Pursuant to Section 347 of the Criminal Code, an effective annual interest rate that exceeds 60% of the total credit advanced under an agreement or arrangement is a criminal rate. Anyone who enters into an agreement or arrangement to receive interest at a criminal rate or who receives a payment or partial payment of the interest at a criminal rate commits an offence. The party receiving the payment is also deemed to have knowledge of the nature of the payment and that it was received at a criminal rate1. The lender may face imprisonment or fine if it requests the payment of interest at a criminal interest rate. The portion of the interest rate agreed upon between the parties which corresponds to the usurious interest rate may be unenforceable. Moreover the existence of the criminal interest rate may also affect the ability of the lender to recover the capital or principal amount of the loan granted.
Recently, the Supreme Court of Canada denied leave to appeal of the Quebec Court of Appeal's decision in Ting-Sheng Chao v. Chi-Wei Lin2. In that case, the Quebec Court of Appeal upheld the trial court's decision enjoining the full reimbursement of a loan by Lin to Chao which included interest, a portion of which was charged at a criminal rate. The lower Courts based their decision on an acknowledgement of debt executed by Chao in favour of Lin on July 24, 2008 which only acknowledged Chao's liability for indebtedness equal to the principal amount of the capital advanced to Chao, free of interest (the "Acknowledgement"). The Acknowledgement was essential to the lower Courts' decision because the Courts declared that the Acknowledgement effected novation of the original terms of the loans (without considering that the verbal agreement between Lin and Chao included the payment of interest at a usurious interest rate) and entitled Lin, the lender, to capital reimbursement. In addition to the reimbursement of the capital, the lower Courts ordered the payment of interest at the legal interest rate. It would have been interesting to see the lower Courts' decision if Chao would have made partial payments, which included the payment of interest at a usurious interest rate.
Lin, the respondent, claimed that during a three-month period, he made multiple loans to Chao who promised to reimburse him an amount exceeding the capital amount. The loans at issue were $10,000 advanced on January 13, 2008 with a return of $15,000 (50%); $10,000 advanced on January 14, 2008 with a return of $16,500 (65%); $3,000 advanced on January 15, 2008 with a return of $4,950 (65%); $5,000 advanced on January 25, 2008, with a return of $8,250 (65%); $10,000 advanced on February 25, 2008, with a return of $13,000 (30%); $10,000 advanced on March 13, 2008, with a return of $13,000 (30%); and $3,000 advanced on March 25, 2008, with a return of $4,450 (48%) for an aggregate loan advance of $51,000. In return, Chao undertook to reimburse Lin for the larger aggregate principal amount of $75,150. The parties did not document in their agreement either the time or the amount of the advances.
Chao admitted having received those amounts from Lin, however she claimed that those amounts were remitted to her by Lin for investment purposes in a game strategy at the roulette in the Casino of Montreal. She contended that considering the loss and gains over time, no amount was owed to Lin.
The Superior Court did not analyze the rights and obligations of the parties based on the validity of the loans which, considering the return agreed upon by the parties, would have resulted in a usurious interest rate being charged. The Superior Court's single comment regarding the interest rates was the fact that Lin, an experienced financial planner, should have known that the gain promised by Chao would constitute the receipt of interest at an illegal interest rate. However, the judge ordered Chao to reimburse $51,300 to Lin, which equaled the capital amount of the loans made by Lin to Chao, less $2,000 already reimbursed by Chao. The judge's decision was based on the Acknowledgement, which was limited to the reimbursement of the capital of the loans made by Lin to Chao. In addition to the principal amount to be paid, the judge ordered the payment of interest at the legal rate and additional indemnity pursuant to Section 1619 of the Civil Code of Québec from the date of the institution of proceedings. At the time of the trial court decision, the legal rate and the additional indemnity was 6% per annum.
Quebec Court of Appeal
Chao appealed the Superior Court's decision claiming that the loan made to her by Lin was illegal considering the interest rate agreed upon at the time the loan was made, which, for a portion of the overall loan, was greater than 60%. The Québec Court of Appeal did not share the same opinion, and based on the Acknowledgement it upheld the trial court's decision. The Quebec Court of Appeal stated that the Acknowledgment had the effect of creating novation, such that the original loan and all of its terms and conditions no longer existed. Furthermore, the Québec Court of Appeal refused to declare the nullity of the loans based on Section 23323 of the Civil Code of Québec and therefore did not accept Chao's claim that she signed the Acknowledgement without free and enlightened consent considering Lin's threats. The Court of Appeal maintained the trial court's decision and Chao had to reimburse $51,300 to Lin less $2,000 already reimbursed, plus the interest at the legal rate and the additional indemnity pursuant to Section 1619 of the Civil Code of Québec.
Supreme Court of Canada. Chao appealed the Québec Court of Appeal decision and the Supreme Court of Canada dismissed the appeal without written reasons.
1 Section 347 of the Criminal Code stipulates that everyone who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate, is guilty of an indictable offence and liable to imprisonment for a term not exceeding five years or guilty of an offence punishable on summary conviction and liable to a fine not exceeding $25,000 or to imprisonment for a term not exceeding six months or to both.
2 2013 QCCS 5939; 2015 QCCA 1853; 2016 CanLII 47516 (CSC).
3In the case of a loan of a sum of money, the court may pronounce the nullity of the contract, order the reduction of the obligations arising from the contract or revise the terms and conditions of the performance of the obligations to the extent that it finds that, having regard to the risk and to all the circumstances, one of the parties has suffered lesion.