Interest Act - 2008 Report

SECTION BY SECTION REVIEW AND RECOMMENDATIONS

Section 2—Laissez-Faire Approach to Interest Rates

[11] Section 2 states:

Except as otherwise provided by this Act or any other Act of Parliament, any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on.

[12] As Professor Telfer pointed out in his 2007 paper, Parliament enacted the original version of this provision in 1886 with a view to abrogating usury laws then in force in some of the provinces.

[13] Lenders (and others providing for contractual interest) are still subject to the other provisions of the Act, to section 347 of the Criminal Code,[2] and to any other federal statute prescribing interest rates. A chart attached to this paper as Schedule “A” identifies provisions in other federal statutes prescribing interest rates.

Other Federal Legislation Regulating Interest Rates

[14] There are four types of provisions dealing with interest rates in other federal legislation: those fixing an interest rate or providing a formula for fixing an interest rate; those setting out a default rate for circumstances where the interest rate cannot be ascertained; those setting out a maximum interest rate; and those setting out a range for the interest rate (the interest cannot be less than the minimum rate stated or more than the maximum rate stated).

[15] Aside from section 347 of the Criminal Code, the other federal provisions prescribing interest rates are very subject-matter and context specific. They include provisions:

 

  • (a) setting the interest rate payable on government annuities;
  • (b) setting the interest rate payable in relation to or as part of the calculation of federally administered pensions;
  • (c) regulating the interest rate payable on Canada Student Loans;
  • (d) setting the interest rate payable or the maximum interest rate payable under other federal loan or assistance programs;
  • (e) setting out the interest rates applicable on sums payable to the federal government (such as amounts payable to the Receiver General under the Excise Tax Act[3] or penalties payable under the Employment Insurance Act[4]);
  • (f) setting out the power of the Federal Court and Federal Court of Appeal to award pre- and post-judgment interest;
  • (g) dealing with the calculation of interest on certain deposits under the Canada Deposit Insurance Corporation Act[5] in circumstances where the term of a deposit contract extends beyond the interest termination date and not all of the information necessary for the calculation of interest is available by that date;
  • (h) setting the maximum annual rate of interest payable on promissory notes under the Small Business Loans Regulations, 1993[6] and the maximum annual imputed rate of interest used to calculate the scheduled payments on a capital lease under the Canada Small Business Financing (Establishment and Operation of Capital Leasing Pilot Project) Regulations;[7]
  • (i) setting the maximum rate of interest payable under First Nations property tax laws; and
  • (j) stipulating the interest rate applicable where, in the context of credit sales of goods to an importer in Canada, it is not possible to ascertain the interest rate referred to in a clause of the Special Import Measures Act,[8] or there is no such interest rate.

Continued Utility of Section 2

[16] While “interest” is a federal subject-matter under the Constitution Act, 1867, there are in fact numerous provincial and territorial statutes prescribing interest rates in the context of subject-matters within provincial or territorial competence. Schedule “B” identifies provisions in provincial and territorial statutes prescribing interest rates. Schedule “B” will be discussed below in the context of section 3 of the Act. It should be noted that provincial consumer legislation, which typically avoids specifically prescribing fixed, minimum, maximum or default interest rates but instead regulates disclosure of the cost of borrowing and provides relief in cases of unconscionable transactions, could be viewed as the modern substitute for usury legislation.

[17] Section 2 is not an impediment to commerce, nor has it given rise to difficulties in interpretation or application like some of the other provisions of the Interest Act. Section 2 and the principle of freedom of contract it embraces may influence the interpretation of parties’ agreements by the courts.[9] While its scope may have been whittled down by the choice of both the federal Parliament and provincial and territorial Legislatures to regulate interest rates in specific contexts, and by consumer protection legislation, the working group is not prepared to say that section 2 no longer serves a purpose. It continues to articulate the federal laissez-faire policy first articulated in 1886 – that absent legislation to the contrary, parties are free to stipulate for any agreed-upon rate of interest. Because the policy reflected in section 2 is still current, the provision is not obsolete.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018