The new Criminal Interest Rate Regulations (Regulations) announced on December 23, 2023, give rise to several important civil implications for lenders and service providers throughout Canada, even though the Regulations have not yet been declared in force.
Criminal Rate of Interest
The background and some of the issues related to the Regulations have been set out previously in our Blakes Bulletin: Unwrapping the Criminal Interest Rate Regulations Released December 23, 2023.
Simply put, while the coming into force date for the Regulations is not currently known, the “criminal rate” under section 347 of the Criminal Code has been amended from an effective annual rate of interest of 60% to an annual percentage rate of interest which exceeds 35%.
As noted by the Supreme Court of Canada, the definition of “interest” in section 347 of the Criminal Code is very broad. It includes many types of charges, expenses and fees that would otherwise not be considered “interest” at common law nor even under general accounting principles.
Proposed Commercial Exemptions
As reported in our previous bulletin noted above, there are important exemptions to the proposed amendments to section 347 of the Criminal Code. Those include an exemption to an agreement or arrangement for a commercial or business purpose in circumstances where a borrower is not a natural person and either:
(a) the amount of credit advanced under the agreement or arrangement is more than C$10,000 but less than or equal to C$500,000, provided that the annual percentage rate of interest does not exceed 48% on the credit advanced; or
(b) the amount of the credit advanced under the agreement or arrangement is more than C$500,000.
The Regulations also exempt certain pawn loans described in our earlier bulletin.
Does “Interest” Charged Even Fall Within Section 347 of the Criminal Code?
Appellate authority, including from the Supreme Court of Canada, provides that there are two steps to be taken when analyzing whether a fee or charge constitutes “interest” within section 347 of the Criminal Code. The first step is to determine whether the fee or charge is for the “advancing of credit.” If so, the second step is to determine whether the credit is being advanced pursuant to an agreement or arrangement.
Such authority also provides that an individual examination of the true nature of the arrangement and the charges incurred is needed to determine whether the charges are “interest,” as defined in section 347 of the Criminal Code. Many charges, expenses and fees may not fall within the confines of “interest” if, for example, those represent and can be properly characterized as the recovery of a disbursement or the genuine pre-estimate of costs incurred in collecting on overdue accounts. In those circumstances, the “interest” may not be a charge paid or payable for the advancing of credit, and section 347 of the Criminal Code may not have application. Some judicial authority suggests that such charges, expenses and fees are less likely to be connected to the advancing of credit in circumstances involving service providers and customers. That said, each individual agreement or arrangement, together with the factual background, must be examined to determine whether the “interest” charged even falls within section 347 of the Criminal Code.
What Happens if “Interest” Exceeds the Criminal Rate?
The Supreme Court of Canada has recognized the broad consensus that courts should not necessarily take the traditional approach that contracts in violation of statutory enactments are void in cases of statutory illegality involving section 347 of the Criminal Code. Instead, the Supreme Court of Canada has ruled that courts should be given wide discretion to fashion a remedy, depending on the circumstances. The spectrum of available civil remedies is broad. At one end, it involves contracts so objectionable that their illegality will taint the entire contract, such as exploitive loan-sharking arrangements and contracts that have a criminal object. At the other end of the spectrum are contracts that, despite contravening a statutory enactment, are otherwise unobjectionable, which will often attract the application of the doctrine of severance.
The Supreme Court of Canada provided guidance as to the exercise of that discretion, which should include a consideration of at least: (i) whether the purpose or policy of section 347 of the Criminal Code would be subverted by severance; (ii) whether the parties entered into the agreement for an illegal purpose or with an evil intention; (iii) the relative bargaining positions of the parties and their conduct in reaching the agreement; and (iv) the potential for the debtor to enjoy an unjustified windfall.
In some cases, the courts have applied notional severance so that, while a party was not entitled to collect interest above the criminal interest rate, the offending provision was read down, with the result that the agreement instead provided for the maximum legal rate of interest.
Despite the original provisions being enacted more than 40 years ago, fortunately, established jurisprudence provides guidance as to the applicability of section 347 of the Criminal Code and the civil remedies available if the criminal rate of interest is exceeded.
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