Canada: Equity Kickers And The Criminal Rate Of Interest

Entering into a loan transaction that also has an equity component, such as the issuance of shares or warrants, has previously given rise to some concern that the loan could ultimately run afoul of the 60 percent criminal rate of interest. While this has widely been thought to be contrary to the intended purpose of the criminal interest provision (preventing loan-sharking), there has still been a risk that equity could be captured and valued as interest due to the broad definition and judicial interpretation of "interest" in that provision. However, that risk has been diminished by a decision of the Ontario Superior Court that was recently upheld by the Ontario Court of Appeal.1

The Criminal Rate of Interest and Equity

Section 347 of the Criminal Code makes it a criminal offence to enter into an agreement with an effective annual interest rate in excess of 60 percent.2 The provision is triggered in two ways: (1) if the agreement, on its face, has an interest rate above 60 percent; or (2) if, during the term of the loan, the lender ultimately obtained interest in excess of 60 percent. The latter creates a "wait and see" approach, and has sometimes been a source of concern where equity has been offered in connection with a loan transaction (often referred to as an "equity kicker" or "equity sweetener"). The concern often being that at the end of the credit period, the value of that equity, if considered "interest" under section 347, will result in an interest rate above 60 percent. While corporate directors and executives need not be overly concerned with criminal charges, this provision has been used by borrowers to attack a loan agreement (or parts thereof) as unenforceable and has provided a basis for challenging the originally agreed upon transaction.

Despite the original intention of section 347 to avoid loan-sharking, the definition of interest in section 347 is drafted broadly and has generally been interpreted broadly by the courts, resulting in its potential application to otherwise legitimate corporate transactions between sophisticated parties. In determining whether an item is "interest", courts have generally considered whether the item is, in substance, a cost incurred to receive credit.3 There has been fairly limited case law under section 347 considering the use of equity, and similar, instruments in connection with a loan. However, royalty payments, anticipated profits, shares, warrants and even an investment opportunity have potentially been considered "interest", or potentially included in an interest calculation, for purposes of section 347.4 This has led to some uncertainty and concern that the section could be applicable where some form of equity is offered as part of a debt transaction, notwithstanding the fact it does not fit within the original intention of section 347.  However, a decision of Justice Gans of the Ontario Superior Court, which was recently upheld by the Ontario Court of Appeal, provides some comfort to corporate lenders.5

Bimman v. Neiman Narrows the Scope

In 2015, Justice Gans of the Ontario Superior Court released his decision in Bimman v. Neiman,6 narrowing the application of section 347 to equity kickers.

The case was an oppression application brought by shareholders with respect to actions taken by the defendants (mainly in respect of cash calls and the granting of a mortgage), and also sought repayment of amounts under a shareholders' agreement. While only an ancillary issue before the court, Justice Gans specifically considered whether shares that the defendant shareholders received as a result of their loans to the company fell within the definition of "interest".  Justice Gans recognized the original intention of section 347 to stop loan-sharking and found that transactions such as the one in this case–shareholder loans in exchange for or coupled with the issuance of shares–were not the type that Parliament intended to prohibit. Justice Gans was not persuaded that the shares constituted a "charge or expense" as those terms are used in the statutory definition of interest. Notably, he found that while there may be a cost associated with issuing shares at sub-market value, that cost is really borne by the shareholders of the company and, additionally, the issuance of shares is not a charge "paid or payable" by the company and therefore does not fall within the definition of "interest"; the shares were not redeemable at the option of the shareholders, the company was not committed to re-purchasing them in the future, and they did not guarantee any right to future payment.

However, Justice Gans was careful to state that he was not determining whether shares were categorically excluded from section 347 and that each case must be decided on its own particular facts. In addition, he noted that neither the shareholders nor the company were attacking the shareholder loans as violating section 347, which may give his finding less weight than a case where the borrower was challenging the legality of the loan transaction. Nevertheless, his finding, which moves the issuance of shares away from the definition of interest in section 347, should still provide some comfort to those providing and receiving equity as part of a loan transaction. Although this specific issue was not at issue before the Court of Appeal, the fact that the substance of Justice Gans' decision was unanimously upheld by the court should give the decision more weight.7 While the risk of section 347 for equity kickers and similar transactions is not completely gone, it appears to have diminished.


1 Birman v. Neiman 2017 ONCA 264, appeal and cross-appeal from 2015 ONSC 2313, 2015 ONSC 3076, 2015 ONSC 4144, and 2015 ONSC 4414

2 A "payday loan" exception was introduced in 2007: s. 347.1.

3 See Garland v. Consumers' Gas Co., [1998] 3 S.C.R. 112.

4 See e.g. Boyd v. International Utility Structures Inc. (2001), 88 B.C.L.R. (3d) 183 (S.C.), aff'd 2002 BCCA 438; 677950 Ontario Ltd. v. Artell Developments Ltd. (1992), 93 D.L.R. (4th) 334 (Ont. C.A.), aff'd [1993] 2 S.C.R. 443; J.D.M. Capital Ltd. v. Smith, 39 B.C.L.R. (3d) 340 (S.C.), rev'd (1998), 58 B.C.L.R. (3d) 272 (C.A.); Aectra Refining & Marketing Inc. v. Lincoln Capital Funding Corp. (1991), 6 O.R. (3d) 146 (Ct. J. (Gen. Div.)); and Re Bearcat Explorations Ltd. (2004), 3 C.B.R. (5th) 173 (Alta. Q.B.).

5 The issue of section 347 was not pursued on appeal but the Ontario Court of Appeal generally upheld the findings and analysis of Justice Gans, with the exception of his award for punitive damages and a valuation point.

6 2015 ONSC 2313.

7 2017 ONSC 264, dismissing the appeal but reversing findings with respect to punitive damages and the number of shares to be issued.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.