In Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18
("Krayzel"), the Supreme Court of Canada
held that an interest rate increase that was structured as a lower
rate in the absence of default infringed Section 8 of the
InterestAct (Canada). In its analysis, the
majority decision looked at whether mortgage loan that offered a
lower rate of interest where there was no default is in substance
the same as imposing a higher interest rate after a default. It
ultimately found that framing the higher rate of interest as part
of an incentive to avoid a default could not save a loan from the
Interest Act prohibition.
Section 8(1) of the Interest Act provides that:
"No fine, penalty or rate of interest shall be stipulated
for, taken, reserved or exacted on any arrears of principal or
interest secured by mortgage on real property or hypothec on
immovables that has the effect of increasing the charge on the
arrears beyond the rate of interest payable on principal money not
In Krayzel, the mortgage terms reserved a lower rate where the
loan was not in default by way of a discount. Effectively, interest
was set at 25% with a lower "pay rate" applicable to the
required monthly payments under the loan. Although the difference
between pay rate and the 25% rate accrued to the principal of the
loan, the agreement provided that upon payment in full at maturity,
these accrued amounts were forgiven. In the majority decision, the
decision looked past the form of the interest rate structure and
found that in effect, the "pay rate" applied when the
loan was not in default and a higher rate applied when the loan was
The Court was careful to point out that "a rate increase
triggered by the passage of time alone does not infringe s. 8 [of
the Interest Act]" in its analysis of the interest
rate structure put in place by the first loan amendment in Krayzel.
This should provide comfort to lenders who structure loans with an
interest rate that increases at a set date prior to maturity, but
lenders must be very careful to ensure that that the rate increase
is no way conditional on default, as it was in the second loan
amendment at issue in Krayzel. Lenders should work with the lawyers
to ensure that their interest rate structure is on side with the
Interest Act and that all of the relevant factors have
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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