Interest Act - 2008 Report

Section 3—The Default Rate of Interest

[18] Section 3 of the Interest Act provides as follows:

Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.

[19] Professor Telfer’s 2007 paper reveals that the rate of five percent was set in 1900, apparently to reflect the lending rates at financial institutions at that time.

[20] Section 3 is potentially applicable in two circumstances: where interest is payable in an agreement between the parties or where interest is payable by law. In both those circumstances, it only applies where “no rate is fixed.”[10]

[21] The scope of the application of section 3 in the first context has been significantly reduced by the jurisprudence:

(a) It only applies “when there is no provision made in an applicable statute or in an agreement and no mechanism is provided by which a rate can be fixed”.[11] Courts have striven to identify a mechanism in contracts before them so as to oust section 3;[12] and

(b) The phrase “fixed …by law” has been construed to cover circumstances where an interest rate is fixed by statute, where a formula for setting the rate is set out in a statute, or where the statute delegates discretion to a judge, adjudicator or adjudicative agency to set the rate.[13]

[22] In short, the scope of section 3 has been limited to the “rare case, if any, where a court or statutory body cannot legitimately award interest.”[14]

Provincial and Territorial Legislation dealing with Interest Rates

[23] As with the federal provisions dealing with interest rates, there are four categories of interest rate provisions in provincial and territorial statutes and regulations: those setting a fixed rate or formula; those setting a default rate; those setting a maximum rate and those setting a minimum rate. Schedule “B” summarizes the provincial and territorial provisions under those category headings.

[24] Examples of provincial and territorial provisions dealing with interest rates include (N.B., not every example applies in every jurisdiction):

  • (a) Provisions dealing with prejudgment and post-judgment interest;
  • (b) Provisions dealing with interest rates payable on monies paid into court;
  • (c) Provisions dealing with interest rates on arrears on required payments such as maintenance payments or wages under employment standards legislation;
  • (d) Provisions setting interest rates payable on amounts owing to government (such as taxes or penalties) or on overpayments made by government;
  • (e) Provisions setting interest rates payable on security deposits in a landlord-tenant relationship;
  • (f) Provisions setting interest rates payable on agriculture industry loans by government or government housing loans;
  • (g) Provisions setting interest rates on provincial student loans;
  • (h) Provisions setting interest rates payable under other provincially-administered loan programs;
  • (i) Provisions setting minimum interest rates payable by a credit union or development corporation;
  • (j) Provisions setting interest rates payable on statutorily-mandated compensation;
  • (k) Provisions setting interest rates payable on instalment payments on automobile insurance;
  • (l) Provisions setting interest rates payable on inactive accounts in provincially-regulated financial institutions; and
  • (m) Provisions setting the interest rate payable under contracts for sale of Crown lands.

Continued Utility of Section 3

[25] In light of the range of provincial and territorial provisions dealing with interest rates and in light of the narrow scope left in which section 3 of the Interest Act operates both because of the provincial and territorial incursions and because of the construction given to section 3 by the courts, is this default rate required?

[26] In the view of the working group, section 3 still has relevance for three reasons:

  • (a) One cannot foresee all the potential scenarios to which such a default rate may be relevant;
  • (b) While there is other federal legislation dealing with interest rates, it is (aside from section 347 of the Criminal Code) subject-matter and context specific; and
  • (c) The provinces and territories have not completely occupied the field (and constitutionally-speaking could not do so) and the interest rate provisions in provincial and territorial legislation are also subject-matter and context specific.

[27] The second question raised in relation to section 3 is whether, in a world of fluctuating interest rates, a fixed rate of 5% per annum makes sense, especially given its provenance.

[28] While some of the interest rate provisions set out in Schedules “A” and “B” contain a fixed rate (i.e., 3% per annum), many contain instead a statutory formula that permits the prescribed interest rate to move with the market.

[29] Some of these formulae are quite complex. For example, subsection 13(1) of the Canada Student Loan Regulations[15] provides for one applicable rate of interest to be:

the aggregate of one per cent and the rate fixed by the Minister for each loan year by calculating, immediately preceding the commencement of that loan year, the simple arithmetic mean of the mid-market yields at the close of business on Wednesday in respect of the six months immediately preceding the commencement of that loan year on all Government of Canada bonds payable in Canadian currency and due to mature in one to five years, as computed and provided by the Bank of Canada, rounded to the nearest one-eighth of one per cent.

[30] Other provisions are much simpler. The Interest and Administrative Charges Regulations[16] provide, in subsection 5(1), for interest on amounts owing to Her Majesty to be “calculated and compounded monthly at the average bank rate plus 3%”.

[31] Some provisions set the interest payable by reference to the prime rate, typically the prime rate at a particular bank (e.g., the Bank of Canada, the principal banker to the Province, etc.). For example, under the Enhanced Recovery of Oil Royalty Reduction Regulation,[17] the rate of interest is “the annual rate of interest established by the Province of Alberta Treasury Branches as its prime lending rate on loans payable in Canadian dollars that is in effect on the first day of the month in which that day occurs plus 1%.” A large number of Ontario regulations[18] provide for the payment of the “average prime rate”, which is defined as:

the mean, rounded to the nearest whole percentage point, of the annual rates of interest announced by each of the Royal Bank of Canada, The Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, the Bank of Montreal and The Toronto-Dominion Bank to be its prime or reference rate of interest in effect on that date for determining interest rates on Canadian dollar commercial loans by that bank in Canada.

[32] In the view of working group, it would be preferable for the default rate in section 3 of the Interest Act to be tied to market rates in some fashion.

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