On January 24, 2024, Kelby Carter and Alana Scotchmer of our Financial Services Groupwrote about the federal government's overhaul of the Criminal Code's criminal interest rate provisions. They noted that as part of the 2023 budget the federal government proposed several sweeping changes to the criminal interest rate rules, including:
- Changing from an effective annual rate (EAR) to an annual percentage rate (APR) method of calculating criminal interest.
- Lowering the criminal interest rate from 45 percent APR (60 percent on an EAR basis) to 35 per cent APR.
- Capping the cost of payday loans (defined as "an advancement of money in exchange for a post-dated cheque, a pre-authorized debit or a future payment of a similar nature") at $14 per $100 borrowed.
- Introducing several exemptions for commercial loans over $10,000.00 and for pawn loans.
The federal government proposed that these changes would take effect through a change to the wording of the Criminal Code itself, as well as through a new set of regulations called the Criminal Interest Rate Regulations. However, the federal government had not previously announced when these changes would come into force.
Announcement of effective date for rules
As part of its 2024 budget, the federal government announced its intention to push forward with implementing the proposed changes to the Criminal Code's criminal interest rate provisions. Accordingly, after a period of regulatory review and consultation the federal government has announced that the criminal interest rate changes will come into effect on January 1, 2025.
We expect that these measures will reduce uncertainty for lenders and increase access to more flexible loan structures for commercial borrowers (borrowers other than natural persons). Commercial borrowers and lenders will now be able to structure loans with up to a 48 per cent APR interest rate for loans between $10,000 and $500,000.00. Further, commercial loans over $500,000.00 will be able to be structured with no cap on the interest rate, allowing for more flexibility for commercial borrowers who may present a more difficult credit risk.
Budget 2024: Further efforts
Though the changes introduced in 2023 and coming into force in 2025 represent the Liberal government's main efforts to adjust the criminal interest rate provisions of the Criminal Code, the government is not done with this topic yet. As part of its 2024 budget, the government announced further changes to the Code's criminal interest rate provisions. In particular, the government has introduced the following material changes:
- A new offence of "entering, offering to enter, or advertising an offer to enter" an agreement that provides for the receipt of interest at the criminal rate.
- The government has repealed section 347(7) of the Code, which required the attorney general to consent to any prosecution in respect of criminal interest rates.
- New definitions for "interest" and "credit advanced," which incorporate language to capture the new "entering, offering to enter, or advertising an offer to enter" offence.
The federal government passed its 2024 budget on June 20, 2024. However, these changes will come into force on a date to be fixed by cabinet.
In its promotional materials for the budget the government described these changes as "empowering law enforcement" to "protect vulnerable Canadians from harmful illegal lenders." The materials also note that the federal government intends to work with the provinces to consider other methods of fighting predatory lending, such as enhancing transparency, disclosure, and marketing practices for payday loans.
Lenders and borrowers will need to keep an eye out to watch for the effective date of the new "entering, offering to enter, or advertising an offer to enter" offence, and can expect that the federal and provincial governments will make more changes to interest rate and lending regulations in the future.
Summary
January 1, 2025 is the date the new changes to the criminal interest rate provisions of the Criminal Code come into force. Accordingly, lenders and borrowers of all stripes should be proactive in adjusting their documentation and policies to account for the new changes. Our team of financial services and lending professionals is ready to help with any questions you may have about the new changes and how they may affect your lending and borrowing practices.
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