Lingering uncertainty remains around new criminal interest rate one month after effective date

Lawyers from Robins Appleby recently gave comments on Canadian Lawyer regarding the federal criminal interest rate.

As of January 1, 2025, the Canadian federal government has lowered the criminal interest rate from an effective annual rate (EAR) of 60% (approximately 48% annual percentage rate, APR) to 35% APR, aiming to curb predatory lending practices. Despite advance notice, legal experts highlight ongoing uncertainties that may complicate compliance for lenders.

Key areas of ambiguity include:

1. Definition of Interest: The Criminal Code broadly defines interest to encompass various charges such as fees, fines, penalties, and commissions. However, it’s unclear whether specific charges, like non-sufficient funds fees, fall under this definition.
2. Exemptions for Commercial Loans: The new regulations exempt certain commercial loans from the 35% APR cap. Loans between $10,000 and $500,000 are subject to a 48% APR limit, while those exceeding $500,000 have no interest rate cap. These exemptions apply when the borrower is not a “natural person” and the loan serves a business or commercial purpose. The term “natural person” isn’t defined in the Criminal Code, leading to questions about its applicability to sole proprietors and general partnerships.
3. Scope of Business or Commercial Purpose: There’s uncertainty regarding what qualifies as a business or commercial purpose, especially for individuals with financial arrangements like margin loans with banks.

Legal professionals advise lenders to thoroughly review and update their credit agreements and lending practices to align with the new regulations, paying close attention to these ambiguities to ensure compliance.