Interest - Criminal. Hybrid Financial Ltd. v. Flow Capital Corp.
In Hybrid Financial Ltd. v. Flow Capital Corp. (Ont CA, 2022) the Court of Appeal considered a 'hybrid' loan/credit/equity scheme to determine whether the criminal interest rate provisions of s.347 CCC applied:
The Statutory Provisions. 7550111 Canada Inc. v. Charles
 Subsection 347(1) of the Criminal Code makes it an offence to enter into an agreement or arrangement to receive interest at a criminal rate or to receive payment of interest at a criminal rate.
 Subsection 347(2) defines key terms applicable to the section. “Credit advanced” means, for the purposes of this appeal, the money “actually advanced under an agreement or arrangement”.
 “Criminal rate” means “an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty per cent on the credit advanced under an agreement or arrangement”.
 “Interest” means “the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement, by or on behalf of the person to whom the credit is or is to be advanced”.
Application of Section 347 of the Criminal Code
 As noted in Garland at para. 51, the interpretation of “interest” mandated by s. 347 “may not follow intuitively from the concepts of “credit” and “interest” as those terms are employed at common law and in everyday life”. What is crucial is the substance of the transaction and, as the Supreme Court goes on to note at para. 52, the “plain terms of s. 347 must govern its application.”
 Stripped to its essence, the substance of the transaction here was that Flow advanced money to Hybrid, and Hybrid was required to pay money in return. The money Hybrid had to pay in return was an expense incurred for the advance of credit and was subject to the strictures of s. 347.
 The application judge erred in limiting her inquiry to whether the Agreement contained provisions with watertight compartments consistent with debt or credit transactions, as opposed to those amounting to equity investments, and she lost sight of the breadth of the statutory language. As noted in Garland, “[t]he thrust of the definitions of “credit advanced” and “interest” is to cover all possible aspects of any transaction to ensure that the cost of using someone else’s money never exceeds the criminal rate. […] Clearly the intention of the legislature was to concentrate on the substance of the transaction, not on its mechanics or form”: Garland, at para. 51, citing Mira Design Co. v. Seascape Holdings Ltd. (1981), 1981 CanLII 721 (BC SC), 34 B.C.L.R. 55 (S.C.), 22 R.P.R. 193, at p. 60. In the present case, the application judge emphasized the form of the transaction over its substance. That the payments Hybrid had to make were styled as “royalties” did nothing to alter the substance of the Agreement.
Should Flow Be Insulated from the Consequences of Section 347 Because Hybrid Elected to Pay Out Its Obligations?
 Here the Agreement does not on its face require payment of illegal interest. An interest rate that exceeds 60 per cent was triggered based on when Hybrid chose to exercise the buyout option.
 Given this fact, Flow contends that, even if s. 347 would apply to the payments under the Agreement, to the extent they were triggered by Hybrid’s voluntary act, s. 347 would not apply. As noted in Dancorp at para. 30, “[a] lender who enters into an agreement to receive interest under ambiguous terms bears the risk that the agreement, in its operation, may in fact give rise to a violation of s. 347. The principle in [Nelson v. C.T.C. Mortgage Corp. (1984), 1984 CanLII 572 (BC CA), 59 B.C.L.R. 221 (C.A.), 16 D.L.R. (4th) 139, aff’d 1986 CanLII 14 (SCC),  1 S.C.R. 749] protects the lender from incurring such liability in circumstances that are beyond its control.”
 In Nelson, a mortgagor elected to prepay amounts owing on a mortgage. The agreement on its face did not require payment of illegal interest, but the result of the prepayment was that the interest rate exceeded 60 per cent. The rationale of Nelson was that a lender “who has entered into a lawful agreement should not, as the result of the voluntary act of the debtor, be guilty of a criminal offence”: Dancorp, at para. 36.
 In Garland, a criminal interest rate was triggered by a penalty associated with the late payment of a gas bill. The gas company argued that, because a criminal rate was not triggered if the customer waited more than 38 days to pay after the due date, the criminal rate was triggered by the voluntary act of the debtor, and was not in violation of s. 347. The Supreme Court rejected this argument. In summarizing the principles governing the interpretation of s. 347, the court stated, at para. 58, that “[t]here is no violation of s. 347(1)(b) where a payment of interest at a criminal rate arises from a voluntary act of the debtor, that is, an act wholly within the control of the debtor and not compelled by the lender or by the occurrence of a determining event set out in the agreement” (emphasis added). At para. 61, the court concluded that, in this context, the customer’s payment of the penalty was not a voluntary act that would trigger an illegal rate of interest because the penalty was “automatically triggered by an event specified in the arrangement between the parties”.
 In this case it is unnecessary to consider the scope and application of the voluntary act exception outlined in Nelson, Dancorp, and Garland because of the inclusion in the Agreement of s. 6.13, the Maximum Permitted Rate provision. The application judge erred in failing to consider this provision when assessing this issue.
 Section 6.13 stipulates that “under no circumstances” will Flow receive a payment, including a buyout payment, that is at a “rate that is prohibited under Laws”. The provision goes on to state that, in the event a payment to be received by Flow “would, but for this Section 6.13, be a rate that is prohibited under Laws”, the effective rate shall be adjusted to a rate that is one percentage point “less than the lowest effective annual rate that is so prohibited”.
 In this case, when Hybrid elected to pay out its obligations, to the extent that the buyout amount would otherwise have exceeded the prohibited rate of interest, the parties had provided for a reduced rate. There is no question of Hybrid’s unilateral act rendering an otherwise legal rate of interest illegal. Rather, by including s. 6.13, the parties provided in the Agreement for a lawful rate of interest if the buyout option were exercised.
 Both parties are sophisticated in commercial matters and were assisted by lawyers. They must have recognized that there was a risk that payments under the Agreement could run afoul of s. 347 of the Criminal Code so they included a contractual term to deal with that possibility. There is no reason why they should not be held to their agreement.
In 7550111 Canada Inc. v. Charles (Ont CA, 2020) the Court of Appeal made some useful comments on criminal interest rate, although it declined to decide the issue due to an inadequate evidence record:
 With respect to the criminal rate of interest submission, the question is whether the terms of the mortgage, including the ten percent interest rate and the various fees and charges, exceed an effective annual rate of interest of 60 percent as prohibited under s. 347 of the Criminal Code. On its face, the mortgage provides for a ten percent interest rate.
 Under s. 347(2) of the Criminal Code, “interest” is broadly defined to include “the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit… but does not include any repayment of credit advanced or any insurance charge, official fee, overdraft charge, required deposit balance or, in the case of a mortgage transaction, any amount required to be paid on account of property taxes”. A “criminal rate” of interest means “an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty per cent on the credit advanced under an agreement or arrangement”.
 As a result, where, as here, a mortgage does not contain on its face a criminal rate of interest, the party alleging that a mortgage contravenes s. 347 must identify the fees or other charges that it alleges are “interest”, and then provide evidence that the effective annual rate of interest calculated in accordance with “generally accepted actuarial practices and principles” exceeds sixty percent.