Effective as of January 1, 2025, the criminal rate of interest specified in section 347 of the Criminal Code (Canada) (the Criminal Code) was reduced to an annual percentage rate (APR) that exceeds 35%. Prior to the amendments, the criminal rate of interest was an effective annual rate (EAR) that exceeded 60%. At a high level, EAR takes compounding over the course of a year into account whereas APR does not. The change from EAR to APR alters the method of calculation.¹ Consequently, it is now a criminal offence to offer loans at an interest rate higher than 35% APR, subject to certain exceptions within the regulations described below.

Background

The Government of Canada's Bill C-47, the Budget Implementation Act, 2023, No. 1 (Bill C-47) proposed amendments to section 347 of the Criminal Code to combat the predatory lending practice of extending high interest rate loans and to enhance consumer financial protection. Bill C-47 received royal assent on June 22, 2023,² and on May 31, 2024, the Governor General in Council announced that the proposed amendments will become effective on January 1, 2025.

New exempting regulations

The Government of Canada introduced the Criminal Interest Rate Regulations³ (the Regulations), effective as of January 1, 2025, in conjunction with the amendments to the Criminal Code, to facilitate commercial activities and guide market participants while also meeting the objective to combat predatory lending practices. The Regulations set forth three exemptions to which the new criminal interest rate of 35% APR will not apply, which are (1) commercial loans; (2) pawnbroking loans; and (3) payday loans.

The rationale for exempting the first two types of loans – commercial loans and pawnbroking loans – stems from being perceived to fall outside of the Government of Canada's policy objective to combat predatory lending.⁴ The Department of Justice views payday loans as necessitating specific federal limits on borrowing costs due to their higher risk of exploitation.⁵ The Government of Canada perceives the exemptions in the Regulations balances the policy objectives of protecting borrowers while maintaining economic opportunities.⁶ 

Commercial loans exemption

The criminal interest rate for commercial loans is capped at 48% APR (approximately the same as the current criminal interest rate) where:

1. the amount of credit advanced is between CA$10,000 to CA$500,000;
2. the borrowing is for a commercial or business purpose; and
3. the borrower is not a natural person.⁷

Further, there is no criminal interest rate where:

1. the amount of credit advanced is greater than CA$500,000;
2. the borrowing is for a commercial or business purpose; and
3. the borrower is not a natural person.⁸

A commercial loan in an amount less than CA$10,000 will be subject to the new lower criminal interest rate of 35% APR. As such, lenders are recommended to carefully document the intended use of proceeds to ensure they qualify for an exemption.

Pawnbroking loan exemption

To be exempt from the lower criminal interest rate of 35%, pawnbrokers must meet the following criteria: (i) they must advance less than CA$1,000 in credit for pawning tangible personal property or corporeal movable property, excluding vehicles, (ii) the only recourse for defaulting borrowers must be the seizure of the pawned property, and (iii) the APR on the advanced credit must not exceed 48%.⁹

Payday loan limit

The Regulations cap the total cost of borrowing for payday loans at CA$14 per CA$100 borrowed (or 14% APR in provinces with an approved payday loan regime. Fees for dishonoured cheques of CA$20 or less are excluded from this CA$14 limit.

Grandfathering of prior loan agreements and expanded scope of prohibited activities

The new criminal interest rate is not intended to apply to payments received under loan agreements compliant with section 347 prior to the January 1, 2025, amendments.¹⁰ Such loan agreements will remain enforceable under the prior laws. Further, the amendments expanded the scope of activities that may be captured under the criminal interest provision, such as offering and advertising credit at a criminal rate. To ensure continued compliance with the legislation clients should seek advice when initiating and/or amending their loan agreements.

Clarities needed on the new amendments

The new amendments and the Regulations raise ambiguities on several areas such as the following:

1. Will a trust will be considered a "natural person" to qualify for an exemption under the Regulations?
2. What will be considered "business/commercial purposes" under the Regulations?
3. Will a guarantee from a natural person for a corporate borrower in a high-interest rate loan be enforceable?
4. If a loan agreement that existed prior to January 1, 2025, is amended, restated or increased, will the new criminal rate of interest and associated Regulations apply to it or will it continue to be grandfathered under the prior laws?

We are considering the above questions and related matters in the context of new and ongoing transactions.

For further information or guidance on the legislation or how the amendments may impact your loans, please contact the authors, Ryan Therrien, Jonathan Meyer, Leo Cho, Zehan Jagosh or another member of Dentons Canada’s Banking and Finance group.

1. Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023, 1^st Sess, 44^th Parl, 2023 (as assented to June 22, 2023) at Section 610(1).↩
2. Ibid.↩
3. Criminal Interest Rate Regulations, SOR/ 2024-114↩
4. Regulatory Impact Analysis Statement, Canada Gazette, Part II, Volume 158, Number 13↩
5. Ibid.↩
6. Ibid.↩
7. Ibid at Section 1.↩
8. Ibid.↩
9. Ibid.↩
10. Budget Implementation Act, 2023, No. 1 (S.C. 2023, c. 26) at Division 34, Sections 614-615, see Transitional Provisions.↩