in
1 Notes issued under the Bank of Canada Act in the following denominations are called in:
- (a) one dollar;
- (b) two dollars;
- (c) twenty-five dollars;
- (d) five hundred dollars; and
- (e) one thousand dollars.
Coming into force
2 This Order comes into force on January 1, 2021.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Order.)
All bank notes issued by the Bank of Canada since 1935 are legal tender. Although the Bank has not printed new $1, $2, $25, $500 and $1,000 denominations in decades, over $1 billion worth of these denominations remain in circulation. These notes have antiquated security features. In particular, the $1,000 denomination facilitates illicit activities.
Existing authorities and mandates
Pursuant to the Constitution Act, 1867, the Parliament of Canada has exclusive legislative authority over all matters related to currency and coinage, the issue of paper money and legal tender. Thus far, Parliament has chosen to legislate these issues under the Bank of Canada Act and the Currency Act. These statutes grant the Bank of Canada the sole right to issue bank notes intended for circulation as legal tender in Canada. The Bank of Canada is responsible for supplying Canadians with bank notes that can be used with confidence.
“Legal tender” refers to currency that may be lawfully tendered in payment of a debt. All bank notes issued by the Bank of Canada are legal tender and can be used towards payment of a debt: governments, businesses and individuals must accept a payment in any bank note denomination in any quantity if the payment is against a debt or financial obligation.
Withdrawn bank notes
The Bank of Canada supplies financial institutions with the bank notes they need to satisfy public demand through the bank note distribution system. This system is also used to remove withdrawn bank notes (i.e. non-current bank notes) and bank notes considered to be unfit for further circulation (e.g. mutilated or defaced notes).
Since 1935, the Bank of Canada has issued seven bank note series, resulting in 65 distinct denomination variants. All denomination variants prior to the polymer Frontier series (2011–2013) have been withdrawn and are removed from circulation as they surface. Approximately $13.9 billion of the total $82.4 billion in bank notes in circulation are old bank note series that have not yet surfaced and are therefore considered to remain in circulation. These are comprised mostly of non-polymer $100 notes ($7.8 billion), non-polymer $50 notes ($2.3 billion), non-polymer $20 notes ($2.1 billion) and non-polymer $1,000 notes ($747 million). These also include old bank note series that will likely not be redeemed (e.g. collectibles such as the $25 and $500 commemorative denominations issued in 1935), bank notes that are facilitating illicit activities, bank notes held as a store of value or for precautionary purposes, and bank notes that have been lost or destroyed. Table 1 outlines the quantity of bank notes remaining in circulation for which the Government has announced in Budget 2018 that it will remove legal tender.
Volume in Circulation
1 044 799
Bank notes and financial crime
In February 2018, the Department of Finance (Finance Canada) published a consultation paper “Reviewing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime” which, in a section entitled “Bulk Cash,” identified that large bank note denominations facilitate illicit transactions, that Canada stopped producing $1,000 bank notes in 2000, and that removing legal tender status for large denominations could be considered a practical next step to strengthen confidence in the fact that Canadian currency is being used for legitimate transactions domestically and internationally. This step would be consistent with recent practices of other countries (e.g. the United Kingdom [UK]).
The consultation paper noted that bank notes are widely used by criminals and remain intrinsically linked to most criminal activity. In Canada’s Financial Action Task Force (FATF) Mutual Evaluation report, the use of bearer instruments (e.g. cash) to facilitate illicit transactions was identified as a key concern. Large denominations are especially an issue, as they are likely supporting the transportation and smuggling of large values in a manner that avoids drawing the suspicion of law enforcement officials. Recognizing that large denominations are used by organized crime and in money laundering, Canada stopped producing $1,000 bank notes in 2000.
In Canada, there are criminal networks across the country that are responsible for the processing of hundreds of millions of proceeds of crime in bulk cash. These transactions are often observed by law enforcement in public places, as bags or boxes of cash are exchanged. Those who are providing cash in these situations have links to criminal organizations and criminal activity and do not otherwise have legitimate reasons for possessing these amounts in cash. However, the use of multiple cash transfers, the recourse to professional money movers, and the placement of cash in the financial system often make it difficult for law enforcement to establish the link between the cash and the commission of a specific criminal offence.
Older notes are also more vulnerable to counterfeiting. Retailers bear the brunt of losses caused by counterfeiting; however, most retailers are unwilling to refuse customers paying with older series notes unless they can be assured that their competition will do the same, or they are directed by law (e.g. by the Government’s removal of legal tender status). According to the Retail Council of Canada, the total value of fraud reported by Canadian businesses in 2017 was $30.4 million, and losses from counterfeits accounted for just over $1 million.
Accordingly, in Budget 2018, the Government committed to (1) amending the Currency Act to place limits on bank notes that can be used as legal tender; (2) amending the Currency Act and the Bank of Canada Act to facilitate the maintenance of high quality bank notes in the money supply; and (3) initiating the process to remove legal tender status of non-current bank note denominations (i.e. $1, $2, $25, $500 and $1,000 bank notes).
