In Canada, like many jurisdictions, there are a number of longstanding provisions in contracts that are not regularly redrafted. After all, things do not change that often in the mining business. An example of this is the force majeure clause, which is a standard practice to include in contracts. However, prior to the pandemic, this clause was not widely used. As a result of those events, a large percentage of the legal population learned the difference between epidemic and pandemic. For an industry like the mining sector, which cannot simply switch to working from home or remote arrangements overnight, breaches of contracts suddenly became a reality.
Another one of those provisions, to do with what constitutes a “criminal rate of interest,” is on the verge of changing as well. On April 20, 2023, as part of a consultative process, the Government of Canada tabled Bill C-47, the Budget Implementation Act (the Bill C-47). Bill C-47 includes amendments to the criminal interest rate provision under section 347 of the Criminal Code (Canada), which aims to crack down on predatory lending by reducing the criminal interest rate. “Predatory lending” has come to mean lenders beyond what we used to think of as just “loan sharks,” and now includes overly aggressive payday lending arrangements. The mining sector has always had a mixture of financing alternatives available to it – equity, debt, royalties, streaming agreements, etc. For those companies accessing debt markets, the interest rate payable can get high for companies that have a higher risk profile. The criminal rate of interest mechanism has always been there to put a cap on the high end of interest rates, at least in contracts.
The Canadian government has already proposed to lower the criminal interest rate to 35% APR (as defined below) while also proposing to adjust existing payday loan exemptions to cap the maximum amount of interest that could be charged for such arrangements. This not only applies to mining companies directly borrowing, but also to their employees accessing short-term financing in remote locations.
The criminal interest rate is applicable to most money lending products in Canada. When it comes to what qualifies as “interest” under the Criminal Code, a very broad interpretation is given and it includes, among other things, fees, fines, penalties, commissions, charges and expenses. It also includes the interest rate applicable to missed payment on equipment leases.
Most lawyers know that currently, based on section 347 (1) of the Criminal Code, the criminal interest rate is set at an effective annual rate (EAR) of 60%. The idea being that taking advantage of people who desperately needed money for one thing or another was so egregious that it should be considered criminal. When that limit was fixed in 1980, the Bank of Canada’s overnight rate was 21%. The difference between the overnight rate and the EAR was 39% at that point in time. We live in a very different interest rate environment these days. Currently, the Bank of Canada’s overnight rate is around 4.5%. That means the difference between the overnight rate and the EAR is now approximately 55%. The mining sector has been impacted by a number of disruptive forces over the last few years – some positive and some negative. On one hand, the clean energy transition appears to be good for product demand, while inflationary pressures, on the other hand, seem to have increased the cost of every input, including borrowing costs.
At the same time, Bill C-47 proposes that, in order to calculate interest, we will transition away from EAR, which has been used since 1980, to an annual percentage rate (APR). The current EAR of 60% would be equivalent to an APR of roughly 47%. Under the Bill, the criminal interest rate would be reduced to an APR of 35%. A reduction to 35% APR will align with the existing maximum interest rates that can be imposed on consumers in the Province of Québec.
As is usually the case when the government amends legislation, Bill C-47 excludes certain agreements or contractual arrangements to set out in future regulations (which are not yet published), so it remains to be seen what types of agreements or contractual arrangements will be excluded from the application of the new rules. Before you feel the need to rush out to see whether your current lending arrangements violate the proposed changes, Bill C-47 includes transitional provisions that will grandfather existing agreements or contractual arrangements. This means the new criminal interest rate will apply to agreements or contractual arrangements entered into after the day on which the new rules come into force.
With respect to payday loans, the new rules would also establish a limit on the amount of interest payable, limiting the amount payday lenders may charge to CA$14 per CA$100 borrowed. This limit would align the Government of Canada with the Province of Newfoundland and Labrador, which currently has among the lowest limits under similar provincial legislation. For companies operating in multiple provinces, this coordination will be appreciated.
The Government of Canada may not be finished yet. The government intends to launch additional consultations on whether the criminal rate of interest should be reduced even further than as set out in Bill C-47 and with respect to the payday lending exemptions.
An APR of 35% seems like an extraordinary cost of debt that no mining company would take over other alternatives. Most of the time that is probably true, but desperate times call for desperate measures and some parts of the mining sector are definitely having a tough time right now. Those companies should keep these rates in mind when wondering how high their actual rates of borrowing can go.
Key takeaways for mining companies include:
- Review the interest rates payable in any new borrowing arrangements that you are considering entering into.
- Review the default interest rates payable for items like drilling equipment, storage locations and vehicle leases.
- Monitor future changes with respect to these rates, as they are now expected to change over time, unlike what has happened historically.
- Ensure that your employees are aware of these provisions if they work in locations where payday lending is used.
For more information on this topic, please contact the author Greg McNab.