Canada Interest Act - Preliminary Background Paper 2007

CIVIL LAW SECTION

Preliminary Background Paper on the Canada Interest Act

Thomas G. W. Telfer, University of Western Ontario

Readers are cautioned that the ideas or conclusions set forth in this paper, including any proposed statutory language and any comments or recommendations, may not have not been adopted by the Uniform Law Conference of Canada. They may not necessarily reflect the views of the Conference and its Delegates. Please consult the Resolutions on this topic as adopted by the Conference at the Annual meeting.

Charlottetown, PEI, September 9-13, 2007

Introduction*

[1] All of the current provisions of the Canada Interest Act[1] can be traced back to the late nineteenth century. Although the Constitution Act granted Parliament exclusive jurisdiction over the subject of “interest”[2] in 1867, the federal government moved very gradually towards enacting national legislation dealing with interest. The essential elements found in today’s Interest Act were added piecemeal over a twenty year period between 1880 and 1900 and were never the subject of a comprehensive debate which examined all facets of the legislation at one time.[3] Today the legislation has been described as “hopelessly dated”[4] and “functionally dead.”[5]

[2] Although the Act may no longer be serving its original nineteenth century purpose the legislation continues to remain an irritant for courts, lawyers, lenders and borrowers who try and understand its effect, scope and modern day purpose. There are approximately 828 reported and unreported cases in the LexisNexis Quicklaw database that have considered the Interest Act.[6] Approximately 75 per cent of those cases have been decided since the beginning of 1980. This preliminary background paper examines the original purpose of the Interest Act and compares these original purposes with how the Act is being interpreted in light of the commercial reality of the present day.

[3] The Interest Act deals with five main issues. First, the Act does not seek to govern fairness in lending by fixing or capping interest rates.[7] Rather, s. 2 provides (subject to the Act and other Acts of Parliament) that “any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on.”[8] Second, s. 3 of the Interest Act establishes the default rate of 5 per cent, where interest is payable under an agreement or by law, and no rate is fixed by the agreement or by law. Third, ss. 4 and 6 provide a disclosure regime for non-mortgage and mortgage transactions. Fourth, s. 8 prevents mortgage lenders from increasing the rate of interest or charging fines or penalties after default. Finally, s. 10 provides individual mortgagors “with limited rights to pay their mortgage loans after five years, irrespective of the mortgage term.”[9]

[4] Part I of this paper will provide an analysis of ss. 2 and 3. Part II of the paper will consider the provisions relating to mortgage transactions: ss. 6, 8 and 10. Part III examines the disclosure regime for non-mortgage loans in s. 4.

Next Annual Meeting

2017 Conference

Hotel Saskatchewan

Regina, SK

August 13 - 17, 2017
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