Written by Denise Bright, Preet Gill, David Rotchtin and Emmett Larsen
On May 11, 2021, Bill C-274, An Act to amend the Criminal Code (Criminal Code Interest Rate) received first reading in the House of Commons. The Bill proposes to amend the definitions of "criminal rate" and "interest" under section 347(2) and repeal section 347.1 which provides exemptions from the criminal interest restrictions in certain limited circumstances.
The Existing Criminal Interest Framework—Section 347
Section 347(1) makes it an offence to enter "into an agreement or arrangement to receive interest at a criminal rate, or receive[s] a payment or partial payment of interest at a criminal rate." Currently, the criminal rate is interest at an annual rate in excess of 60 percent.
The calculation of interest for the purposes of the Criminal Code is not limited to the rate of interest listed in the applicable agreement, but includes fees, fines, penalties and commissions paid as part of advancing the credit, no matter who pays these charges. As a result, the interest rate for the purposes of the Criminal Code often exceeds the rate set forth in the agreement itself.
Proposed Amendments to Section 347
The Bill reduces the criminal rate to 30 percent plus the Bank of Canada's overnight rate on the day the agreement is entered into or renewed.1 The Bank of Canada's overnight rate currently stands at 0.25 percent and criminal interest, if calculated at the date of this article, would occur at any rate in excess of 30.25 percent.
The Bill also amends the definition of interest to now expressly include "insurance charges" in the calculation of interest. Section 347(2) defines an insurance charge as the cost of insuring the risk assumed by the lender, so long as the amount of insurance does not exceed the amount of credit advanced.
Repeal of Section 347.1
Currently, section 347.1 is an exception to the offence provisions of section 347. The prohibition on charging interest above the criminal rate does not apply to payday loan loans (as defined) if (1) the loan is $1,500 or less, for a maximum term of 62 days; (2) the lender is a provincially licensed payday lender; and (3) the federal government has designated the provinces as having legislative measures to protect recipients of payday loans which limit the total cost of borrowing. The Bill will repeal this exception entirely and, as a consequence, payday lenders will be subject to the same criminal interest provisions as other lenders. The repeal of section 347.1 will also result in payday loans being subject to section 2 of the Interest Act (Canada).
Impact on Lenders
While the Bill would affect all lenders, payday lenders and other non-traditional lenders will likely face the greatest impact. The changes, if adopted, will lower the rate at which interest charged or received is at a rate that violates the Criminal Code. Due to the proposed repeal of section 347.1, payday lenders will no longer have an exemption from the criminal rate offences under section 347. 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, more commonly, the criminal interest provisions are used by borrowers as a shield to try to invalidate interest provisions, when lenders attempt to enforce their rights to be paid.
We also note that a prior Bill (Bill S-237) was introduced in March 2017 that proposed an exemption to section 347 for all loans advanced for business or commercial purposes over $1 million. However, this Bill died after a third reading in the Senate and it is not known if it will be reintroduced.
For other Bennett Jones articles on criminal interest, read Equity Kickers and the Criminal Rate of Interest and Equity Kickers and the Criminal Rate of Interest: Part II.
Bennett Jones has extensive experience in finance and lending matters. We will continue to monitor developments in respect to the proposed Bill. If you have any questions about the Bill or how these changes may impact your loans, please contact a member of the Bennett Jones Financial Services group.
1. In addition to this Bill, Bill S-233 was introduced in the Senate May 4, 2021. The Senate Bill is similar, however, it proposes that criminal interest be based on the Bank of Canada overnight rate plus 20 percent.