On April 20, 2023, following a consultation in 2022, the Government of Canada tabled Bill C-47, the Budget Implementation Act (the "Bill"). The Bill includes, amongst many other things, amendments to the criminal interest rate provision under section 347 of Canada's Criminal Code, which aim to crack down on predatory lending by reducing the criminal interest rate.
The Bill was preceded by the Government of Canada's budget announcement on March 28, 2023, in which the Government of Canada proposed to lower the criminal interest rate to 35% APR (as defined below) while also proposing to adjust existing payday loan exemptions to cap the maximum amount of interest that could be charged.
The criminal interest rate is applicable to most money lending products in Canada. When it comes to what qualifies as "interest" under the Criminal Code, a very broad interpretation is given and it includes, among other things, fees, fines, penalties, commissions, charges and expenses.
Presently, based on section 347(1) of the Criminal Code, the criminal interest rate is set at an effective annual rate ("EAR") of 60%. When that limit was fixed in 1980, the Bank of Canada's overnight rate was 21%. The difference between the overnight rate and the EAR was 39% at that point in time. Conversely, the Bank of Canada's current overnight rate is around 4.5%. Consequently, the difference between the overnight rate and the EAR is now approximately 55%.
Notably, in order to calculate interest, the Bill will transition away from EAR, which has been used since 1980, to an annual percentage rate ("APR"). For reference, the current EAR of 60% would be equivalent to an APR of roughly 47%. Under the Bill, the criminal interest rate would be reduced to an APR of 35%. A reduction to 35% APR will align with the existing maximum interest rates that can be imposed on consumers in the Province of Québec.
Importantly, the Bill excludes certain agreements or contractual arrangements as set out in future regulations. However, there have been no such regulations proposed at this point in time, so it is unclear what types of agreements or contractual arrangements will be excluded from the application of the new criminal interest rate provisions.
The Bill includes transitional provisions that will grandfather existing agreements or contractual arrangements. Therefore, the new criminal interest rate will apply to agreements or contractual arrangements entered into after the day on which the Bill comes into force, noting that details regarding this process and any potential exceptions are still to be established.
The Bill also proposes to establish a limit on the amount of interest relating to payday loans, limiting the amount payday lenders may charge to $14 per $100 borrowed. This limit would align the Government of Canada with the Province of Newfoundland and Labrador, which currently has among the lowest limits under existing Provincial legislation.
The Government of Canada has been clear that it intends to launch additional consultations on whether the criminal rate of interest should be reduced even further than as presently set out in the Bill. Additionally, the Government of Canada intends to launch further consultations on additional revisions with respect to the payday lending exemptions.
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