Written By Denise D. Bright, Preet K. Gill, David E. Gruber and Okey Ejibe
On March 22, 2022, Bill S-239, An Act to amend the Criminal Code (Criminal Interest Rate) went to second reading at the Senate. The Bill proposes changes to section 347(2) of the Criminal Code which would reduce the current criminal interest rate.
The Existing Criminal Interest Framework—Section 347
Section 347(1) of the Code provides that everyone who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate, is guilty of an offence. The current criminal interest rate is an effective annual rate that exceeds 60 percent.
It is important to note that "interest," in the context of the Code, includes any fee, fine, penalty, commission or other similar charge or expense paid as part of advancing the credit, irrespective of the person who pays or to whom any such charges and expenses are to be paid. Therefore, an interest rate for the purposes of the Code often exceeds the rate specified on the face of a particular agreement or arrangement.
Section 347.1 of the Code currently provides an exception to the criminal interest rate offence for payday loans (as defined) if: (a) the loan is $1,500 or less, for a maximum term of 62 days or less; (b) the lender is a provincially licensed payday lender; and (c) the federal government has designated the province as having legislative measures to protect recipients of payday loans which limit the total cost of borrowing.
Proposed Amendments to Section 347
There have been several unsuccessful efforts to amend section 347 of the Code. Several Bills have been presented to both the Senate and House of Commons, often with the primary aim of reducing the criminal interest rate, but the Bills never made it to the point of becoming law. In the effort to reduce the threshold from the current 60 percent, different rates, ranging from 20 percent to 45 percent have been recommended and considered over the years by both houses of Parliament. Since 2013, there have been three prior senate bills (S-233 (43rd Parliament), S-237 (42nd Parliament) and S-210 (41st Parliament)) which have failed on the order paper. Bill C-274, the immediate preceding Bill on this subject, which received first reading in the House of Commons on May 11, 2021, among other things, sought to reduce the criminal rate to 30 percent plus the Bank of Canada's overnight rate on the day the agreement is entered into or renewed. It also sought to repeal section 347.1 of the Code, which would have had the effect of subjecting payday lenders to the same criminal interest provisions as other lenders. However, the Bill never made it to second reading.
Bill S-239, which is currently before the Senate, proposes to reduce the criminal rate to 20 percent plus the Bank of Canada's overnight rate on the day the agreement is entered into or renewed. The Bank of Canada's overnight rate currently stands at one percent and the criminal interest, if calculated at the date of this article, would occur at any rate in excess of 21 percent.
Impact on Lenders
The changes proposed in Bill S-239 will impact a broad range of both commercial and consumer lenders, whose interest rates may exceed the revised criminal rate, including commercial lending entities, credit card issuers, in-store cards and layaway programs. Borrowers may seek to use the criminal interest provisions as a shield to try to invalidate interest provisions when lenders attempt to enforce their rights to be paid. Unlike the changes proposed in prior Bill C-274, this change as currently drafted will not impact payday lenders which would remain exempted under section 347.1 of the Code.
On the face of the provision, any lender that is found to charge or receive interest exceeding the criminal rate could be guilty of either (a) an indictable offence and liable to imprisonment for a term not exceeding five years or (b) an offence punishable on summary conviction and liable to a fine of not more than $25,000 or to imprisonment for a term of not more than two years less a day, or to both. However, practically speaking, the most likely impact is that borrowers will seek to use the provision as a means of voiding, or reading down, interest provisions within their loan agreements.
The current Bill S-239 was introduced in the Senate and, if passed by the Senate, will require approval of the House of Commons before it becomes law. On December 16, 2021, the prime minister issued a mandate letter to the minister of finance setting out his expectations for the ministry of finance going forward. One of the priorities listed was to "crack down on predatory lenders by lowering the criminal rate of interest." Time will tell if 2022 is the year that the criminal interest rate is amended. We will continue to monitor Bill S-239 and any other proposed changes to the criminal interest rate.