Legislators Jump The Shark: Proposed Reduction Of The Criminal Interest Rate Will Have Implications Far Beyond Loansharking

• Published date: 14 July 2022
• Subject Matter: Criminal Law, Crime
• Law Firm: Aird & Berlis LLP
• Author: Mr Jonathan Marun-Batista and Josh Suttner

On March 22, 2022, Bill S-239,An Act to amend the Criminal Code (criminal interest rate)went to second reading at the Canadian Senate. The Bill proposes to amend the criminal interest rate in s. 347(2) of theCriminal Code(the "Code") from 60% per annum to 20% per annum, plus the Bank of Canada's overnight rate on the day an agreement is entered into or renewed (currently 2.5% per annum).

If Bill S-239 becomes law, interest rates would be capped at 22.5% (as of the date of this article). The impact of such a change would be wide-ranging and affect loans that both lenders and borrowers might never have expected to approach an illegal rate of interest.

The Current Criminal Interest Rate

Section 347 of theCodestipulates that everyone who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate, is guilty of an offence. Subsection 347(3) sets out that any person who receives a payment of interest at a criminal rate, absent evidence to the contrary, is deemed to know that the payment breached s. 347.

The current criminal interest rate is an effective rate that exceeds 60% per annum. TheCodedefines interest broadly and includes all charges, expenses, fees, fines, penalties, commissions, etc. Many commercial loans provide that borrowers shall pay the lender's legal,¹commitment, and standby fees, as well as other fees including fines, penalties, commissions, or similar charges or expenses²as part of advancing the credit, irrespective of the person who pays or to whom any such charges and expenses are to be paid. The sum of these fees can turn an otherwise innocent agreement into one that exceeds 60% per annum effective interest, in breach of s. 347.

The original purpose for enacting s. 347 appears to have been to address loansharking - unlicensed street lenders offering credit at exorbitant interest rates and employing intimidation and violence to enforce their contracts.³Bill S-239 sponsor Senator Pierrette Ringuette's speech at second readingin the Senate, however, did not clarify whether loansharking remains the underlying policy reason behind the proposed amendment.

The Court's Response to Illegal Contracts in the Civil Context

Usually, in the civil context, the Court will not enforce illegal agreements on public policy grounds. InWojnarowski, et al v. Bomar Alarms Ltd.,⁴for example, the Court refused to enforce an obviously illegal agreement which permitted a creditor to avoid income tax on payments of interest it received from the debtor.

An agreement that provides for an effective interest rate over 60% would similarly be illegal. So the question becomes, how does s. 347 affect civil claims where interest is alleged to be greater than 60% per annum?

With respect to otherwise innocent loan agreements that provide for effective interest...