Civil Section Minutes 2007

The Canada Interest Act

Presenter: Professor Thomas G. W. Telfer, University of Western Ontario

Professor Telfer’s preliminary background paper examines the original purpose of the Canada Interest Act and compares these original purposes with how the Act is being interpreted in light of today’s commercial reality. He noted that all of the current provisions of the Canada Interest Act can be traced back to the late 19th century. Today, the legislation has been described as “hopelessly dated” and “functionally dead”.

The Act does not seek to govern fairness in lending by fixing or capping interest rates. Rather, it deals with five main issues – freedom to set the interest rate by contract or agreement (section 2); the default rate of interest (section 3); disclosure régimes for non-mortgage and mortgage transactions (section 4 and 6); prohibiting increasing the rate of interest or charging fines or penalties after default on a mortgage (section 8) and repayment rights respecting mortgages (section 10). A detailed analysis of the history of these five issues, and their treatment by courts, was provided.

Section 2 – the freedom to set a rate of interest by contract – is not absolute. For example, as section 2 is limited by other Acts of Parliament, it must be limited by section 347 of the Criminal Code (the criminal interest rate provision).

The default rate of interest in section 3 of the Act was last changed in 1900 to 5%; the scope of the provision has been limited by the growth of prejudgment legislation and court decisions have tended to “narrow the scope of section 3 to the rare case, if any, where a court or statutory body cannot legitimately award interest”.

The underlying aim of section 6 – the mortgage disclosure provision – has not been met, as most court decisions have restricted the scope of the application of the section. Also, the courts have had to grapple with the “imprecise and obscure language” of the section. It was noted that, as a result of interpretations applied by the courts, the most common type of mortgage in Canada (amortized mortgage with half-yearly compounding and fixed monthly payments containing an element of principal and an element of interest that changes each month) is probably not covered by section 6. Also, what information must be disclosed under the section is far from understandable.

Section 8 only applies to mortgages and, in general, precludes the lender from increasing the rate of interest on default. Although there is extensive case law on section 8, one court concluded that “the only thing on which the courts seem to agree is the difficulty of construing the language of section 8 in the context of the modern commercial world”.

Subsection 10(1), which provides for a repayment right after 5 years, is described as Parliament’s response to the prevailing practice in 1880 of long-term mortgages. Today, the commercial reality is short-term mortgage with amortization. Subsection 10(2) exempts mortgages “given by a joint stock company or other corporation” from the right of repayment, and has provided another source of litigation.

Section 4 provides for a disclosure régime for non-mortgage loans. However, there is an underlying disagreement in the case law as to whether section 4 should be restricted to the protection of consumers or whether it should also cover sophisticated borrowers. Furthermore, the case law has found a number of exceptions with restrict the scope of the provision. It was noted that limitations of the section itself and the case law have undermined Parliament’s original intention of an understandable disclosure régime.

In conclusion, the Canada Interest Act is a 19th century statute that predates the emergence of modern credit and that has not kept up with present day commercial reality. In approaching changes, the fundamental question should be: what are the underlying policy issues to be addressed in the Act.

Discussion:

It was noted that, in looking at this Act, its constitutional aspect must be kept in mind -- “interest” is a federal power under the Constitution. However, the courts have also acknowledged that the provinces have a significant role to play in the area of consumer protection. Another comment described sections 4 and 8 as “international embarrassments”, but also noted we should not be quick to abandon the Act as a whole, as some provisions may still have a use.

RESOLVED:

THAT a Working Group be established to consider the issues in the Report, examine the provisions of the Interest Act in light of provincial legislation and common law developments and report to the ULCC at the 2008 meeting.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018