As discussed in our blog, Government Seeks Feedback on Lowering the Criminal Rate of Interest, the Government of Canada conducted consultations in respect of the criminal interest rate under the Canadian Criminal Code. We have been monitoring the government for any indication of the results of its consultations.
Readers are reminded that currently a ”criminal rate means an effective annual rate (EAR) of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty percent on the credit advanced under an agreement or arrangement".
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".
On March 28, 2023, the Government of Canada presented a new budget. As part of the budget the government indicated that it was their intention to introduce changes to the Criminal Code to lower the criminal rate from the equivalent of 47 percent annual percentage rate (APR) to 35 percent APR. As indicated above the current rate is set at 60 percent EAR (v. APR). It appears that in calculating the forgoing rates, the government assumed monthly compounding and no fees which, using the same assumptions, would result in a change from the 60 percent EAR to approximately a 42 percent EAR. The government will also launch consultations as to whether the rate should be even further reduced.
The government also indicated that it would be adjusting the payday lending exemption in section 347.1 of the Criminal Code to limit payday lending charges to no more than $14 for every $100 borrowed. It will also launch consultations on additional revisions to the provincial/territorial- requested payday lending exemptions.
The 2023 budget focuses on what the government refers to as "predatory lending" and the fact that predatory lenders "can take advantage of some of the most vulnerable people". It is unclear from the budget whether the reduced criminal interest rate will be applicable to all lending or whether it will only be applicable to loans to individuals. It is also unclear as to whether the definition of criminal interest will be changed from an EAR calculation to an APR calculation.
We will continue to monitor these proposed change and look forward to the clarity legislation will (hopefully) provide. If you have any questions about the proposed amendments or how they may affect your business, please contact the authors or a member of the Bennett Jones Financial Services group.
Readers can calculate the rates cited for EAR rates here.