By: Danielle Maksimow and Kay Olugbemi, Norton Rose Fulbright Canada LLP
Introduction
On January 1, 2025, the Canadian government is amending Sections 347 and 347.1 of the Criminal Code Act of Canada (the Criminal Code) through the Budget Implementation Act, 2023, No.1 (S.C. 2003, c. 26) and the Criminal Interest Rate Regulations, SOR/2024-114 (the Regulations). These amendments will lower the criminal interest rate in Canada from an annual rate of interest of 60% to an annual percentage rate of 35% and importantly, narrow the application of the Criminal Code provisions so that the provisions will no longer apply in certain situations, including where the credit is advanced to a non-natural person for a business or commercial purpose and the loan amount is over Cdn.$500,000.
Interest Defined under the Criminal Code
Interest is broadly defined under the Criminal Code as being the “aggregate of all charges and expenses, including fees, fines, penalties, commissions or other similar charges or expenses or in any other form, paid or payable for the advancing of credit under an agreement or arrangement, or that would be paid or payable if such an agreement or arrangement was entered into, by or on behalf of the person to whom the credit is to be advanced or would be advanced but does not include the repayment of credit advanced or insurance charge, official fee, overdraft charge, required deposit balance or, in the case of a mortgage transaction, any amount required to be paid for property taxes.” Thus, while prior to the effectiveness of the upcoming amendments, the criminal rate of interest was an annual interest rate of 60%, effectively the annual percentage rate (APR), after taking into consideration the concepts recognized in the definition of interest, typically equalled closer to 45%- 48%. The amendments clarify this discrepancy by using APR rather than an annual rate of interest and significantly lower the maximum APR to 35%.
Criminal rate of interest is a hybrid offence in Canada and it can be tried summarily meaning that the penalty will be a fine of not more than Cdn. $25,000 or imprisonment for a term not more than two years less a day, or it can be tried by indictment where the penalty is imprisonment for a term not exceeding five years.
New Exemptions to the Criminal Interest Rate
While the new APR maximum applies to all lending transactions under the Regulations, certain agreements previously captured by the Criminal Code will now be exempt from the application of the criminal rate of interest. The categories for exemption are as follows:
- Business or Commercial Purposes: Where the borrower is not a natural person and the borrowing is for a business or commercial purpose, the credit advanced is between Cdn.$10,000 to or less than Cdn.$500,000 and the APR is less than 48%, Section 347 of the Criminal Code will not apply. In addition, a borrowing is completely exempt where the credit advanced is to a non-natural person for a business or commercial purpose and for an amount more than Cdn.$500,000. The latter exception will apply most private placement transactions.
- Pawnbroking loans: Pawnbrokers are exempted from the application if the credit is advanced towards the pawning of tangible personal property other than a vehicle, the amount advanced is less than Cdn.$1,000, the APR does not exceed 48% and the only remedy of the pawnbroker is to seize the pawned property.
- Payday loans: The Regulations set a national interest cap of 14% on the amount advanced to the borrower for “payday loans”. The Criminal Code previously exempted the application of the criminal rate of interest if the amount advanced was under Cdn.$1,500, the tenor of the loan was for 62 days or less, the lender advancing the loan was licensed provincially to advance such loans and the province where the loan was advanced was designated. To be designated, the province must have legislative measures to protect borrowers. In determining whether a payday loan complies with the limit set by the Regulations, the total cost of borrowing will not include fees, fines, penalty or other charges authorized by provincial law and imposed on the borrower for defaulting in any payment or the dishonoured cheque fee if the amount imposed is less than Cdn.$20.
Determination of the Loan Amount
In a further amendment to the Criminal Code through Bill C-69, credit advanced is defined as “the aggregate of the money and the monetary value of any goods, services or benefits actually advanced or to be advanced under an agreement or arrangement, or that would be advanced if an agreement or arrangement -as offered, including in an advertisement was entered into, minus the aggregate of any required deposit balance and any fee, fine, penalty, commission and other similar charge or expense directly or indirectly incurred under the original or any collateral agreement or arrangement.” The implication of this is that the loan amount is determined as the aggregate of money under an agreement or arrangement minus the aggregate of any required deposit balance and fees that may be incurred directly or indirectly under any collateral agreement. Therefore, in a lending transaction where different amounts are drawn at different times, the aggregate amount to be advanced under the original lending agreement will be the applicable amount for this purpose.
Care must be taken where the credit sum originally advertised is different from the sum agreed after negotiations. If the amount advertised is under the Cdn.$500,000 exemption rule, the APR must comply with the Criminal Code Act and the Regulations. In the event that the final agreement is above Cdn.$500,000, the exemptions will then apply as stated in the Regulations.
How this Affects Lenders
Criminal interest rates were previously only applicable to agreements actually entered into. However, this is being changed to include an advertisement of an offer to enter into an agreement or arrangement in which the interest to be received will constitute a criminal rate. Thus, where there is a public offer of credit and the interest rate falls within what would be a criminal rate, then the offence would have already been committed, regardless of the fact that no agreement was actually signed.
The change will also necessitate that businesses who charge fees that may fall within the definition of an interest will need to review their agreements and fees charged to determine whether the amendments to the criminal interest rate will be applicable to them.
While the amendments create the exemptions discussed above, it is important to note that for the exemptions to apply, the borrower must be a non-natural person. Therefore, when a natural person, as the borrower, takes out a credit that is above Cdn.$500,000, the exemptions that apply to commercial loans of over Cdn.$500,000 will not apply and the interest rate for that loan must comply with Section 347 of the Criminal Code, as amended. This has the potential to have significant implications where certain loans such as capital calls (where the borrower may be an individual) exceed Cdn.$500,000 and a lender mistakenly assume that the exemptions would apply. In these situations, lenders need to ensure that such loans do not charge interest that exceeds an APR of 35%.
Further, lenders in high-risk credit markets may need to conduct a comprehensive review of their lending processes to determine how to navigate what will be a tighter interest rate regime. There may be a need to re-assess qualifying factors for borrowers where the amount to be advanced does not fall within the exemptions and the existing interest rate needs to be reduced to comply with the Criminal Code, as amended. We recommend that lenders:
- Review their forms of advertisement of credit facilities, since merely advertising a criminal interest rate will constitute the commission of an offence regardless of whether an agreement is entered into;
- Review their existing credit agreement templates to reduce fees, fines and interests chargeable where the credit advanced does not fall within the exemptions; and
- Where the amount advanced falls within the exemptions, include representations and warranties and covenants to evidence that the facility will be used for business or commercial purposes.
Norton Rose Fulbright Canada LLP will continue to monitor developments in this area and notify you as they arise. For more information, please contact Danielle Maksimow at danielle.maksimow@nortonrosefulbright.com.
