Revisiting Section 8 of the Interest Act After Rabinowitz: While Context Matters, Prudence Endures

The Ontario Court of Appeal’s decision in Rabinowitz v. 2528061 Ontario Inc., 2026 ONCA 21 (Rabinowitz), revisits the application of section 8 of the Interest Act (the “Act”), which prohibits the charging of interest on arrears of principal or interest that exceeds interest charged on the mortgage prior to default. The Court of Appeal’s reasons, which are brief in their substantive analysis of section 8 of the Act, are best understood when read together with the more detailed reasons of the trial judge, which canvass the relevant jurisprudence at greater length.

The dispute arose from a series of agreements of purchase and sale between Naftali Rabinowitz, as purchaser and 2528061 Ontario Inc., as vendor, for the purchase of approximately 45.7 acres of vacant land in Caledon, initially priced at $14 million based on an estimated 31 developable acres. As negotiations progressed and further due diligence was required, the vendor agreed to extend the purchaser’s conditional period in exchange for a $600,000 advance, comprised of the release of the $250,000 deposit and a further $350,000 payment, which was secured by a six‑month mortgage and intended to be credited against the purchase price on closing. When the transaction ultimately failed to close, the purchaser sought repayment of the mortgage, giving rise to the section 8 issue of whether the stipulated 12% interest rate commencing on the mortgage’s balance‑due date constituted impermissible interest on arrears. At trial, the court focused narrowly on the mortgage instrument itself, concluding that in substance, interest only accrued if the mortgage was not repaid at maturity and therefore offends section 8 of the Act.

The Court of Appeal found that this analysis was incomplete without considering the mortgage within the context of the parties’ overall commercial arrangement, and reading section 8 harmoniously with section 2 of the Act which preserves contractual freedom to stipulate interest rates. The mortgage was part of a broader agreement of purchase and sale. The advanced funds functioned much like a conditional deposit, secured against title. If the transaction closed, the mortgage proceeds would be credited against the purchase price, and if not, the rationale for interest-free money disappeared. The increase of the mortgage was not tied to any default, and the terms of the agreement were commercially reasonable in the circumstances. The Court of Appeal, found there to be no basis to disturb that agreement,  and allowed the appeal in the mortgage action, ordering that the mortgage be repaid at 12% interest.

Key Takeaways

• Section 8 of the Interest Act remains firmly in place and continues to prohibit interest rate increases that are triggered by default or arrears.
• Courts will continue to scrutinize maturity‑based rate increases in traditional mortgages, particularly where they function as disguised penalties.
• Where an interest provision is part of a commercial arrangement and negotiated with full legal advice, courts may look beyond the mortgage in isolation and consider the true commercial substance of the deal.

Conclusion

Viewed holistically, Rabinowitz does not mark a departure from settled Interest Act principles but illustrates how commercial context may inform their application in limited, fact‑specific circumstances. Lenders should therefore continue to draft interest provisions conservatively and avoid reading the decision as a licence to abandon cautious interest-rate drafting in loan structures.