The Budget Implementation Act, 2018, No. 1, which received royal assent on June 21, 2018, amended the Currency Act to allow the Governor in Council to call in bank notes, by order. Calling in $1, $2, $25, $500 and $1,000 notes would remove the legal tender status of those notes. Removing their legal tender status would invalidate those notes as a means of payment. The notes would continue to be honoured at face value by the Bank of Canada.
The objectives of this Order are to
- 1. Contribute to the reduction of illicit transactions using Canadian bank notes
- Removing the legal tender status of the $1,000 denomination would, for example, reduce its perceived liquidity and therefore its desirability. Following the removal of legal tender status, $1,000 bank notes would, after a transition period, only be exchangeable at the Bank of Canada.
- 2. Reduce counterfeiting of Canadian bank notes
- Counterfeiting undermines confidence in Canadian bank notes. Non-polymer bank notes, especially high denominations, are vulnerable to counterfeiting because they do not have the latest security features.
- 3. Increase confidence in the integrity and security of Canadian bank notes in circulation
- The Order would increase consumer confidence in the integrity and security of bank notes in circulation by replacing little-used, non-current bank notes with current, commonly used bank notes with more advanced security features. These new notes are familiar to retailers and machine-recognizable (e.g. by self-checkouts, vending machines, smart safes and cash recyclers) to validate the authenticity and quality of the bank notes.
This Order removes the legal tender status of bank note denominations no longer issued by the Bank of Canada (i.e. $1, $2, $25, $500 and $1,000 bank notes) effective January 1, 2021. Following this transition period, the Bank of Canada would continue to honour these bank notes and exchange them at their face value.
Finance Canada and the Bank of Canada worked closely with federal partners including Payments Canada, the Royal Canadian Mounted Police (RCMP), the Canada Border Services Agency (CBSA), and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to support the implementation of this change.
Finance Canada and the Bank of Canada also consulted members of the bank note distribution system (i.e. financial institutions). Given the denominations targeted for legal tender status removal are no longer printed and rarely seen, financial institutions had no strong negative reactions to the proposal. They requested assistance from the Bank of Canada to coordinate and manage the operational impacts following the announcement, as they expect the volume of these notes being returned to increase, as well as the potential for counterfeits to be submitted.
In February 2018, Finance Canada released a discussion paper entitled “Reviewing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime” seeking feedback from stakeholders as part of its broader review of Canada’s anti-money laundering and anti-terrorist financing regime. As noted above, bulk cash is mentioned in this paper. Finance Canada received comments from three stakeholders on this part of the paper, which indicated support for the removal of legal tender status for large denominations.
For example, one credit union recommended the removal of legal tender status for large denominations after a period of notice to force their removal from circulation/storage. An industry association representing credit unions agreed that the direction to remove the legal tender status of bank note denominations no longer issued by the Bank of Canada will be beneficial in curtailing the movement of illicit cash. However, another industry association representing money services businesses was opposed to removing legal tender status for large bank notes, stating that no criminal would be deterred from criminal activity due to the extinction of $1,000 bank notes, and that the focus should be on the new preferred currency of criminals: cryptocurrency.
This Order was not published in the Canada Gazette, Part I, for comment, because this initiative had been previously announced in Budget 2018; the impacted bank notes have been withdrawn for decades (they are no longer current); and because the notes would continue to be honoured at face value.
Modern treaty obligations and Indigenous engagement and consultation
No impacts have been identified in respect of the Government’s obligations in relation to Indigenous rights protected by section 35 of the Constitution Act, 1982, or its modern treaty obligations.
Legally, removing legal tender status of $1, $2, $25, $500 and $1,000 bank note denominations would impact any person in the world who may own one of the affected bank notes and wish to use those notes to repay a debt in Canada. There is no evidence to suggest that Indigenous peoples in Canada use these bank notes any more or less than the average person. Because the Bank of Canada will continue to honour these bank notes and exchange them for new polymer notes, no specific group is expected to be adversely affected.
Finance Canada, in consultation with federal partners (i.e. the Bank of Canada, the RCMP, FINTRAC and the CBSA), assessed options to achieve the stated policy objectives. Removing the legal tender status of the bank notes in question was the recommended option; the only possible way to remove legal tender status of bank notes (barring legislative amendments) is for the Governor in Council to issue an order pursuant to the Currency Act.
Costs and benefits
The Bank of Canada already has processes in place to accept bank notes from the public and replace them with either new notes or electronic balances. Over a short period, there may be nominal increases in operational costs for the Bank of Canada and potentially the RCMP, as they manage increased volumes of bank note exchanges. Any costs would be absorbed within existing resource levels.
