From:
http://www.aircanada.com/en/travelin...e/checked.html
Liability for loss, delay or damage to baggage for travel wholly between points in Canada is limited to $1500 CAD per passenger unless a higher value is declared in advance and additional charges are paid. For most International travel (including domestic portions of international journeys) up to approximately $9.07 USD per pound ($20.00 USD per kilo) for checked baggage and $400 USD per passenger for unchecked baggage. Contact Air Canada for further information.
Please note that Air Canada assumes no liability for money, jewelry, silverware, negotiable papers, securities or other valuables, business documents, samples, liquids, food and other perishables, computers, prescription drugs, photographic equipment, video equipment, cellular telephones, artistic items, chinaware/ceramics/pottery, electronic and mechanical items, glass, musical instruments and equipment, paper (includes photographs/negatives/prints, historical documents, maps), sporting goods (tennis rackets, scuba gear, fishing rods, surfboards, sporting trophies such as animal antlers and horns).
Despite care in the handling of your baggage, we trust you will understand that we are not responsible for the following: nicks, scratches, missing pullstraps, zipper damage, scuff marks, damage to wheels, soiling, manufacturing defects, damage resulting from over-packing or spillage of packed items.
My interpretation would be that if none of the last paragraph applies, they would be responsible for fixing the bag properly...although they do seem to have left themselves lots of loopholes.