Changes to the Criminal Code Rate of Interest Rules – What it Means for You

The new year will bring with it changes to the regulation of interest rates in Canada. Effective January 1, 2025, one such key change will be to the Criminal Code criminal interest rate. A new, lower, criminal rate of interest limit will now be set for loans, subject to various exemptions/carve outs. In our view, the most important change is that business/commercial purpose loans to corporate borrowers in excess of $500,000 will not be subject to any interest rate cap.  

Only new loan arrangements made on or after January 1, 2025 will be impacted by this change – existing loans will continue to be subject to the current 60% Effective Annual Rate (EAR) cap on interest.

What is the Criminal Interest Rate?

Canada’s Criminal Code makes it an offence to enter into a lending arrangement involving interest at a criminal rate. Due to the prevalence of predatory lenders taking advantage of vulnerable borrowers, including low-income Canadians, newcomers to Canada, and those with limited credit history, the Canadian government sought to lower the cap on interest rates.[1] In an effort to prevent unreasonably high interest rate loans, the Canadian government passed the Budget Implementation Act, 2023, No.1, which amends the maximum interest rate under the Criminal Code. More on the purpose behind the amendments can be read here.

The January 1, 2025 amendment lowers the interest rate cap from 60% EAR (which is effectively equivalent to 48% on an annual percentage rate (APR) basis), to 35% APR.

Interest will remain broadly defined in the Criminal Code and will continue to include any fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement.[2]

Why Does APR/EAR Matter?

The main difference between APR and EAR for the purposes of this change is the method of calculating the interest rate. Unlike APR, EAR takes compounding interest into account. APR is annualized, without regard to compounding interest.

How Will it Impact You?

There are several exemptions to the new cap. Commercial/business loans of over $10,000 but less than $500,000 are exempt from the new criminal interest rate, provided that the APR on these loans does not exceed 48% and the borrower is not a “natural person”. Practically speaking, in these situations, the criminal rate remains the same as it was prior to January 1, 2025 since 60% EAR is effectively equivalent to 48% APR. Commercial/business purpose loans over $500,000 will not be subject to any interest rate cap.[3] The primary rationale behind this exemption seems to be that sophisticated commercial borrowers do not need the same protections as more financially vulnerable borrowers.

Pawnbroking loans in which the amount of credit advanced is less than $1,000 and the APR does not exceed 48% are also exempt from the criminal interest rate. For payday loans, there is a limit of 14% on the total cost of borrowing.[4]

Uncertain Aspects of the New Amendments

There are still ambiguities when it comes to interpreting the new law. It is not yet clear whether a trust will be considered a “natural person”. It also remains unclear what will be interpreted to be a “business/commercial purpose” and what impact there may be on the enforceability of a guarantee in respect of a high-interest loan for a corporate borrower with individual (i.e. “natural person”) guarantors. Further, where interest is compounded daily, it could result in an effective annual rate that is over the criminal rate threshold, while not triggering the Criminal Code provisions due to the change in calculation of interest from an EAR to APR mechanism. In other words, the new rules (EAR vs. APR calculation) appear to create a likely unintended potential consequence, which is that a corporate borrower might not have the same protections against a criminal rate of interest as it would have had under the old rules. As before, lenders are cautioned to take care with short terms loans, as the interest rate must be annualized over a year-long term. For instance, a loan with a 10% return over a 30-day term is, once annualized, a 120% APR and breaches the both the former Criminal Code regime and the new regime.

For more information on Canada’s new criminal interest rate or any other assistance related to financial services, please feel free to reach out to Andrew Biderman or Leslie McGowran.

[1] “Criminal Interest Rate Regulations: SOR/2024-114” (31 May 2024) online: <https://canadagazette.gc.ca/rp-pr/p2/2024/2024-06-19/html/sor-dors114-eng.html>

[2] Criminal Code, R.S.C., 1985, c. C-46 at s. 347(2).

[3] Supra note 1.

[4] Supra note 1.