The Government of Canada recently introduced the Budget Implementation Act, 2023, No. 1 (the "Budget Implementation Act") and the Criminal Interest Rate Regulations (the "Regulations") in an effort to crack down on predatory lending. Both acts will come into force as of January 1, 2025.
In 2023, when the Government of Canada announced its intention to lower the criminal rate of interest, lenders worried that the combination of interest, fees, commissions and other charges and expenses payable under or in connection with their loan agreements would qualify as "criminal." The new legislation is not bad news for all lenders, however. A large proportion of commercial lenders can rest assured that their commercial loans benefit from exceptions set out in the Regulations.
The Current Regime
Section 347 of the Criminal Code (the "Code") governs the criminal rate of interest and applies to virtually all credit agreements and arrangements in Canada, including instalment loans, lines of credit and credit cards. Pursuant to Section 347, anyone who enters into an agreement or arrangement to receive payment or partial payment of interest at a criminal rate is guilty of an offence punishable by imprisonment or a fine, or both. Absent evidence to the contrary, lenders who receive interest at a criminal rate are deemed to know they were receiving interest at such a rate.
The Code defines "criminal rate" as an effective annual rate ("EAR") of interest that exceeds 60% (being roughly equivalent to a 48% annual percentage rate ("APR") of interest) on the credit advanced under an agreement or arrangement. EAR is generally perceived as being the "true" interest rate payable on a loan as it takes the effect of compounding into account.
The Code defines "interest" to encompass more than simply the interest rate specified on the face of a particular agreement or arrangement. It includes charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement. In the commercial lending context, this definition has been understood to capture commitment fees, loan fees, monitoring fees, standby fees, administrative fees, advance fees, facility fees and exit fees, to name a few.
The New Regime: Amendments & Exemptions
The Budget Implementation Act amends Section 347 of the Code by, among other things, (i) broadening the scope of activities that constitute a criminal offence to include the "entering, offering or advertising an offer to enter" into an agreement that provides for the receipt of interest at a criminal rate, and (ii) changing the rate of interest and the method of calculating such interest from 60% EAR to 35% APR (roughly equivalent to 41% EAR, based on monthly compounding) for the purposes of the definition of "criminal rate." It also gives regulation-making authority to the Governor in Council to provide for the types of agreements or arrangements that are exempt from Section 347.
The Governor in Council used that authority to make the Regulations, which were pre-published to the Canada Gazette, Part I on December 23, 2023. The Regulations exempt certain types of pawn loans and commercial loans from the reduced criminal interest rate. Section 347 of the Code will not apply to commercial loans so long as the following criteria are satisfied:
- the borrower is not a natural person; and
- either:
- the amount of the credit advanced is between $10,000 and $500,000 and the APR does not exceed 48%; or
- the amount of the credit advanced is greater than $500,000.
A Step Towards Promoting Fair Lending Conditions in Canada
The amendments to Section 347 of the Code represent the first significant update to the criminal rate of interest regime in over 40 years. In our view, the amendments accomplish the objective of discouraging predatory lending practices.
By providing exceptions to the rules set out in the Code for certain commercial lending transactions agreed to by contracting parties, the Government of Canada has also recognized that commercial loans may price in high rates of return to attract capital investment without being considered predatory. Commercial lending transactions are typically entered into by sophisticated borrowers that understand the risks of such transactions. Through the exemptions, the amendments facilitate commercial lending, while discouraging predatory lending.
Proactive Next Steps for Lenders
In spite of the exemptions set out in the Regulations, commercial lenders should be mindful of the amendments to Section 347 of the Code, as it is possible that an otherwise compliant transaction entered into prior to January 1, 2025, could be in violation of the Code once the legislation comes into force.
Going forward, commercial lenders and their legal counsel can avoid contravening Section 347 of the Code by ensuring that their transactions are structured appropriately. Loan documents should include a carefully worded criminal interest rate clause to address the steps that the parties will take if their agreement inadvertently contravenes the Code.
In response to the changing legal landscape, commercial lenders, in consultation with their legal counsel, should:
- review existing loan documents to address potential criminal rate of interest issues;
- adjust new lending agreements to ensure that they align with the reduced criminal rate of interest;
- utilize the exemptions found in the Regulations to avoid the application of Section 347 of the Code; and
- review any applicable reduction clauses in existing loan documents to ensure compliance with the Code for inadvertent breaches or deemed breaches.
The authors gratefully acknowledge the assistance of summer student Karla Ledesma in the preparation of this update.
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