Decrease in the Criminal Interest rate – Lenders take Note!

As of January 1, 2025, significant amendments to the Criminal Code Act of Canada – particularly Section 347- have come into force.  These changes lower the criminal interest rate in Canada from an effective annual rate of interest of 60% (approximately 48% APR) to a maximum annual percentage rate (APR) of 35%.

What This Means For Lenders

Under the amendment, it is now a criminal offence for any person to:

  • Enter into, or offers to enter into, an agreement or arrangement to receive payment or partial payment of interest exceeding 35% APR; or
  • Advertises such offer

Anyone found guilty of the offense is liable to imprisonment or a fine.

Definition of Interest

For the purpose of Section 347, interest is defined to be all charges and expenses – whether in the form of a fee, fine, or penalty, commission or similar charge or expense –  excluding  the repayment of credit advance or insurance charge, official fee, overdraft charge, required deposit balance, or any amount required to be paid on account of property taxes.

Presumption of Knowledge

A key amendment introduces a presumption of knowledge: if a person receives a payment or partial payment of interest at a criminal rate, it is presumed that such person is aware of its nature and illegality– significantly raising the stakes for lenders.

Exemption From The Criminal Interest Rate

While the APR cap is now 35%, there are certain transactions which are exempt, provided they meet very specific criteria:

  1. Business or Commercial Loan
  • The borrower is not a natural person, and
  • The loan is for a business or commercial purpose, and either:

 

  • (a) the amount of the credit advanced is more than $10,000 but less than or equal to $500,000 and the APR of interest does not exceed 48% on the credit advance calculated in accordance with generally accepted actuarial practices and principles, or

 

  • (b) the amount of the credit advanced is more than $500,000, in which case the Government considers such transaction to represent a level of sophistication that does not require protection of Section 347.

 

  1. Pawnbroking Loans
  • The lender is engaged in the business pawnbroking;
  • The credit advanced is for pawning of tangible personal property or corporeal movable property other than a vehicle;
  • The amount of the credit is less than $1,000; and
  • The APR does not exceed 48%.

Should the borrower defaults, the recourse of the lender is to seize the pawned property.

 

  1. Payday Loans
  • The regulations put a cap of 14% on the amount advanced.
  • The total cost of borrowing excludes any fee, fine, penalty or other charge that is specifically authorized under the applicable provincial law, provided:
  • It is imposed on the borrower for default (dishonoured cheque);
  • Amount is less than $20.

What Lenders Must Do Now

In light of the amendments, lenders must take a proactive approach to ensure compliance bu considering the key actions such as:

  • Ensure APR Compliance: Lenders must carefully compute and confirm the APR and include all charges and fees that qualify as “interest” .  Regularly and thoroughly review all loan structures, pricing and repayment terms to ensure the APR does not exceed 35%.

 

  • Review Advertising Practice and Materials: Lenders must ensure that all marketing materials and advertisements are reviewed and adjusted to reflect compliance with the new interest rate cap.

 

  • Charges and Interests: Lenders are advised to review their charges and expenses to determine whether they are captured within the interest calculation and risk exceeding the threshold.

 

  • Evaluating Exemptions Cautiously: While there are exemptions, they are limited in nature and quite restrictive as to each type. Lenders must evaluate exemptions before relying on them.

 

  • Update Lending Procedures: Review Lending Procedures, re-assess qualification factor of their borrowers and determine whether it is appropriate to lend money to borrowers to comply with the criminal interest rate requirements.

 

  • Update Legal Documentation: Standard Loan Agreements, Disclosure forms and templates should be updated. Consider incorporating warranties and covenants to confirm compliance or if applicable, to ensure the transaction falls under the exemptions

 

Need Assistance?

The implications of this amendment are significant.  If you are a lender, finance company, or advisor needing to understand how this affects your lending practice or contracts, our legal team is here to help. Please do not hesitate to contact one of our lawyers for guidance.

 

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