On July 22, 2023, the Government of Canada released the Budget Implementation Act, 2023, No. 1. Among other things, the Budget Implementation Act amended section 347 of the Criminal Code, changing the criminal interest rate across Canada effective January 1, 2025.
The criminal interest rate is the maximum rate at which a lender can charge interest on a loan before it becomes a crime. Under the old section 347, the criminal interest rate was 60% Effective Annual Rate (EAR), or approximately 48% Annual Percentage Rate (APR). Under the new Budget Implementation Act, the criminal interest rate will be lowered to 35% APR.
Purpose behind the new rate
The purpose behind the new rate change was explained in the Government's Regulatory Impact Analysis Statement, which was released in the Canada Gazette on December 23, 2023 alongside the Criminal Interest Rate Regulations. The Criminal Interest Rate Regulations also contain three exemptions from the new rate, which are discussed below.
The Regulatory Impact Analysis Statement explains that the amendments are designed to address the issue of predatory lenders taking advantage of vulnerable individuals looking for credit by extending very high interest rate loans. Some of the populations most affected by this predatory behaviour are identified as low-income Canadians, newcomers to Canada, and those with limited credit history. The intent in passing the amendments was to alleviate some of the concerns that the previous criminal interest rate was allowing people to become trapped in a cycle of debt that they could not escape.
What is APR?
APR is a method of calculating interest rates which includes various fees that may be charged by the lender in connection with the loan.
The Cost of Borrowing (Trust and Loan Companies) Regulations set out the formula for calculating APR, including a list of which specific fees are included and excluded in the calculation.
Under section 5(1) of the Cost of Borrowing (Trust and Loan Companies) Regulations, the following are included in the APR calculation:
- Administrative charges, including charges for services, transactions or any other activity in relation to the loan;
- Charges for the services, or disbursements, of a lawyer or notary that the borrower was required to retain;
- Insurance charges (other than those excluded under section 5(2));
- Charges for a broker, if the broker's fees are included in the amount borrowed and are paid directly by the lender to the broker; and
- Charges for appraisal, inspection, or surveying services, (other than those excluded under section 5(2)), related to property that is security for a loan, if those services are required by the lender.
Under section 5(2) of the Cost of Borrowing (Trust and Loan Companies) Regulations, the following are excluded from the APR calculation:
- Charges for insurance on the loan if the insurance is optional;
- Charges for insurance on the loan if the borrower is its beneficiary and the amount insured reflects the value of an asset that is security for the loan;
- Charges for an overdraft;
- Fees for registering documents or getting information from a public registry about security interests related to property given as security for the loan;
- Penalty charges for prepayment of the loan;
- Charges for the services or disbursements of a lawyer or notary (other than those included under section 5(1));
- Charges for insurance against defects in title to real or immovable property if the insurance is paid for directly by the borrower;
- Charges for appraisal, inspection or surveying services provided directly to the borrower in relation to property that is security for a loan;
- Charges for insurance against default on a high-ratio mortgage or hypothec;
- Fees to maintain a tax account that are required for a high-ratio mortgage or hypothec;
- Fees to maintain a tax account that are optional;
- Any fee to discharge a security interest; and
- Default charges .
The three exemptions
As mentioned above, in the Criminal Interest Rate Regulations set out three exemptions from the new criminal interest rate. These are (1) Commercial Loans; (2) Pawnbroking Loans, and (3) Payday Loans (Limit).
The justification in the Criminal Interest Rate Regulations for the first two exemptions (commercial loans and pawnbroking loans) is that these lending practices fall outside the scope of the Government's policy objective of cracking down on predatory lending. The justification for the third exemption (payday loans) is that the nature of this type of loan warrants its own specific federal limit on the cost of borrowing. The exemptions aim to ensure that vulnerable borrowers still have some access to credit and maintain economic development opportunities.
- Commercial Loans
The criminal interest rate is 48% APR
(approximately the same as the old rate) where the amount of credit
advanced is between $10,000 to $500,000
;, the borrowing is for a commercial or
business purpose, and the borrower is not a natural person (e.g.
the borrower is a corporation partnership, etc.)
There is no criminal rate where the amount of
credit advanced is greater than $500,000
;, the borrowing is for a commercial or
business purpose
;, and the borrower is not a natural
person.
- Pawnbroking Loans
The criminal interest rate is 48% APR for pawnbroking loans where the amount of credit advanced is less than $1 ,000. Pawnbroking loans include scenarios where the lender is a pawnbroker, credit is advanced for the pawning of an item by the borrower, and the recourse of the lender upon default is to take ownership of the pawned property.
- Payday Loan Limit
The limit on the total cost of borrowing under a payday loan agreement is 14% of the money advanced. In these cases, the cost of borrowing does not include any fee, fine, penalty, or other charge that is specifically authorized under the applicable law and imposed on the borrower for defaulting in any payment, or for providing a dishonoured cheque or other dishonoured instrument if the amount of the fee is $20 or less.
Does the new criminal interest rate affect my existing loan?
According to section 614 of the Budget Implementation Act, 2023, No. 1, the new criminal interest rate will not apply in respect of payments of interest that arise from an agreement or arrangement that was entered into before the day the new amendments come into force (i.e., before January 1, 2025).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.