When Does an Interest Charge Become Illegal?

Interest Charges Must Be Established When a Contract is First Arranged. Using an Invoice For First Notice of an Interest Charge Is Improper and Unenforceable. Interest Must Also Be Shown as an Annual Rate and Be Less than Sixty (60%) Percent.

Contract Containing Unlawful Interest Rate Charges

Businesses sometimes attempt to add terms of interest by showing an interest charge on an invoice; however, where the interest charge was without prior agreement, meaning without discussion and agreement when the contract was established, such a unilaterally adding of an interest term is improper, without binding effect, and insufficient to alter the originally discussed contract terms as were silent on an interest charge; King Road Paving and Landscaping Inc.  v. Plati, 2017 ONSC 557 at paragraphs 79 to 88.

What Happens If An Interest Rate Is Shown Only As a Monthly Rate Rather Than Annualized Rate?

If An Interest Rate Is Shown Without An Annualized Rate, Then the Interest Charge Becomes Void.

For most contracts involving the sale of goods and services (i.e.  other than mortgages) where an interest rate is stated as applying to late payment or overdue accounts will require that the annual interest rate be shown.  The mandate to show an annual interest rate is found in s.4 of the federal Interest Act, R.S.C.  1985, c.  I-15.  In circumstances where an interest rate that is less than annual is shown, such as a two (2%) percent monthly interest charge,  without also stating the annual interest rate, such an agreement is void and unenforceable.

The Interest Act also governs the interest rate that applies if an agreement for interest is made but the rate of interest undeclared.  In such a situation, the Interest Act statutorily establishes a five (5%) annual rate.  Counter-intuitively, many perceive that where a lesser rate is stated without the annualized rate such as the example of two (2%) percent mentioned above, this unenforceable rate should be substituted with the statutory five (5%) percent rate; however, the law will not operate in such a manner as to amend or adjust the defective rate of interest stated in the contract.  The law within the Interest Act only establishes the rate at five (5%) percent when interest was agreed to but the rate unstated.  Accordingly, in a situation where a rate is stated without the annualized interest rate, any interest becomes disallowed.

How Much Interest Can Be Charged?

An Interest Charge of Sixty (60%) Percent or Greater Is Unlawful.

Additionally, even if stated 'correctly' as an annualized interest rate, any interest rate charged beyond sixty (60%) percent annual runs contrary to s.347 of the Criminal Code of Canada, R.S.C.  1985, c.  C-46 and may be punishable by five (5) years imprisonment as an indictable offence or six (6) months imprisonment and/or twenty five thousand ($25,000) dollar fine as a summary conviction offence.  Lately, much legal news has come from concerns involving the fees and other charges as charged by pay day loan businesses and whether such fees are merely interest charges in disguise and if such are interest charges in 'disguise' whether such amounts to criminal activity when calculation of such interest charges in 'disguise' establishes a rate beyond sixty (60%) percent.  These payday or short-term loan businesses are regulated per the Payday Loans Act, 2008S.O.  2008, Chapter 9.  The decision in the case of The Director v. The Cash Store, 2014 ONSC 980 has helped define some of the parameters established by this law.

Summary Comment

Attempts to add an interest charge onto an invoice without first having first arranged an agreement to charge interest is improper and unenforceable.  Furthermore, an interest clause must show the agreed upon interest rate as an annual rate, or include an annualized rate if a monthly rate is shown, and the annualized rate must be less than sixty (60%) percent.

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