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Under s. 347 of the Criminal Code of Canada it is an offence to enter an agreement or arrangement to receive interest at a criminal rate, or to actually receive payment or partial payment of interest at a criminal rate. 

Criminal rate is an effective annual rate in excess of 60% on the credit advanced. The effective annual rate is calculated over the period during which credit is actually outstanding. If it is possible according to generally accepted accounting principles to amortize facility fees over the entire period during which credit is actually outstanding, then it is possible to spread the facility fee over the entire duration of the loan. 

Interest is the aggregate of all charges and expenses 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 any amount required to be paid on account of property taxes. Interest is broadly defined and includes a facility fee a borrower agrees to pay to obtain the loan: William E. Thomson Associates Inc. v. Carpenter (1989), 61 D.L.R. (4^th) 1 (Ont. C.A.). Where a condition of the loan was a share of the anticipated profits from a real estate deal, the share of the anticipated profits falls within the definition of interest: 677950 Ontario Ltd. v. Artell Developments Ltd. (1992), 93 D.L.R. (4^th) 334 (Ont. C.A.), affd [1993] 2 S.C.R. 443. A late payment penalty on a utility bill may be considered interest: Garland v. Consumers’ Gas Co., [1998] 3 S.C.R. 112. 

Credit advanced is the aggregate of the money and the monetary value of goods, services or benefits actually advanced or to be advanced minus the aggregate of any required deposit balance and any fee, fine, penalty, commission or similar charge or expense incurred under the agreement or arrangement, or any collateral agreement or arrangement.  

The mental element of this offence is proof that the accused voluntarily entered the agreement or arrangement which results in the accused receiving a criminal rate of interest: William E. Thomson Associates Inc. v. Carpenter (1989), 61 D.L.R. (4^th) 1 (Ont. C.A.). Whether an “agreement or arrangement” violates s. 347 is determined at the time the transaction is entered into. Whether an “interest payment” violates s. 347 is determined at the time the payment is received. A person is deemed to have knowledge that a payment or partial payment of interest is at a criminal interest rate. There is no violation of s. 347 if the payment of interest at a criminal rate arises solely from the voluntary payment of the debtor, and did not arise from the request of the lender or a term of the agreement: Degelder Construction Co. v. Dancorp Developments Ltd., [1998] 3 S.C.R. 90. 

It is no defence that the borrowers agreed to participate in the agreement or arrangement. An honest mistake as to the terms of the agreement or arrangement may be a defence: R. v. McRobb (1984), 20 C.C.C. (3d) 493 (Ont. Co. Ct.), var’d 32 C.C.C. (3d) 479n (Ont. C.A.). 

The exceptions include the actual cost of insuring the risk of advancing credit under the agreement or arrangement, any fee paid to any governmental authority to perfect any security such as registration fees, any actual overdraft charge not exceeding $5.00 from a bank, credit union or trust company, any fixed or ascertainable amount advanced or to be advanced that is held as a security deposit in the event of default, and the actual amount paid on account of property taxes. 

The unlawfulness of the transaction does not necessarily render the entire agreement or arrangement void if the illegal part can be severed from the rest of the agreement or arrangement, but in any event the borrower will be required to repay the principal: William E. Thomson Associates Inc. v. Carpenter (1989), 61 D.L.R. (4^th) 1 (Ont. C.A.). 

The lesson to be drawn from this is that a lender must be careful when imposing fees and charges on a loan, or to arrange for a loan. Depending on the duration of the loan the amount charged might exceed the criminal rate of interest. Arrangements to participate in the anticipated profits upon resale may be taken into consideration when determining the effective rate of interest. While a properly drafted loan agreement will continue to be effective except for that portion that is unlawful, the whole problem can be avoided if a lender is aware at the onset of the effective rate of interest when all fees and charges are taken into consideration.