Other than having to go to a financial institution, Canadians and Canadian businesses would not incur any costs as financial institutions would exchange the affected bank note denominations for an equivalent value. If Canadians wish to return bank notes following the removal of legal tender in 2021, they will have to mail them to the Bank of Canada. There would be a nominal expense associated with this (i.e. the cost of an envelope and a stamp).
Notes no longer issued are being removed from circulation to be replaced with notes in current denominations that are recognizable by machinery and the Canadian public, increasing confidence in Canada’s bank notes. For example, technically, you can use a 1935 $25 bank note when you go shopping or pay a bill. However, the cashier might refuse it because it looks unfamiliar, but it is still worth $25.
Removing legal tender status of $1, $2, $25, $500 and $1,000 bank notes facilitates the maintenance of high quality bank notes in the money supply as older, paper notes with antiquated security features would be replaced with new polymer notes which contain more advanced security features that make them more difficult to counterfeit and are in better condition overall. Officially taking the $1, $2, $25, $500 and $1,000 notes out of circulation will help achieve that goal. However, this decision will have little impact on most Canadians, since these bank notes have not been produced in decades and are seldom found in the money supply. Many Canadians would not recognize them, which means they likely would not be accepted in transactions.
- The $1 and the $2 notes stopped being issued in 1989 and 1996, respectively, and were replaced with coins.
- The $25 note was a commemorative note. Both it and the $500 note were discontinued shortly after they were issued in 1935.
- The $1,000 note stopped being issued in 2000.
Removing these old notes from circulation can help ensure that Canadian bank notes stay current, of high quality and secure. It also guarantees they are always easy to use.
It would also reduce illicit activities, such as counterfeiting, money laundering and tax evasion. The removal of legal tender status of the $1,000 denomination, for example, would reduce its perceived liquidity and hence its desirability. Once removed from circulation, these notes would only be able to be exchanged at financial institutions and the Bank of Canada. The next largest bank note, the $100 denomination, adds weight and size by a factor of ten. In practical terms, lower denomination notes are an order of magnitude more difficult to transport and transact with due to the larger quantity needed to complete a transaction. Moreover, in 2000, the Bank of Canada stopped printing $1,000 notes at the recommendation of the RCMP based on evidence that these notes were supporting illicit activities and the black market. In this way, this proposal will result in a money supply that is more secure for Canadians.
Small business lens
The Order is not expected to have a significant impact on businesses, including small businesses. Since retailers bear the cost of counterfeiting, retailers may save money through reduced losses from counterfeiting. Accordingly, small businesses may benefit from the implementation of this Order. However, since these bank notes stopped being produced at the latest almost 20 years ago and are generally no longer used as a method of payment in legitimate business, any impact (positive or otherwise) on small businesses is expected to be negligible.
The “One-for-One” Rule does not apply to this Order, as it would not impose any administrative burden on businesses.
Regulatory cooperation and alignment
Other G7 and Commonwealth countries are successfully managing the quality of their bank notes in circulation. Upon the adoption of the Euro, members of the European Union withdrew the legal tender status of their previous national currencies, and some countries demonetized their previous national currencies (e.g. Norway, France, Hungary and the Netherlands). The UK routinely declares withdrawn bank notes to be non-legal tender. In March 2018, it removed the legal tender status of non-polymer 10 pound notes, which was the twelfth time it has removed the legal tender status of a denomination of a bank note series since 1988. In December 2016, Australia announced that it will investigate the role of cash in facilitating black market activities. This announcement triggered a sharp increase in use of the AUD100 bank notes, which may have been due to those who operate in the shadow economy spending their reserves.
International experience has demonstrated that when non-legal tender status bank notes were honoured for a long time and there was ample transparency and notice made to the public, they could be removed from the bank note distribution system with little disruption. Conversely, suddenly announcing demonetization with little to no transparency and giving the public insufficient time to exchange their bank notes would likely be received negatively and create economic disruptions.
This Order is not related to a work plan or commitment under a formal regulatory cooperation forum (e.g. the Canada-US Regulatory Cooperation Council, the Canadian Free Trade Agreement Regulatory Reconciliation and Cooperation Table, the Canada-European Union Comprehensive Economic and Trade Agreement Regulatory Cooperation Forum).
Strategic environmental assessment
In accordance with The Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that the Order would not result in positive or negative environmental impacts. Therefore, a strategic environmental assessment is not required.
Gender-based analysis plus
No gender-based analysis plus (GBA+) impacts have been identified for this Order.
Implementation, compliance and enforcement, and service standards
The Order removes the legal tender status of $1, $2, $25, $500 and $1,000 bank notes effective January 1, 2021. The Bank of Canada will be in charge of implementation and has already started working with members of the bank note distribution system (i.e. financial institutions) to plan for potential increases in volume of the affected bank notes being returned by Canadians. The Bank of Canada will prepare internally for the increase in volume and will have processes in place to receive the affected bank notes and exchange them for current bank notes.
Funds Management Division
Financial Sector Policy Branch
Department of Finance Canada
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