Government Announces Exemptions to the Proposed Lower Criminal Interest Rate

January 04, 2024

Written By Denise Bright and Preet Gill

As we previously reported in April 2023 in our blog, It's Official—Proposed Criminal Interest Rate Amendments Introduced, the Government of Canada is proposing to lower the current criminal rate of interest to 35 percent. At the time, the Government indicated certain loans would be exempt from this lower rate. On December 23, 2023, the long-awaited exemptions were announced but were limited to certain commercial loans, pawn loans and payday loans. Importantly for many of our clients, a new exclusion from the criminal interest provisions for commercial loans over $500,000 will accompany the new lower criminal interest rate, if the proposed legislation is passed in its current form.

The Proposed Criminal Interest Rate Amendment

The current criminal rate of interest is an effective rate of 60 percent, which equates to an annual percentage rate of interest (APR) of approximately 48 percent. The Government of Canada has proposed to amend that rate to "an annual percentage rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 35 percent on the credit advanced." Therefore, the Government is proposing to lower the criminal rate of interest by approximately 13 percent to result in an APR of 35 percent. The proposed amendments represent the first significant update to the criminal rate of interest since 1980.

At the time the proposed amendments were released, the amending Bill provided regulation-making authority to: (1) provide exemptions for certain types of agreements from the criminal rate; and (2) fix a limit on the total cost of borrowing for payday loans. On December 23, 2023, the Government of Canada released the long-awaited proposed Regulations pursuant to this provision.

Purpose of the Regulations

The Regulatory Impact Analysis Statement accompanying the proposed Regulations indicates that the Government's focus is on predatory lending that impacts the most vulnerable Canadians, trapping them in a "cycle of debt". There are two key categories of loans that the Government has identified as falling outside this policy objective and therefore should be exempt (at least to some extent): commercial loans and pawn loans. In addition, the Regulations propose a limit on payday loans to harmonize the cost of these loans across all provinces with a payday loan regime.

Commercial Loan Exemptions

The proposed Regulations include exemptions for commercial loans above $10,000. A commercial loan would be defined as one where the borrower is not a natural person, and "the borrower has entered into the agreement or arrangement for business or commercial purposes". Parties will need to be diligent to ensure both parts of the definition are met to achieve the proposed relief.

First, a commercial loan with a value between $10,000 and $500,000 would be exempt so long as the APR on the loan does not exceed 48 percent. In other words, commercial loans above $10,000 and below $500,000 will continue to be subject to the current criminal rate of interest and not the proposed lower criminal interest rate. The Government's rationale for this exemption is to continue to provide small business owners with some level of criminal protection.

Second, commercial loans above $500,000 would be entirely exempt from any interest rate cap. This represents a significant change from the existing provision. The stated rationale is primarily that these types of sophisticated transactions do not affect vulnerable Canadians, and the proposed exemption will "avoid contractual frictions and ensure healthy and productive investments in areas of venture capital and private equity".

Readers should note that commercial loans less then $10,000 will be subject to the new lower criminal interest rate of 35 percent, when the legislation comes into force.

Pawn Loans

Small dollar, non-recourse collateralized loans, commonly referred to as "pawn loans", would be exempt provided: the lender carries on a pawnbroking business, the borrower pawns personal property (other than a vehicle), the only recourse on default is seizure of the pawned property, the amount advanced is less than $1,000 and the APR does not exceed 48 percent (so it would continue to be subject to the current higher criminal interest rate). However, pawn loans above $1,000 are not exempt, so as not to incentivize lenders to manipulate the exemptions through the use of collateral loans.

Payday Loans

In 2007, an exemption to the criminal rate of interest was introduced for certain payday loans (where the loan is for $1,500 or less, for a term of 62 days or less, is issued by a licensed lender, and the province has a payday loan regime in place). The proposed Regulations would harmonize borrowing limits amongst the provinces, imposing a new federal limit on the cost of borrowing for payday loans: $14 per $100 borrowed in all provinces that have an approved payday loan regime. The proposed Regulations would also exclude dishonoured cheque fees of $20 or less from the calculation of the $14 rate limit. This serves to cap the one-time dishonoured cheque fee that a payday lender could charge to $20 (consistent with the lowest provincial allowable fee).

Currently, only the territories and Quebec do not have a designated payday loan regime; therefore, payday loans in those regions would not be exempt from the criminal rate of interest.

Coming into force

The proposed Regulations will come into force three months following publication of the final Regulations in the Canada Gazette, Part II (to align with the coming into force of the lowering of the criminal interest rate). The three-month period is intended to allow lenders to adjust their operations to ensure compliance with the new provisions. Once in force, the lower criminal rate of interest provisions and Regulations will apply to all agreements entered into on or after the date the provisions come into force. Existing loans will continue to be governed by the prior criminal interest rate.

The Government of Canada has invited comments on the proposed Regulations for 30 days (until end of day on January 22, 2024).¹ We will continue to monitor these amendments as they proceed. If you have any questions, please contact the authors.

Authors