[co-author: Will Sardo - Student-at-Law]

As we have reported in prior blogs, the Government of Canada is moving forward with plans to lower the criminal interest rate to an annual percentage rate (APR) of 35 percent (the current criminal interest rate, being an effective rate of 60 percent, is equivalent to an APR of about 48 percent). Pending amendments also expand the scope of what activities and agreements are captured by the criminal interest provision, but new regulations provide important exemptions particularly with respect to certain types of commercial loans, which will be a welcome change to previously uncertain commercial arrangements.

New Interest Rate

On May 31, 2024, the governor general in counsel announced that the amendments to section 347 of the Criminal Code reducing the criminal interest rate to 35 percent (APR) will be effective January 1, 2025.

Clients are reminded that interest for the purposes of criminal interest is very broadly defined: "the aggregate of all 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, by or on behalf of the person to whom the credit is or is to be advanced, irrespective of the person to whom any such charges and expenses are or are to be paid or payable, but does not include any repayment of credit advanced or any insurance charge, official fee, overdraft charge, required deposit balance or, in the case of a mortgage transaction, any amount required to be paid on account of property taxes". Consequently, the interest rate for purposes of the Criminal Code often exceeds the rate specified on the face of a particular agreement or arrangement.

Revised Payday Loan Limit

Currently, section 347.1 is an exception to the offence provisions of section 347. The prohibition on charging interest above the criminal rate does not apply to payday loans (as defined) if: (1) the loan is $1,500 or less, for a maximum term of 62 days; (2) the lender is a provincially licensed payday lender; and (3) the federal government has designated the provinces as having legislative measures to protect recipients of payday loans which limit the total cost of borrowing. This exception is now repealed in its entirety and instead, certain payday loans are subject to a different exemption under the new Regulations.

The new Regulations are intended to harmonize borrowing limits amongst the provinces, imposing a new federal limit on the cost of borrowing for payday loans: $14 per $100 borrowed in all provinces that have an approved payday loan regime. The proposed Regulations would also exclude dishonoured cheque fees of $20 or less from the calculation of the $14 rate limit. Therefore, the cost of payday loans will be limited to no more than 14 percent APR.

Currently, only the territories and Quebec do not have a designated payday loan regime; therefore, payday loans in those regions would not be exempt from the criminal rate of interest.

Pending Expansion of Captured Activities

In addition to the change in rate, section 347 is also being amended, on a date fixed by order of the governor in counsel, to expand the activities that are caught by such section.

Criminal interest is currently calculated at the time an agreement is entered into and also when interest is paid. If the new provisions are proclaimed, interest will also be calculated when there is an offer to finance or an advertisement of an available financing, materially expanding the scope of the existing provision.

Further, the additional proposed amendments would allow criminal proceedings to commence against those charging or receiving criminal rates of interest without the consent of the Attorney General to commence proceedings.

As of the date of this blog, all of the amendments have been passed but the government has not yet indicated when the above additional amendments will become effective, but it would not surprise the authors if they become effective concurrent with the other amendments on January 1, 2025.

New Exempting Regulations

On June 19, 2024, the Government of Canada published the Criminal Interest Rate Regulations which will become effective on January 1, 2025. These regulations set forth three exemptions to which the incoming criminal interest rate of 35 percent APR will not apply.

1. Commercial Loans Exemption

The regulations carve out an exemption for agreements or arrangements whereby:

• The borrower is a corporation or otherwise not a natural person;
• The funds are borrowed for a business or commercial purpose; and
• The funds advanced total more than $10,000.

Where the funds advanced under this exemption are $500,000 or less, the criminal interest rate is capped at 48 percent APR; where the funds advanced under this exemption total more than $500,000, there is no criminal rate of interest. If any of the above criteria are not met, then the exemption to the 35 percent ARP rate is not available. Clients are advised that it will be important to adequately document the proposed use of proceeds to ensure access to the exemption.

2. Pawnbroking Loan Exemption

Pawnbrokers who loan less than $1000 in response to the pawning of tangible personal property or corporeal movable property (excluding vehicles), and for whom, in the event of the borrower’s default, their only recourse is seizure of the pawned property will not incur criminal interest if the rate is equal to or below 48 percent APR.

The third exemption is with respect to payday loans, as discussed above.

Transitional Provisions

The amendments provide that the new criminal interest rate does not apply to a payment arising from an agreement entered into before these new provisions come into force. In other words, an agreement that was compliant with section 347 at the time it was entered into is not impacted by the change. The legislation is unclear as to the possible impact of an amendments on existing agreements, including with respect to interest rates.

Conclusion

The reduction in the criminal interest rate has been contemplated for some time and the recent confirmation of the date of such change provides welcome certainty to the market. The corresponding regulations will result in many commercial facilities being exempt from the criminal interest provisions which will not only provide certainty but increased flexibility to structure creative financing solutions, including the granting of warrants.