Canadian Tire

Capital Management

Canadian Tire Corporation’s (CTC's) objectives when managing capital are: ensuring sufficient liquidity to support its financial obligations and execute its operating and strategic plans; maintaining healthy liquidity reserves and access to capital; and minimizing the after-tax cost of capital while taking into consideration current and future industry, market and economic risks and conditions.

The Company monitors its capital structure by measuring debt-to-earnings ratios and manages its debt service and other fixed obligations by tracking its interest and other coverage ratios and forecasting corporate liquidity. 

The Company manages its capital structure over the long term to optimize the balance among capital efficiency, financial flexibility, and risk mitigation. Management calculates its ratios to approximate the methodologies of credit rating agencies and other market participants on a current and prospective basis. Many of these ratios include lease liabilities. To assess its effectiveness in managing capital, Management monitors these ratios against targeted ranges. 

The Company has a policy in place to manage capital. As part of the overall management of capital, Management and the Audit Committee of the Board of Directors review the Company’s compliance with and performance against the policy. In addition, periodic review of the policy is performed to ensure consistency with risk tolerances.

In order to maintain or adjust the capital structure, the Company has the flexibility to adjust discretionary capital spending, adjust the amount of shares purchased under its normal course issuer bid program, adjust the amount of dividends paid to shareholders, repay debt, issue new debt and equity, monetize various assets, engage in additional sale and leaseback transactions of real estate properties and increase or decrease the amount of sales of co-ownership interests in credit card loans receivable to GCCT.

As a result of the economic impacts of the COVID-19 pandemic, the Company took actions to enhance its cash position and financial flexibility, including implementing a plan to reduce operating costs at the head office and corporate stores, reducing discretionary capital expenditure and working capital requirements across the Company, and pausing its share purchases other than for anti-dilutive purposes.

Financial covenants of the existing debt agreements are reviewed by Management on an ongoing basis to monitor compliance with the agreements. The key financial covenant for Canadian Tire Corporation is a requirement for the Retail segment to maintain, at all times, a ratio of total indebtedness to total capitalization equal to or lower than a specified maximum ratio (as defined in the Company’s bank credit agreements, but which excludes consideration of CTFS Holdings Limited, CT REIT, Franchise Trust and their respective subsidiaries).

The Company was in compliance with all financial covenants under its existing credit agreements as at January 2, 2021 and December 28, 2019. Under these covenants, the Company has sufficient flexibility to support business growth. 

Helly Hansen is required to comply with covenants established under its bank credit agreements, and was in compliance with all financial covenants thereunder as at December 31, 2020 and 2019.

CT REIT is required to comply with covenants established under its Declaration of Trust, the Trust Indenture and bank credit agreement and was in compliance with all financial covenants thereunder as at December 31, 2020 and 2019.

Canadian Tire Bank's Regulatory Environment

Canadian Tire Bank (“CTB” or “the Bank”), a federally chartered Schedule I bank, is required to comply with regulatory requirements for capital, other regulatory requirements that have an impact on its business operations and certain financial covenants established under its bank credit agreement. 

CTB manages its capital under guidelines established by the Office of the Superintendent of Financial Institutions of Canada (“OSFI”). OSFI’s regulatory capital guidelines are based on the international Basel Committee on Banking Supervision framework entitled Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (“Basel III”), which came into effect in Canada on January 1, 2013, and measures capital in relation to credit, market and operational risks. The Bank has various capital policies and procedures and controls, including an Internal Capital Adequacy Assessment Process (“ICAAP”), which it utilizes to achieve its goals and objectives.

The Bank’s objectives include: holding sufficient capital to maintain the confidence of investors and depositors; and being an appropriately capitalized institution, as measured internally, defined by regulatory authorities and compared with the Bank’s peers.

OSFI’s regulatory capital guidelines under Basel III allow for two tiers of capital. Common Equity Tier 1 (“CET1”) capital includes common shares, retained earnings and AOCI, less regulatory adjustments which are deducted from capital. The Bank currently does not hold any additional Tier 1 capital instruments; therefore, the Bank’s CET1 is equal to its Tier 1 regulatory capital. Tier 2 capital consists of the eligible portion of general allowances. Risk-weighted assets (“RWAs”) include a credit risk component for all on-balance-sheet assets weighted for the risk inherent in each type of asset, off-balance sheet financial instruments, an operational risk component based on a percentage of average risk-weighted revenues and a market-risk component for assets held for trade. For the purposes of calculating RWAs, securitization transactions are considered off-balance-sheet transactions and, therefore, securitized assets are not included in the RWAs calculation. Assets are classified as held for trade when they are held with trading intent.

The leverage ratio prescribed by OSFI’s Leverage Requirements Guideline provides an overall measure of the adequacy of an institution’s capital and is defined as the all-in Tier 1 capital divided by the leverage ratio exposure. The leverage ratio exposure is the sum of on-balance sheet exposures, derivative exposures, securities financing transaction exposures and off-balance sheet items.

As at December 31, 2020 and 2019, CTB complied with all regulatory capital guidelines established by OSFI, its internal targets as determined by its ICAAP and all financial covenants under its bank credit agreement.