Business Law Blog

In the 2023 Federal Budget, the Canadian federal government expressed its intention to reduce the criminal rate of interest currently set out in the Criminal Code^[1] to protect financially vulnerable Canadians from predatory lending practices.^[2] Generally, predatory lending involves certain lenders taking advantage of borrowers by imposing unfair loan terms. These loans often carry high interest rates and fees, often making them unaffordable or difficult for individuals to pay back, particularly low-income Canadians and those with a limited credit history.

On June 22, 2023, Parliament approved Bill C-47 (the “Bill”) to implement the proposed changes discussed in the 2023 Federal Budget. However, the amendments introduced by the Bill are not yet in force – they will only become effective at a later date determined by order of the Governor in Council. Once effective, the proposed amendments to section 347 of the Criminal Code will: (i) revise the definition of “criminal rate” under section 347(2) to lower the rate of interest considered criminal under Canadian law, and (ii) introduce certain loan arrangements that will be exempt from the application of section 347.^[3]

CURRENT CRIMINAL INTEREST RATE REGIME

Currently, section 347(2) of the Criminal Code sets the criminal interest rate as an effective annual rate of interest (“EAR”)^[4] that exceeds 60%. The prohibition on charging a criminal rate of interest is generally applicable to all situations in Canada where someone enters into an agreement or arrangement to receive interest, excluding however, transactions under the Tax Rebate Discounting Act and certain payday loan agreements.^[5] For example, the prohibition on charging the criminal interest rate would apply to instalment loans, but would not apply to payday loans that meet the following criteria: (i) valued at $1,500 or less, with a term of 62 days or less, (ii) issued by a licensed lender or an individual authorized by provincial laws, and (iii) issued in provinces designated by the Governor in Council as having a payday lending system.^[6]

PROPOSED NEW CRIMINAL INTEREST RATE REGIME

Definition of Criminal Rate

One key element of the Bill is that it amends section 347(2) of the Criminal Code, whereby the definition of “criminal rate” will be amended to mean “an annual percentage rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 35 per cent on the credit advanced”.^[7] The effect of this amendment is two-fold. First, the method of calculating the criminal interest rate will change from an EAR to an annual percentage rate (“APR”). Second, the in-force criminal interest rate in excess of 60% (EAR), which equates to an interest rate that exceeds 48% (APR), will be replaced with an interest rate in excess of 35% (APR).  Once this amendment is in force, any annual interest rate exceeding 35% (APR) will be a criminal rate of interest for almost all credit agreements and arrangements in Canada.

Proposed Exemptions

Notwithstanding the broad scope of the amendment to the definition of “criminal rate”, the Bill also introduces section 347.01 to the Criminal Code. Specifically, section 347.01(2) provides that the Governor in Council may, by regulation, exempt specific lending practices from the prescribed criminal interest rate.^[8] Under the proposed Criminal Interest Rate Regulations (the “Proposed Regulations”), to be enacted under the Criminal Code pursuant to the Bill, two types of loans will be excluded from regulatory scrutiny: (i) certain commercial loans, and (ii) pawn loans. The Proposed Regulations are not currently in force^[9], and may undergo further revisions to incorporate feedback gathered during the formal consultation period, which ran from October 5, 2023, to January 7, 2024.^[10]

(a) Commercial Loans

Generally speaking, commercial loans are loans designed for businesses and their corporate needs, distinguishing them from loans intended for individual borrowers for personal use. Parties to commercial loans are generally more sophisticated and have a nuanced understanding of the associated risks and rewards. As a result, the federal government determined that parties to commercial loan agreements do not necessarily require the protection of legislated criminal interest rates. Therefore, the Proposed Regulations provide that the new “criminal rate” will not be applicable to commercial loan agreements where: (i) “the amount of the credit advanced under the agreement or arrangement is more than $10,000 but less than or equal to $500,000 and the [APR] does not exceed 48% on the credit advanced”, or (ii) “the amount of credit advanced under the agreement or arrangement is more than $500,000”.^[11]

(b) Pawn Loans

Pawn loans are low-value, non-recourse collateralized loans where the borrower’s unpaid debt is discharged upon the lender retaining the collateral put forward by the borrower as security for the loan. For instance, a lender retains a valuable item provided by the borrower until the loan is fully repaid. If repayment doesn't occur within the specified term, the collateral becomes the lender's property, and the borrower's obligations terminate. Consequently, pawn loans are understood to involve less risk to the borrower and do not impact a borrower's credit score or their ability to obtain other loans. As such, the Proposed Regulations provide that the new criminal interest rate will not apply to pawn loans where: “the amount of the credit advanced under the agreement or arrangement is less than $1,000 and the [APR] does not exceed 48% on the credit advanced”.^[12]

LEGAL CONSEQUENCES

Pursuant to Section 347(1) of the Criminal Code, the legal consequences for violating the prohibition on charging a criminal rate of interest include imprisonment for a term not exceeding five years, a fine up to $25,000 or imprisonment for a term of not more than two years less a day, or both.^[13] These consequences remain unchanged under the Bill.

TAKEAWAYS

Once the new criminal interest rate related amendments in the Bill are in force, lenders affected by the proposed amendments will need to understand the legal implications and consult legal counsel to update their practices, policies, and documentation to adhere to the new criminal interest rate lending regime. Similarly, affected borrowers should consider seeking legal advice when reviewing new credit agreements and arrangements to ensure compliance with the new legal requirements.

If you have any questions concerning the amendments to the Criminal Code discussed in this article and its implications for your business, please reach out to any member of our Banking and Debt Financing Group or Corporate Commercial Law Group.

^{[1] RSC 1985, c. C-46.}

^{[2] Canada Gazette, Part I, Volume 157, Number 51: Criminal Interest Rate Regulations (December 23, 2023), Online: Government of Canada <https://www.gazette.gc.ca/rp-pr/p1/2023/2023-12-23/html/reg3-eng.html> [Criminal Interest Rate Regulations].}

^{[3] Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023, 1st Sess, 44th Parl, 2023, cl 610-611 (assented to June 22, 2023) [Bill C-47].}

^{[4] EAR and APR are different methods of calculating interest rates. The key difference is that EAR considers compounding (i.e., earning interest not just on the initial amount of money (principal), but also on the accumulated interest that has been added to the principal over time) while APR does not, and simplifies it to a standard annual rate.}

^{[5] Criminal Code, RSC 1985, c C-46, ss 347(1), 347(8), 347.1(2).}

^{[6] Ibid at ss 347.1(2), (3).}

^{[7] Bill C-47, supra note 2 at cl 610.}

^{[8] Bill C-47, supra note 2 at cl 611.}

^{[9] Criminal Interest Rate Regulations, supra note 1.}

^{[10] Consultation on Cracking Down on Predatory Lending Faster by Further Lowering the Criminal Rate of Interest and Increasing Access to Low-Cost Credit (modified January 11, 2024), Online: Government of Canada <https://www.canada.ca/en/department-finance/programs/consultations/2023/consultation-on-cracking-down-on-predatory-lending-faster-by-further-lowering-the-criminal-rate-of-interest-and-increasing-access-to-low-cost-credit.html>.}

^{[11] Criminal Interest Rate Regulations, supra note 1.}

^{[12] Ibid.}

^{[13] Criminal Code, supra note 3 at s 347(1).}