Amidst volatile oil prices and the uncertain economic times resulting from the shutdown of businesses on account of COVID-19, it is safe to say that a significant number of Alberta businesses are in financial distress. As a consequence, we are seeing a rise in the number of business owners seeking financial assistance, including in the form of loans, in order to keep the lights on during these difficult economic times.
Given that traditional sources of lending (including from the big banks and credit unions) are usually not available to struggling businesses on account of their high risk profile, many business owners are left to find alternative sources of financing from private lenders (“Non-Traditional Lenders”), with much more onerous terms.
As compensation for providing loans to struggling businesses, loans from Non-Traditional Lenders often come with high (and compounding) interest rates, substantial up-front fees, and some form of equity or share component (like options or warrants). Consequently, it is important for both borrowers and lenders to know that there are laws in Canada that protect borrowers from what are considered criminal rates of interest being charged by lenders.
This article provides a brief review of the laws in Canada that govern criminal interest rates pursuant to section 347 of the Criminal Code of Canada1Criminal Code, RSC 1985, c C-46 [Code]. (the “Code”).
WHAT IS A CRIMINAL INTEREST RATE IN CANADA?
Section 347 defines a criminal rate of interest as being in excess of 60% per year of the amount of credit advanced (the “Criminal Rate”) under a credit agreement or arrangement.
There are actually two criminal offences created under s. 347 of the Code. It is illegal to both:
- Enter into an agreement to receive interest at a criminal rate2Code at s. 347(1)(a).; and
- Receive payment of interest at a criminal rate, whether or not an agreement to receive such interest has actually been entered into3Code at s. 347(1)(b)..
“Interest” is defined very broadly in the Code as 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.4Code at s. 347(2): ““interest”… 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
WHAT DO THE COURTS CONSIDER IN CALCULATING “INTEREST”?
Most credit arrangements or agreements do not explicitly state an interest rate as high as the Criminal Rate. However, the courts also cast a wide net in interpreting what additional fixed payments, such as fees, charges, commissions and penalties imposed by lenders on borrowers will be included in the calculation of “interest” under a credit agreement or arrangement for the purposes of interpreting s. 347 of the Code.
For example, the Supreme Court of Canada (“SCC”) has commented that “for the purposes of s. 347 “interest” is an extremely comprehensive term, encompassing many types of fixed payments which would not be considered interest proper at common law or under general accounting principles.”5Garland v. Consumers’ Gas Co., [1998] 3 SCR 112 [Garland] at para 27.
FEES AND CHARGES THAT ARE INCLUDED IN THE CALCULATION OF “INTEREST” BY THE COURTS
One major example of a type of fee that is included in the calculation of “interest” by the courts for the purposes of s. 347 is the legal fees of the lender (not legal fees paid by the borrower to his own lawyer).6685231 Alberta Ltd. v. 512130 Alberta Ltd., 1998 ABQB 47; Bcorp Financial Inc. v. Baseline Resort Developments Inc., 1990 CanLII 1734 (BC SC) [Baseline]; Bon Street Developments Ltd. v. Terracan Capital Corp., 1992 CanLII 754 (BC SC) [Bon Street].
Borrowers and lenders should also be aware of the following non-exhaustive list of additionalfees and charges when negotiating credit arrangements, as these additional fees have been considered to be part of the “interest” paid pursuant to s. 347 and are included by the courts in calculating criminal interest rates. These fees and charges include (but are not limited to)7Baseline; Bon Street; Great Basin Gold Ltd. (Re), 2012 BCSC 1459 (CanLII); Kilroy v. A OK Payday Loans Inc., 2006 BCSC 1213 (CanLII); Aectra Refining & Marketing Inc. v. Lincoln Capital Funding Corp., 1991 CanLII 7140 (ON SC); Terracan Capital Corp. v. Pine Projects Ltd., 1991 CanLII 11794 (BC SC); Boyd v. International Utility Structures Inc., 2002 BCCA 438 (CanLII); Fawcett v. Western Canadian Coal Corp., 2010 BCCA 70 (CanLII); William E. Thomson Associates Inc. v. Carpenter, 1989 CanLII 185 (ON CA); Smith Estate v. National Money Mart Company, 2008 CanLII 27479 (ON SC).:
- commitment fees;
- loan fees;
- monitoring fees;
- standby fees;
- administrative fees;
- advance fees;
- facility fees;
- processing fees;
- brokerage fees;
- bonus interest;
- initial fees;
- late fees;
- extension fees;
- royalty payments (including those paid under a separate royalty agreement but entered into in consideration for financing); and
- finance charges.
