New Year; No Criminal Interest Rate For Commercial Loans – Financial Services

As previously announced in our Cassels Comments (see our
articles from March 29, 2023; January 17, 2024; and August 1, 2024), effective January 1, 2025,
Canada has implemented new rules regarding the criminal interest
rate under the Criminal Code (the Code). A key change provides that
the criminal rate of interest will be lowered from an effective
annual rate (EAR) that exceeds 60% to an annual percentage rate
(APR) that exceeds 35%. Note that in addition to the change in the
rate, there is a change in calculation from an EAR to an APR.

With these changes come certain key exemptions, including
certain exemptions for commercial loans which eliminates the former
60% criminal interest rate for commercial loans.

Commercial Loans Exemption

A commercial loan is defined as one where the borrower is not a
natural person, the agreement or arrangement is entered into for
business or commercial purposes, and either:

• The amount of the credit advanced is more than $10,000 but less
  than or equal to $500,000 and the APR of interest does not exceed
  48% on the credit advanced; or




• The amount of the credit advanced is more than $500,000

With respect to loans above $500,000, the Government has
concluded that these transactions “represent a level of
sophistication that does not require protection through the
criminal interest rate provisions.” Therefore, if the
agreement or arrangement matches any of these criteria, the new
lower criminal interest rate of 35% APR does not apply. Any
commercial loan in an amount less than $10,000 will be subject to
the new 35% APR. Given that few commercial loans are valued below
$10,000, this change is expected to have minimal cost impact on
lenders and commercial borrowers.

Implications on Canadian Commercial Lending Transactions

As discussed in our previous Cassels Comment, Canadian credit agreements or
arrangements typically contain provisions relating to Section 347
of the Code to ensure that the rate of interest does not exceed the
criminal rate of interest. Once the Regulations come into force and
effect, the use of such provisions for loans over $500,000 may no
longer be required. Additionally, with the elimination of the
criminal interest rate for loans over $500,000, lenders may view
Canada as a more desirable jurisdiction for providing financing
arrangements in the commercial lending space in amounts exceeding
$500,000.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.