Proposed Criminal Interest Rate Regulations to Impact Commercial Loans

Newly proposed Criminal Interest Rate Regulations will impact lenders across Canada, and in particular, commercial lenders 

On January 1, 2025, proposed Criminal Interest Rate Regulations (the “Regulations”) will come into effect. While the proposed Regulations will impact lenders across Canada, they will be particularly important to commercial lenders, who should confirm their policies and documentation are adjusted accordingly.

Background & Rationale

The proposed Regulations follow the amendments introduced by the Budget Implementation Act, 2023, No. 1 which amended Section 347 of the Criminal Code by lowering the criminal interest rate from 60% effective annual rate to 35% annual percentage rate (“APR”). These amendments are also anticipated to come into effect on January 1, 2025, concurrently with the proposed Regulations.

In lowering the existing criminal interest rate, the government aims to curb predatory lending practices and address the cycle of debt that traps many Canadian borrowers.

Under the proposed Regulations, the government seeks to exempt commercial loans (among other loan types) from the criminal interest rate, where in the government’s view, such loans do not lead to predatory lending practices or trap borrowers in a cycle of debt.

Commercial Loans

The Regulations propose the following limits for commercial loans in which (a) the borrower is not a natural person, and (b) the borrower has entered into an agreement or an arrangement for business or commercial purposes:

1. Where the commercial loan is valued at $10,000 or less, no exemption would apply and the interest rate would be limited to 35% APR.
2. Where the commercial loan is valued above $10,000 and up to $500,000, the interest rate would be limited to 48% APR.
3. Where the commercial loan is valued above $500,000, no criminal interest rate limit would apply.

In creating the above exemptions to the new criminal interest rates on commercial loans, the government aims to “avoid contractual frictions and ensure healthy and productive investments in areas of venture capital and private equity”.

The government also addressed the reasoning behind eliminating criminal interest rates from commercial loans valued above $500,000 by indicating that “commercial lending transactions above $500,000 represent a level of sophistication that does not require protection through the criminal interest rate provisions”.

Although the government received feedback on these thresholds from a public consultation process earlier this year, it declined to make any changes, stating that the current exemption “maintains a balance in avoiding unintended consequences in the commercial credit market while reducing the risk of regulatory arbitrage or the creation of loopholes”.

Other Changes Brought by the Proposed Regulations

The Regulations are not limited only to commercial loans. If enacted, the Regulations propose imposing other changes such as a new federal limit on the cost of borrowing for payday loans, limiting the amount that can be charged by payday lenders for a dishonoured cheque fee, as well as a limit of 48% APR for small dollar, non-recourse collateralized loans, commonly referred to as pawn loans.

In its 2024 budget, the government announced its intention to introduce new prohibitions against offering or advertising credit at a criminal rate of interest, and to update the definitions of “credit advanced” and “interest” to include both the value of credit offered and interest that would be payable if an agreement was entered into. However, the government did not set a date for these changes to come into force, leaving the date to be fixed by cabinet.

Timelines

As part of its 2024 budget passed on June 20, 2024, the federal government confirmed that the proposed Regulations will come into effect on January 1, 2025, and will apply to all loans entered into on or after that date. On the same day, corresponding amendments to the Criminal Code to lower the criminal rate of interest to an APR of 35% will also come into effect.

Key Take-Aways

• Ensure your new lending arrangements take into account the lower criminal interest rate;
• Review new credit agreements and ensure they contain provisions that address potential criminal interest rate issues; and
• Keep an eye on the dates in which the Regulations and the amendments to the Criminal Code come into force to avoid potential liability.