Anonymised, illustrative composite. The stated coupon was nowhere near the line. The definitions in s.347(2) put every fee into the numerator and take the same fees out of the denominator, and a 90-day term annualises the result.
At a glance
An Alberta sponsor agreed to buy the shares of a specialist metal fabrication business at $6,800,000. Senior debt of $3,900,000 and equity of $2,100,000 were committed. A refinancing of the vendor’s existing equipment leases was expected to release a further $1,150,000, but not until the leases ran to their scheduled maturities about three months after closing.
Rather than delay, the sponsor took a $1,200,000 bridge from a private credit fund for 90 days, secured behind the senior lender. See bridge financing and mezzanine debt for the instruments involved.
The term sheet read as expensive but unremarkable: 14% per annum, a 2% arrangement fee, a 1% standby fee on the committed amount and a 3% bonus payable on repayment. Priced against a 14% headline, nobody in the deal team thought about the Criminal Code.
The sponsor’s counsel ran the arithmetic before signing, because the fees were front-loaded and the term was short. Those two features together are what produce the problem, and they are why the same fee package on a multi-year loan is unremarkable.
Over 90 days the coupon on $1,200,000 at 14% is about $41,425. Add the arrangement fee of $24,000, the standby fee of $12,000 and the repayment bonus of $36,000, and the total charged for the credit is about $113,425.
The denominator is not $1,200,000. Because those same three fees are charges “directly or indirectly incurred” under the arrangement, they come out of the credit advanced, leaving $1,128,000. That is the double effect: $72,000 of fees is added to what is being measured and subtracted from what it is measured against.
$113,425 on $1,128,000 is 10.06% for 90 days. Annualised on a simple basis that is about 40.8%; compounded to an annual equivalent it is about 47.5%. Both are above 35%.
The same dollars over a 12-month term look entirely different: $168,000 of coupon plus the identical $72,000 of fees is $240,000 on $1,128,000, or roughly 21.3% for the year. Nothing about the pricing changed. The term did.
Section 347 of the Criminal Code creates an offence, not merely an unenforceable term. Under s.347(1), “every person who enters or offers to enter into an agreement or arrangement to receive interest at a criminal rate” — or who advertises such an offer, or receives a payment at such a rate — is “guilty of an indictable offence and liable to imprisonment for a term not exceeding five years”, or of a summary offence carrying a fine of not more than $25,000 or up to two years less a day.
Two definitions in s.347(2) do the work. “Criminal rate” means “an annual percentage rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 35 per cent on the credit advanced”. And “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” — excluding repayment of the credit itself, insurance charges, official fees, overdraft charges, required deposit balances and, on a mortgage or hypothec, amounts for property taxes.
The definition most deal teams miss is the third. “Credit advanced” is the money actually advanced “minus the aggregate of any required deposit balance and any fee, fine, penalty, commission and other similar charge or expense directly or indirectly incurred under the original or any collateral agreement or arrangement”. A fee therefore counts twice against the borrower’s side of the ratio.
The unit is the arrangement, annualised — not the coupon, and not the cash cost. A 90-day facility priced identically to a three-year one is a different rate under this section, because the same flat dollars are spread over a quarter of a year rather than three.
The offence is committed by the person receiving the interest. That is the lender, not the borrower — a point worth being precise about, because it is the lender’s counsel who usually reprices once it is raised.
The fund repriced rather than argue. The arrangement fee and the exit bonus were removed, the standby fee was retained, and the coupon was raised to 19% with a 12-month term and a prepayment right after 90 days at par plus one month’s interest.
On the sponsor’s expected 90-day hold that was cheaper in cash terms — roughly $58,900 against the original package’s $113,425 — and the sponsor took the saving. On a 12-month hold it would have been dearer. Both parties were pricing a risk neither had priced before: the possibility that the facility repaid on schedule and the annualised rate was measured on 90 days.
The refinancing completed on day 104. The bridge was repaid with 14 days of extension interest at the contract rate.
For the sponsor, the direct saving on the actual hold was about $54,500. That is not what mattered.
What mattered is that the original structure exposed a lender the sponsor needed to keep, and would have put a criminal-rate question into the diligence file of the very refinancing that was supposed to take it out. A senior lender asked to refinance a facility carrying an unresolved s.347 question does not price that; it declines.
The tell is a flat fee on a short term. Any fee expressed as a percentage of the facility is, in effect, a rate divided by the term — so a 6% fee package on 90 days is a 24% rate before the coupon is added.
The practical test costs a minute: add every fee to the interest, subtract the same fees from the advance, divide, and annualise. If that number is anywhere near the mid-thirties, the term sheet needs a longer term or fewer fees. Note that s.347(4) makes “a certificate of a Fellow of the Canadian Institute of Actuaries” the statutory proof of the annual percentage rate, so a spreadsheet is an indicator and not the test.
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