When Does an Interest Charge Become Illegal?

The Right to Charge Interest Must be Established When a Contract is Negotiated Rather than Afterward. Providing First Notice of Interest Charges On an Invoice is Improper. Interest Must Be Under Sixty (60%) Per Year and Shown as an Annual Rate.

Contract Containing Unlawful Interest Rate Charges

Sometimes a business will add an interest charge onto an invoice without previously discussing the potential interest charge with the customer. This unilateral, meaning single-sided, decision to charge interest without a prior is improper and unenforceable. Simply said, a business is unable to charge interest unless the right to charge interest was agreed to when the deal was made and attempts to add an interest charge after the deal was made, such as providing first notice of an applicable interest onto an invoice, is without binding effect. This was stated in the case of 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.

Is There a Maximum Allowed Interest Rate?

An Interest Charge of Sixty (60%) Percent or Higher Is Illegal.

Even if stated properly shown as an annual interest rate, when an interest charged calculates to sixty (60%) percent or beyond is contrary to s.347 of the Criminal Code of Canada, R.S.C.  1985, c.  C-46 and is illegal. As an illegal interest charge, and where such is contrary to the Criminal Code, persons charging such exorbitant may be punished with up to five (5) years in jail when a charge is prosecuted as an indictable offence or six (6) months imprisonment and/or twenty five thousand ($25,000) dollar fine when prosecuted as a summary conviction offence.

Furthermore, fees and other sums charged by pay day loan businesses are also regulated whereas such fees are often interest charges in disguise and such interest charges in 'disguise' may amount to criminal activity if calculations show a rate beyond beyond the maximum allowed.  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 restrictions.

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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