New regulations clarify that most commercial loans are exempt from more stringent controls on interest rates that will come into force in 2025. Recent amendments to Canada’s Criminal Code, adopted as part of the 2023 Budget Implementation Act, lower the threshold of the legitimate lending rate from the current allowable 48 per cent on an annual percentage basis (APR) to 35 per cent APR.
The move was first promised in the 2023 budget as a means to crack down on predatory lenders and better ward against borrowers getting caught in a cycle of onerous debt. The criminal liability is attached to lenders (not borrowers), but the enabling legislation also provides for some exemptions.,
The new regulations designate borrowers of mid-sized to large commercial loans as outside the government’s intent to protect potentially vulnerable individuals and their dependents. “Commercial loans do not trap Canadians in a cycle of debt as they are extended to commercial entities, not individual Canadians,” the accompanying regulatory analysis states.
It acknowledges that parties to commercial loans generally understand the trade-off of risks to return, and that high interest rates may be necessary to attract capital investment to ventures that could have spinoff benefits for the broader economy. The new regulations leave the 48 per cent APR threshold in place for commercial loans valued between $10,000 and $500,000 and remove all criminal limits on loans that exceed $500,000.
The retention of the 48 per cent APR criminal threshold for lower valued loans is framed as a measure to provide some protection “particularly for small business borrowers”, while also affording them more flexibility to secure financing that may not be available at the lower 35 per cent APR stipulated for individual borrowers. Meanwhile, commercial loans valued at less than $10,000 are considered a relative rarity and a potential loophole for predatory lenders to enter in the absence of controls.
“Commercial loans below $10,000 will be subject to the new criminal interest rate to disincentivize lenders from manipulating regulatory exemptions and circumventing the criminal rate by issuing consumer loans as commercial loans,” the regulatory analysis states. “Commercial loans valued above $500,000 will not be subject to the criminal interest rate. This is to avoid contractual frictions and ensure healthy and productive investments in areas of venture capital and private equity.”
