By David Wedlake and Andrew Paul

In late December 2023, the Federal Government issued draft Criminal Interest Rate Regulations under the Criminal Code. These proposed regulations follow the Budget Implementation Act, 2023, No. 1 which provided for, among other legislative changes, amendments to the Criminal Code to reduce the criminal rate of interest from 60% to 35%. The proposed regulations provide certain exemptions to this lower criminal rate of interest.

Background

Section 347 of the Criminal Code makes it a criminal offence to enter into an agreement or arrangement to receive interest at a criminal rate, or to receive a payment or partial payment of interest at a criminal rate. A criminal rate of interest is defined as an effective annual rate of interest (calculated in accordance with generally accepted actuarial practices and principles) that exceeds 60% on the credit advanced under an agreement or arrangement. This 60% effective annual rate of interest is approximately equivalent to a 48% interest rate on an annualized percentage rate (APR) basis.

Interest under the Criminal Code is broadly defined to include 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.

In 2021, the Federal Government announced its intention to crack down on predatory lending practices by lowering the criminal rate of interest. The Budget Implementation Act, 2023, No. 1 introduced legislative amendments to lower the criminal interest rate to an annual percentage rate (APR) of interest, calculated in accordance with generally accepted actuarial practices and principles, of 35%. While passed, these amendments are not yet in force.

The amendments to the Criminal Code pursuant to the Budget Implementation Act, 2023, No. 1 also included regulation-making authority to provide exemptions for specified agreements or arrangements from the reduced criminal rate of interest. On December 23, 2023, the Federal Government provided notice of the proposed Criminal Interest Rate Regulations under subsections 347.01(2) and 347.1(2.1) of the Criminal Code (as amended by the Budget Implementation Act, 2023, No. 1). The federal government also released its Regulatory Impact Analysis Statement in respect of the proposed regulations.

The Proposed Regulations

The proposed regulations include exemptions to the criminal rate of interest for (i) commercial loans, (ii) pawnbroking loans, and (iii) payday loans.

Commercial Loans

The proposed regulations include potential exemptions for commercial loans dependent upon the size of the loan:

• Commercial loans over $500,000: Provided that the loan is made to a borrower other than a natural person (i.e. to corporate or other entities) and for commercial or business purposes, no criminal interest rate limit will apply.
• Commercial loans over $10,000 but less than or equal to $500,000: Similarly, provided that the loan is made to a borrower other than a natural person and for commercial or business purposes, a criminal rate of interest limit of a 48% (APR) will apply.
• Commercial loans of $10,000 or less: The general 35% (APR) criminal rate of interest will apply, regardless of the borrower or whether the loan is made for business or commercial purposes.

Pawnbroking Loans

The proposed regulations would also exempt certain pawnbroking agreements and arrangements from the lower criminal rate of interest. Provided that: (i) the lender carries on business as a pawnbroker, (ii) the borrower has pawned tangible personal property (other than a motor vehicle) in exchange for the loan, (iii) the lender’s recourse upon a default under the loan is limited to the seizure of the pawned property, and (iv) the loan is less than $1,000, then such loan would be limited to a 48% (APR) criminal rate of interest.

Payday Loans

The proposed regulations also seek to harmonize provincial payday loan regulation, which is not currently regulated under the Criminal Code where there is provincial regulation in place and the payday loan meets certain other criteria. In particular, the proposed regulations would impose a federal limit on the total cost of borrowing under payday loan agreements to 14% of the total advanced. The proposed regulations would also limit dishonoured cheque or other dishonoured instrument fees for a payday loan to $20 (otherwise such amounts must be included in the determination of the total cost of borrowing).

Coming into Force

As noted above, the amendments to the Criminal Code pursuant to the Budget Implementation Act, 2023, No. 1 are not yet in force. These will come into force on a date fixed by order of the Governor in Council.

The proposed regulations contemplate coming into force on the same date the amendments to the Criminal Code become effective. The Department of Justice has signalled that the proposed regulations will come into force three months following the publication of the regulations, in their final form, in the Canada Gazette, Part II (and to align this date with the coming into force of the amendments to the Criminal Code).

Potential Implications

In its Regulatory Impact Analysis Statement, the Federal Government indicated that the current criminal rate of interest of 60% can trap individuals in a cycle of debt. The proposed regulations allow for a lower criminal rate of interest, while limiting the impacts on commercial loans (as well as pawnbroking loans), which do not entrap individuals in a cycle of debt.

While the proposed regulations offer relief for lenders providing commercial loans in excess of $500,000, lenders providing small to medium sized loans, or loans to individuals, should take note of the upcoming amendments to the Criminal Code and the associated regulations. Lenders providing such loans should also be aware of the revised method for calculating a criminal rate of interest under the Criminal Code, which will change from an effective annual rate basis to an annual percentage rate (APR) basis.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact the authors or a member of our Banking & Finance group.

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