As previously announced in our Cassels Comment published in January, the Government of Canada’s Bill C-47, the Budget Implementation Act, 2023, No. 1 (Bill C-47), received royal assent on June 22, 2023. Bill C-47 includes, among other things, proposed amendments to Section 347 of the Criminal Code (the Code), which would lower the current criminal rate of interest from an effective annual rate (EAR) that exceeds 60% to an annual percentage rate (APR) that exceeds 35%.1
On May 31, 2024, the Governor General in Council announced that the amendments to Section 347 would become effective on January 1, 2025. As of that date, the criminal interest rate will be reduced to 35% APR. Here is what that means for lenders.
Exemptions
The Government of Canada’s objective in amending Section 347 is to combat predatory lending practices of extending high interest rate loans.2 Given this objective, there was concern that the amendments were overly broad and could impact many commercial transactions with a lending component. To address these concerns, the Government of Canada published the Criminal Interest Rate Regulations (the Regulations) which will become effective concurrently with the amendments to the Code on January 1, 2025. The Regulations provide for three exemptions to the lowered criminal interest rate, which exempt lending practices that fall outside the scope of the Government’s policy intention: (i) commercial loans, (ii) pawnbroking loans, and (iii) payday loans.3
Commercial Loans Exemption
A commercial loan is one where the borrower is not a natural person, the agreement or arrangement is entered into for business or commercial purposes, and either (i) the amount of the credit advanced is more than $10,000 but less than or equal to $500,000 and the APR of interest — calculated in accordance with generally accepted actuarial practices and principles — does not exceed 48% on the credit advanced, or (ii) the amount of the credit advanced is more than $500,000.4 With respect to prong (ii), the Government’s conclusion is that commercial financing transactions above $500,000 “represent a level of sophistication that does not require protection through the criminal interest rate provisions.”5
If the agreement or arrangement matches any of the above criteria, then the new lower criminal interest rate of 35% APR does not apply. Any commercial loan in an amount less than $10,000 will be subject to the new rate. Since few commercial loans are valued below $10,000, this will have a minimal cost impact on lenders and commercial borrowers.
Pawnbroking Loan Exemption
Those who carry on business related to pawnbroking and (i) have advanced credit in an amount less than $1,000 for tangible personal property or corporeal movable property, other than vehicles, (ii) the seizure of pawned property is the only available recourse against the borrower in an event of default, and (iii) the APR of interest does not exceed 48% on the credit advanced, will be exempt from the new lower criminal interest rate of 35% APR.6
Payday Loan Limit
In addition to the exemptions listed above, the Regulations also impose a limit on the total cost of borrowing under payday loans of $14 per $100 borrowed (or 14% APR) in all provinces that have an approved payday loan regime. Additionally, the Regulations exempt from the calculation of the 14% APR limit (i) fees, fines, penalties, or other charges that are specifically authorized under applicable provincial law and imposed on a borrower for defaulting in any payment and (ii) dishonoured cheque fees of $20 or less. Currently, the only jurisdictions in Canada without an approved payday loan regime are Quebec and each of the territories.7
Impact
As discussed in our previous Cassels Comment, Canadian credit agreements or arrangements typically contain provisions relating to Section 347 of the Code to ensure that the rate of interest does not exceed the criminal rate of interest. Once the Regulations come into force and effect, the use of such provisions for loans over $500,000 may no longer be required. Additionally, with the elimination of the criminal interest rate for loans over $500,000, lenders may view Canada as a more desirable jurisdiction for providing financing arrangements in the commercial lending space in amounts exceeding $500,000.
If you have any questions about the new criminal rate of interest and how it may impact your business, please reach out to any member of the Cassels Banking & Specialty Finance team.
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1 Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023, 1st Sess, 44th Parl, 2023 (as assented to June 22, 2023).
2 Canada Gazette, Part II, Volume 158, Number 13
3 Canada Gazette, Part II, Volume 158, Number 13
4 Canada Gazette, Part II, Volume 158, Number 13
5 Regulatory Impact Analysis Statement, Canada Gazette, Part II, Volume 158, Number 13
6 Canada Gazette, Part II, Volume 158, Number 13
7 Canada Gazette, Part II, Volume 158, Number 13