WHAT IS NOT INCLUDED AS “INTEREST” UNDER S. 347
There are six exceptions listed in the Code that are not considered to be, or included in the calculation of, “interest” in interpreting s. 347. These are:
- Repayment of credit advanced (principal amount).
- Any insurance charge (the cost of insuring the risk assumed by the lender).
- Official fee (fees required by law to be paid to any governmental authority to perfect the security under the financing agreement or arrangement).
- Overdraft charge (a charge of not more than $5 for the creation of or increase in an overdraft).
- Required deposit balance (the amount of the money actually advanced or to be advanced under the financing agreement or arrangement that is required to be deposited or invested by or for the borrower that may be available, in the event of his defaulting in any payment, to or for the benefit of the lender).
- Any amount required for property taxes, for a mortgage transaction.
We recommend that any business or individual seeking or entering into a financing agreement or arrangement retain experienced legal counsel. Financing transactions and agreements should be reviewed by experienced counsel for both parties, in order to best protect the parties’ rights and interests. It is of the utmost importance for both borrowers and lenders (and their respective counsel) to be aware of the potential types and forms of additional fees, charges and payments that can be considered to be “interest” and that would cause a financing arrangement to be in contravention of the Criminal Rates in the Code.
Carscallen LLP’s Banking and Financial Services Expertise
We understand that the rapid emergence of COVID-19 means that many businesses are dealing with a myriad of legal issues. Please contact us if you have any banking or financing questions about your business in connection with COVID-19, or any other business or banking law matters. Our lawyers routinely work remotely and will continue to do so during this time. We remain available to provide legal advice and guidance to clients for all issues that may arise during this time.
For more updates related to COVID-19, please visit our resources page and follow us on LinkedIn.
As this is an ongoing situation of a global nature, the information provided herein is current as of the publishing date of this blog.
- 1Criminal Code, RSC 1985, c C-46 [Code].
- 2Code at s. 347(1)(a).
- 3Code at s. 347(1)(b).
- 4Code at s. 347(2): ““interest”… 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
- 5Garland v. Consumers’ Gas Co., [1998] 3 SCR 112 [Garland] at para 27.
- 6685231 Alberta Ltd. v. 512130 Alberta Ltd., 1998 ABQB 47; Bcorp Financial Inc. v. Baseline Resort Developments Inc., 1990 CanLII 1734 (BC SC) [Baseline]; Bon Street Developments Ltd. v. Terracan Capital Corp., 1992 CanLII 754 (BC SC) [Bon Street].
- 7Baseline; Bon Street; Great Basin Gold Ltd. (Re), 2012 BCSC 1459 (CanLII); Kilroy v. A OK Payday Loans Inc., 2006 BCSC 1213 (CanLII); Aectra Refining & Marketing Inc. v. Lincoln Capital Funding Corp., 1991 CanLII 7140 (ON SC); Terracan Capital Corp. v. Pine Projects Ltd., 1991 CanLII 11794 (BC SC); Boyd v. International Utility Structures Inc., 2002 BCCA 438 (CanLII); Fawcett v. Western Canadian Coal Corp., 2010 BCCA 70 (CanLII); William E. Thomson Associates Inc. v. Carpenter, 1989 CanLII 185 (ON CA); Smith Estate v. National Money Mart Company, 2008 CanLII 27479 (ON SC).
