On May 31, 2024, an Order in Council was made indicating that certain changes to Section 347 of the Criminal Code (Canada), as summarized below, will come into effect on January 1, 2025.
Background:
In our prior updates in 2023 and early 2024, we summarized two notable changes that the federal government announced would be made to the criminal rate of interest: (1) the criminal rate of interest would change from an effective annual rate (EAR) to an annualized percentage rate (APR); and (2) that the criminal interest rate be lowered from 60% EAR to 35% APR (note, the current rate of interest, 60% EAR, is roughly 48% APR). We also highlighted how the changes were part of the federal governments' stated focus on protecting consumers from cycles of debt, without harming the commercial lending market.
Changes to the Criminal Rate of Interest:
Effective January 1, 2025, changes to the criminal rate of interest will impact the following categories of loans (among others)1:
- Pawn loans of less than $1,000, where the only recourse on a default by the borrower is the seizure of the pawned property, will be subject to the rate of 48% APR, which is similar to the current rate of 60% EAR;
- Loans in the amount of $10,000 and below will be subject to the new criminal interest rate of 35% APR;
- Commercial loans between $10,000 and $500,000 will be subject to the rate of 48% APR, which is similar to the current rate of 60% EAR; and
- Commercial loans above $500,000 will not be subject to any interest rate cap.
Commercial loans are defined as loans made where:
- the borrower is not a natural person;
- the borrower is using the arrangements for a business or commercial purpose; and
- either:
- the amount advanced is between $10,000 and $500,000 and the APR of interest does not exceed 48%; or
- the amount advanced is over $500,000.
Although commercial loans valued over $500,000 are not subject to the new criminal rate of interest limitation, loans over $500,000 made to individuals would seemingly be captured. This may have significant implications on loans such as capital call loans where an individual is typically the borrower and the loans may exceed $500,000.
Next Steps and Key Takeaways:
The January 1, 2025 transition date provides stakeholders some time to familiarize themselves with the new rate and how it may affect their operations. Recently, the Canadian Institute of Actuaries published the method for calculating APR.2 Lenders should review the new calculation and ensure their systems are updated accordingly so that they are prepared to implement the changes, once in force.
Additionally, lenders and borrowers should begin thinking about how they will monitor their loan agreements to ensure they remain in compliance with the Criminal Code (Canada).
Should you have any questions or require further information, please contact one of the authors or another member of McMillan's Financial Services group.
Footnotes
1 Please refer to the Criminal Interest Rate Regulations for a fulsome description of the types of loans that will be impacted.
2 Actuarial Evidence, published by Canadian Institute of Actuaries.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2024