On January 1, 2025,  amendments to the Criminal Code provisions regarding the criminal rate of interest enacted through Budget Implementation Act 2023 and Budget Implementation Act 2024 came into force along with new Criminal Interest Rate Regulations (the “Regulations”) originally proposed on December 23, 2023 .     These amendments change the criminal rate of interest and broaden the offence in sections 347 Criminal Code to include not only entering into an agreement or arrangement to receive interest at a criminal rate and receiving a payment or partial payment of interest at a criminal rate but also offering or advertising an offer to enter into such an agreement or arrangement.  They also set a new cap on the cost of borrowing for payday loans.

What has changed?

(i) The criminal rate of interest and payday loan cost of borrowing cap:

The criminal rate of interest has been lowered to 35% annual percentage rate (APR) from a 60% effective annual rate (EAR) with exceptions for certain commercial loans and pawnbroker loans as well as payday loans. 

In acknowledgment that large commercial lending transactions involve sophisticated parties that do not require the same protection the following exceptions have been added through the Regulations for loans meeting the following criteria: (1) the borrower is not a natural person, and (2) the borrower has entered into the agreement or arrangement for business or commercial purposes:

• where the amount of the credit advanced under the agreement or arrangement is more than $10,000 but less than or equal to $500,000, the criminal rate of interest is 48% APR; and
• where the amount of the credit advanced under the agreement or arrangement is more than $500,000, no criminal rate of interest applies.

The Regulations also provide for a higher criminal rate of interest of 48% APR for small pawnbroker loans. This higher cap applies to loans under $1000 where (a) the lender is a person who carries on a business related to pawnbroking; (b) the borrower has pawned tangible personal property or corporeal movable property, other than a vehicle, in exchange for the advancement of credit; and (c) in the event of the borrower’s default the only recourse of the lender is seizure of the pawned property.

Since 2007 payday loans meeting certain criteria (“qualifying payday loans”) have been exempt from the criminal rate of interest, with provinces setting certain limits on interest rates and other fees applicable to those types of loans. The changes effective January 1 2025 add that in order to qualify for this exemption the cost of borrowing of the loan must not exceed 14% of the amount advanced.  This effectively results in a national cap on the total cost of borrowing under a payday loan agreement of 14% of the amount advanced.  Fees or charges specifically authorized under the relevant provincial payday loan legislation for default in payment or for a dishonoured cheque or other dishonoured instrument of $20 or less are excluded from this cost of borrowing calculation.

(ii) Broadening of the offence to include offering and advertising

Changes have also been made to broaden the criminal interest rate offence to include the offering or advertising of credit at an interest rate above the criminal rate, in order to allow law enforcement to target lenders based on offers or advertisements alone, without needing evidence of a completed loan.

Is there grandfathering?

Yes. Transitional provisions to the Budget Implementation Act 2023 provide that the receipt of a payment or partial payment of interest that would be in excess of the new criminal rate of interest is not an offence if the payment arises from an agreement or arrangement to receive interest that was entered into before January 1, 2025 and the interest that arises from that agreement or arrangement would not have been at a criminal rate on the date it was entered into.  Additionally, they provide that the new cap on the cost of borrowing for payday loans does not apply to agreements entered into prior to January 1, 2025. 

What now?

Lenders should confirm that all offerings, advertisements, agreements, policies, systems and processes have been reviewed and where necessary amended to ensure:

• agreements or arrangements are not being entered into that exceed the new criminal rates of interest and offers or advertisements are not being made to enter into such agreements keeping in mind that “interest” is broadly defined in the Criminal Code to include most related fees;
• payments or partial payments are not being received which would violate the new criminal rates of interest keeping in mind the transitional provisions; and
• the new cap on the cost of borrowing for qualifying payday loans is not being exceeded again keeping in mind the transitional provisions.

This may include reexamining clauses in agreements designed to limit interest to the maximum permitted rate.

Are more changes on the way?

It is possible. Consumer protection provisions are constantly evolving. On August 9, 2024 the federal government posted a notice indicating that it intended to propose further changes to s 347 of the Criminal Code to include certain types of insurance premiums in the definition of “interest”.

Please do not hesitate to reach out to the authors of this post or your legal professional at McCarthy Tetrault LLP for assistance.