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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions