Team Members ()

Publications ()

News ()

Pages ()

Services ()

  • Our Team

    Our Team

    • Lawyers & Clerks
    • Leadership Team
    • Board of Directors
    • Human Resources
    • Marketing & Business Development
    • Paraprofessional Services
  • Our Services

    Our Services

    • Service Areas
      • Aboriginal and Indigenous Law
      • Administrative Law
      • Agribusiness
      • Banking and Financial Services
      • Bankruptcy and Insolvency
      • Business Disputes
      • Business Immigration
      • Class Actions
      • Construction Law
      • Corporate and Business
      • Corporate Finance and Securities
      • Corporate Governance and Compliance
      • Cross-Border Law
      • Education Law
      • ESG (Environmental, Social, & Governance)
      • Estates and Trusts
      • Environmental Law
      • Foreign Direct Investment
      • Franchise Law
      • Health Law
      • Insurance
      • Intellectual Property
      • Labour and Employment
      • Litigation
      • Maritime Law
      • Media & Entertainment
      • Municipal Law
      • P3 and Infrastructure
      • Pensions and Benefits
      • Privacy, Data Protection and Cyber Security
      • Public Law
      • Real Estate
      • Regulation of Professions
      • SISIP LTD Allowances Class Action
      • Tax
      • Technology
      • View All
    • Industries
      • Cannabis
      • Construction & Property Development
      • Emerging & High Growth Companies
      • Energy & Natural Resources
      • Financial Services
      • Government & Institutions
      • Insurance
      • Manufacturing, Processing & Sales
      • Mining
      • Ocean Economy
      • Private Clients
      • Technology
      • View All
    • More Services
      • MC Advisory
      • MC Legal Lab
  • Our Insights
  • Our Firm

    Our Firm

    • Our Values
    • Our History
    • Our Representative Work
    • Our Global Reach
    • Our News
    • Diversity & Inclusion
    • Collective Social Responsibility
    • Pro Bono Program
  • Our Careers

    Our Careers

    • Lawyer Opportunities
    • Business Professional Opportunities
    • Paralegal & Legal Assistant Opportunities
    • Summer Student & Articling Opportunities
    • Diversity & Inclusion
    • Collective Social Responsibility
  • 1.866.439.6246
  • Contact
  • Search
  • Stay Updated
  • Contact Us
  • LexMundi World Ready
  • Privacy Policy
  • http://linkedin.com
  • http://facebook.com
  • http://twitter.com
  • 1.866.439.6246
Home > Our Insights > A Penalty by Any Other Name: Supreme Court of Canada Says Interest Rate Increase Triggered by Default, Whatever It’s Called, Infringes the Interest Act in Krayzel Corp. v. Equitable Trust Co.
Publication

A Penalty by Any Other Name: Supreme Court of Canada Says Interest Rate Increase Triggered by Default, Whatever It’s Called, Infringes the Interest Act in Krayzel Corp. v. Equitable Trust Co.

Published:

May 9, 2016

Share

Print

On May 6, 2016, the Supreme Court of Canada decided that a mortgage imposing a higher interest rate in the event of default and reserving a lower rate in the event of no default – whether it’s called an incentive, a penalty or a rose – contravenes section 8 of the Interest Act, and is void. The decision doesn’t mean that a mortgagee or lender can’t offer a borrower an interest rate discount or some relief – but it does mean it must be very careful when drafting it. A mortgage lender that wants to give its clients and borrowers some type of interest rate discount that complies with section 8 must ensure the effect of the performance incentive doesn’t increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

In Krayzel Corp. v. Equitable Trust Co. The mortgagor granted the lender a mortgage at an interest rate of prime plus 2.875% per annum to secure a $27M loan. The parties subsequently entered two mortgage renewal agreements. The first, effective August 1, 2008, extended the mortgage term by seven months and provided for interest to be calculated at prime plus 3.125% per annum over the first six months of the term, and then 25% per annum over the seventh month. The second, effective February 1, 2009 but retroactive to one month before the first renewal agreement’s expiry, provided for:

  • Interest to be calculated at 25% per annum.
  • The borrower to pay monthly interest at the “pay rate” of either 7.5% or prime plus 5.25% – not the stated per annum rate of 25% – and for the difference between the amounts payable at the 25% rate and that at the lower rate to “accrue” to the loan.
  • If the borrower didn’t default, the lender would forgive this “accrued interest”.

On May 15, 2009, the mortgagor defaulted on the loan; the lender demanded repayment at the rate of 25% per annum. The mortgagor resisted on the basis the mortgage terms infringed section 8 of the Interest Act (Canada) on two basis: first, by a mortgage agreement term imposing a rate increase effective only where the mortgagor defaults by either failing to make prescribed payments at a lower “pay rate” of interest or by paying out the loan upon maturity; or by providing for a higher interest rate triggered solely by mere passage of time. The majority of the Supreme Court of Canada (six to three justices) ultimately decided the term is void and left the lender with a much lower rate of interest:

  • Substance over form. In an analysis of section 8 of the Interest Act, what matters is the effect – not the label (whether “interest rate” or “pay rate”) – of the charge. The purpose of section 8 is to protect landowners from charges “that would make it impossible for [them] to redeem, or to protect their equity”. It prohibits a lender from stipulating for, taking, reserving or exacting three classes of charges –  fines, penalties and interest rates – if the effect is to impose a higher charge on arrears than that imposed on the principal not in arrears. And it applies to discounts (incentives for performance) as well as to penalties for non-performance whenever the effect – regardless of the label – is to increase the charge on the arrears beyond the rate of interest payable on principal not in arrears.
  • A rate increase – whatever it’s called – triggered by default is void. A term imposing a rate increase triggered by default infringes section 8, whether it’s cast as imposing a higher rate penalizing default or as allowing a lower rate as a reward for the absence of default. The Court decided the effect of the 25% per annum interest rate under the second renewal mortgage in this case was to reserve a higher charge on arrears than that imposed on principal money not in arrears, and is void. The Court set the rate at the higher of 7.5% and prime plus 5.25%.
  • Time doesn’t change things. A rate increase triggered by the passage of time alone doesn’t infringe section 8 of the Interest Act.

This decision doesn’t mean that a mortgage lender can’t offer a borrower an interest rate discount or some relief – but it does mean it must be very careful when drafting it. Mortgages imposing a higher interest rate in the event of default and reserving a lower rate in the event of no default – whether it’s called an incentive, a penalty or a rose – contravene section 8 of the Interest Act, and will thus be void. A mortgage lender that wants to ensure it complies with section 8 while providing its clients and borrowers with some type of interest rate discount, can only do so if the effect of the performance incentive doesn’t increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears.


Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Banking & Financial Services Team to discuss this topic or any other legal issue.


McInnes Cooper has prepared this document for information only; it is not intended to be legal advice.  You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

© McInnes Cooper, 2016.  All rights reserved.  McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.

Share

Print
View Related Content

Related Services

  • Banking and Financial Services
  • Corporate and Business

Related Industries

  • Financial Services

Related Publications

View All Publications
  • New Brunswick Business Corporations Act: 10 Key Proposed Amendments

    Jan 27, 2023

    The New Brunswick government has proposed significant amendments to the New Brunswick Business Corporations Act. Bill 24 An Act to Amend the…

    Read More
    Publication
  • Should You Incorporate Your Cryptocurrency Activity? 6 Crypto Taxation FAQs

    May 20, 2022

    On May 22, 2010 (affectionately known as “Bitcoin Pizza Day”), a Floridian bought two Papa John's pizzas with Bitcoin. The day is famous…

    Read More
    Publication
  • Mortgage Deficiencies: NB Appeal Court Clarifies Use of “Market Value” & More

    May 2, 2022

    On April 14, 2022, the New Brunswick Court of Appeal released its decision in Royal Bank of Canada v. Estate of Susan Lynn Williams, revisiting…

    Read More
    Publication
  • N.L. Corporations Act: 3 Key Changes Effective April 1, 2022

    Feb 23, 2022

    On April 1, 2022, changes to the Newfoundland and Labrador Corporations Act proposed in Bill 24 An Act to Amend the Corporations Act will take…

    Read More
    Publication
  • Smart Contracts & Automated Contracts: 5 FAQs

    Jan 25, 2022

    More and more people are using smart contracts: the global smart contracts market was valued at USD $145M in 2020; it’s projected to be valued…

    Read More
    Publication
  • Court-Ordered CCAA Super-Priority Charge Can Outrank CRA: 5 Key Take-Aways

    Aug 5, 2021

    On July 28, 2021, the Supreme Court of Canada issued a decision protecting the status of the Companies’ Creditors Arrangement Act (CCAA) as a…

    Read More
    Publication
  • 3 Tips to Exercise Contractual Discretion in Good Faith

    Mar 1, 2021

    The Supreme Court of Canada continues to develop and clarify the organizing principle of good faith performance in contract law. In its 2014…

    Read More
    Publication
  • C.M. Callow Inc. v. Zollinger: 3 Tips to Honestly Exercise Contract Rights

    Jan 18, 2021

    The Supreme Court of Canada, in the 2014 case of Bhasin v. Hrynew, recognized a general organizing principle of good faith performance in…

    Read More
    Publication
  • Chandos Construction Ltd. v. Deloitte Restructuring Inc.: Anti-Deprivation Rule Exists in Bankruptcy Law

    Oct 5, 2020

    On October 2, 2020, the Supreme Court of Canada clarified the existence and application of the anti-deprivation rule in Canadian bankruptcy law.…

    Read More
    Publication
  • Canadian Governance Diversity Disclosure Obligations: Get on Board

    Sep 29, 2020

    This publication has been updated as at December 22, 2022. It’s a forgone conclusion that diversity in thought and in leadership makes good…

    Read More
    Publication
  • Top 5 Legal Considerations When Launching a FINTECH Startup

    Jun 12, 2020

    The financial technology (Fintech) industry uses technology to support and enhance financial and banking services.

    Read More
    Publication
  • Michael Melvin in The Franchise Voice | Legal Digest (Spring 2020)

    May 11, 2020

    McInnes Cooper partner Michael Melvin and Student-at-Law Myriam Whalen provide a detailed Legal Digest in the Spring 2020 Edition of The…

    Read More
    Publication
  • Callidus Capital Corp: Policing CCAA Proceedings

    May 11, 2020

    The Supreme Court of Canada recently released a much-awaited decision regarding the Companies’ Creditors Arrangement Act (CCAA). The CCAA is…

    Read More
    Publication
  • Coping with COVID-19: 3 Legal Remedies for Contractual Liability Risks

    Mar 10, 2020

    The global COVID-19 (a.k.a. Coronavirus or SARS-CoV-2) outbreak has implications for many commercial relationships, its evolving nature and…

    Read More
    Publication
  • 5 Key FAQs About Canadian Cannabis Company “Key Investor” Disclosure Requirements

    Jun 26, 2019

    Information disclosure is a key theme that emerges from Canada’s new cannabis regulatory regime: the government wants lots of information from…

    Read More
    Publication
  • “Register for Individuals with Significant Control”: 5 Key Facts CBCA Corporations Need to Know to Comply

    May 21, 2019

    As of June 13, 2019, private companies incorporated under the Canada Business Corporations Act (CBCA) must prepare and maintain a register of…

    Read More
    Publication
  • Incorporating a Business? Incorporating in N.S. Will Soon Be More Attractive

    Sep 10, 2018

    As of January 2019, incorporating a limited company in N.S. will be more economical. On September 7, 2018, the N.S. government announced it’s…

    Read More
    Publication
  • 3 Ways P.E.I.’s Business Corporations Act Modernized P.E.I. Corporations

    Jul 18, 2018

    This publication has been updated as at January 26, 2023. Prince Edward Island corporations were formerly governed by the P.E.I. Companies…

    Read More
    Publication
  • The More Modern & Transparent Canada Business Corporations Act (CBCA)

    Jun 12, 2018

    This publication has been updated as at July 8, 2022. Changes to the Canada Business Corporations Act (CBCA) over the past several years have…

    Read More
    Publication
  • Supreme Court of Canada Confirms Auditor Negligent & Liable for $40M in Livent v. Deloitte

    Dec 23, 2017

    Parents often threaten their children that if their behaviour did not improve they will get a lump of coal in their Christmas stockings. On…

    Read More
    Publication
  • Is cryptocurrency the right tool for your company to raise capital? 5 FAQs about Initial Coin Offerings (ICO)

    Dec 22, 2017

    Blockchain technology has already been a transformative force in a number of sectors. Its most prominent use to date has been as the…

    Read More
    Publication
  • Canada’s Private Corporation Tax Proposals: Year End Planning in the Face of Uncertainty

    Nov 20, 2017

    October 2, 2017 marked the end of the consultation period relating to the taxation of private corporation proposals the Department of Finance…

    Read More
    Publication
  • Supreme Court of Canada Confirms Cashing Banks Continue to Bear the Biggest Risk of Fraudulent Cheques in Teva Canada Ltd. v. TD Canada Trust

    Oct 31, 2017

    On October 27, 2017, the Supreme Court of Canada confirmed that a bank that pays out on a fraudulent cheque has the protection of section 20(5)…

    Read More
    Publication
  • Federal Crown’s Deemed Trust Priority for Unremitted GST/HST Survives Bankruptcy

    Aug 28, 2017

    Recently, the Federal Court of Appeal confirmed that a tax debtor’s bankruptcy does not extinguish the federal Crown’s priority to proceeds…

    Read More
    Publication
  • 5 Anti-Corruption Law Compliance Program Tips

    Aug 16, 2017

    In the not-so-distant past, Canadian enforcement of its anti-corruption and anti-bribery legal regime has been relatively laid-back. But the…

    Read More
    Publication
  • Proposed Changes to Business Income Tax Rules: A Gamechanger for Private Business Owners

    Aug 4, 2017

    On July 18, 2017, Canada’s Minister of Finance released proposed changes to the Income Tax Act (Canada) that, if implemented, will mark one of…

    Read More
    Publication
  • Steering clear of personal liability for oppression: Supreme Court of Canada offers guidance to corporate leaders in Wilson v. Alharayeri

    Jul 17, 2017

    A corporation does not always sail in calm or safe waters. Cash shortages, unattainable or unmet goals, Board disagreements over the best course…

    Read More
    Publication
  • Growing Your Business: 3 Structuring Solutions

    Jul 13, 2017

    When growing your business, you face many decisions, including choosing the business structure that is right for you. Your legal team can be…

    Read More
    Publication
  • Like it or Not: Supreme Court of Canada decides class action against Facebook can go ahead in B.C. – despite its terms of use in Douez v. Facebook, Inc.

    Jun 23, 2017

    On June 23, 2017, the Supreme Court of Canada decided that in a contest between the choice of forum clause in Facebook’s online terms of use…

    Read More
    Publication
  • Estate Planning in the Age of Medical Assistance In Dying (MAID)

    Apr 21, 2017

    In three years (lightning speed in the law), medically assisted dying went from being illegal to being legal. A great deal has changed, a great…

    Read More
    Publication
  • Cannabis Legalization in Canada: Seeds have sprouted, but the branches are still bare

    Apr 20, 2017

    On April 13, 2017, Canada’s federal government introduced legislation that, if passed into law, will legalize recreational cannabis in Canada.…

    Read More
    Publication
  • Daniel Watt and Sara Mahaney in Gard Update: Legal privilege in the corporate context in Canada

    Apr 6, 2017

    Adding a third jurisdiction to Gard Update’s comparison between privilege in the corporate context under U.S. and English law, McInnes Cooper…

    Read More
    Publication
  • 5 Steps for Compliant Disclosure on Social Media

    Mar 30, 2017

    Social media platforms, like Instagram, Twitter, LinkedIn, YouTube, Facebook and GooglePlus, arguably have more followers and are more closely…

    Read More
    Publication
  • Information Technology (IT) Contracts: 3 Key Lessons for Customers & Service Providers

    Mar 30, 2017

    There are very few examples of a Canadian court interpreting and opining on the provisions of an information technology contract. So the Ontario…

    Read More
    Publication
  • Confidentiality Risks of Doing Business With the Public Sector Just Got Riskier: Completed NS Access to Information Requests Go Online

    Jan 25, 2017

    Doing business with the public sector creates an often overlooked – but very real – risk that the confidential information a business…

    Read More
    Publication
  • Supreme Court of Canada Speaks on the Rectification of Transactions

    Dec 14, 2016

    On December 9, 2016, the Supreme Court of Canada clarified when a court can rectify a transaction that has had unintended tax consequences for…

    Read More
    Publication
  • Supreme Court of Canada Warns Judgment Creditors: Implied Consent is Enough to Disclose Discharge Statement in Royal Bank of Canada v. Trang

    Nov 22, 2016

    On November 17, 2016 the Supreme Court of Canada decided a mortgagee has the mortgagor’s implied consent to disclose its discharge statement…

    Read More
    Publication
  • NB Court Clarifies Mortgage Lenders’ Rights on Default: 5 Steps for NB Mortgage Lenders to Consider

    Sep 23, 2016

    On September 15, 2016, the New Brunswick Court of Appeal clarified the province’s statutory regime governing both the exercise of a lender’s…

    Read More
    Publication
  • Ontario Follows Suit With Securities Act Changes Tightening the Belt on Insider Trading Regulation

    Aug 15, 2016

    The standards expected of market participants are steadily increasing in response to demand to address white collar crime – including…

    Read More
    Publication
  • Deciding Between Federal & Provincial Incorporation: 5 Key Considerations

    Aug 9, 2016

    This publication has been updated as at January 27, 2023. A key legal decision in starting or growing your business is choosing the…

    Read More
    Publication
  • NS Dives into Pooled Registered Pension Plans (PRPP)

    Jun 30, 2016

    As of June 25, 2016, provincially regulated workers and employers in Nova Scotia, Quebec, BC and Saskatchewan can participate in Pooled…

    Read More
    Publication
  • Common Ground: Retail & Commercial Condominium Financing

    Jun 30, 2016

    The condo real estate market, both retail and commercial, is hot. But condo developers and unit buyers need funding. Here’s the legal…

    Read More
    Publication
  • Supreme Court of Canada Decides Income Tax Act Sections are Unconstitutional – and Strengthens Solicitor-Client Privilege in Canada (Attorney General) v. Chambre des notaires du Québec & Canada (National Revenue) v. Thompson

    Jun 6, 2016

    On June 3, 2016, the Supreme Court of Canada, in two related decisions, strengthened the legal protection of solicitor-client privilege in…

    Read More
    Publication
  • NS Poised to Take the Plunge into Pooled Registered Pension Plans (PRPPs)

    May 5, 2016

    NOTE: As of June 25, 2016, provincially regulated workers and employers in Nova Scotia, Quebec, BC and Saskatchewan can participate in Pooled…

    Read More
    Publication
  • 5 Key Changes to Early Warning Reporting System Effective May 9, 2016

    May 2, 2016

    Amendments changing the early warning reporting system take effect on May 9, 2016, provided all necessary approvals are obtained (except in…

    Read More
    Publication
  • New Early Warning Reporting System Exemptions for Certain Securities Lending Arrangements Effective May 9, 2016

    May 2, 2016

    Amendments changing the early warning reporting system take effect on May 9, 2016, provided all necessary approvals are obtained (except in…

    Read More
    Publication
  • The Small Business Deduction: Key Proposed Changes & Strategic Solutions

    Apr 12, 2016

    Federal Budget 2016 proposed to significantly reduce the benefit of and access to the Small Business Deduction. The Small Business Deduction…

    Read More
    Publication
  • Doing Business With the Public Sector: Key Confidentiality Risks & 3 Risk Management Strategies

    Mar 24, 2016

    When a business responds to a public sector Request for Proposal or Expression of Interest (both of which we’ll refer to as an RFP for these…

    Read More
    Publication
  • New Kid on the Block: Crowdfunding Joins Traditional Equity-Based Funding Options for Startups & SMEs

    Oct 19, 2015

    Access to sufficient capital to fund operations, research and development, and other costs is a key challenge for start-ups and for some small…

    Read More
    Publication
  • The Value of Hindsight – 3 Steps to Help Financial Advisors Avoid Client Claims and Complaints

    Mar 30, 2015

    Hindsight is 20/20. Lawyers can’t always predict the outcome of a legal claim. But when a dispute between an investment client and her…

    Read More
    Publication
  • Thou Shalt Not Lie: SCC Recognizes New Duty of Honesty in Contract Law in Bhasin v. Hrynew

    Nov 14, 2014

    On November 13, 2014, the Supreme Court of Canada (SCC) effected a significant development in Canadian contract law by recognizing the…

    Read More
    Publication
  • The Top 5 Corporate Governance Best Practices That Benefit Every Company

    Sep 16, 2014

    This publication has been updated as at August 25, 2022. Many believe that only public companies or large, established companies with many…

    Read More
    Publication
  • Share Purchase Transactions: Tips For Lenders

    Apr 29, 2014

    Lenders are often faced with a situation where a customer (Borrower) approaches them for funds to complete an acquisition of the shares of a…

    Read More
    Publication
  • Legal Update: Risky Trading – Insiders and Potential M&A’s

    Nov 1, 2013

    Recent decisions of securities regulators and amendments to Canadian securities laws demonstrate regulators' lowered tolerance for insiders who…

    Read More
    Publication
  • General Security Agreements: Tips & Traps

    Aug 28, 2013

    A general security agreement (GSA) is the most common form of personal property security used in the Atlantic Provinces to secure commercial…

    Read More
    Publication
  • Franchise Questions: What do I need to know about moving into new markets?

    Jun 7, 2013

    In Franchise Canada’s Spring 2013 “Viewpoints” feature, McInnes Cooper franchise lawyer Michael Melvin answers this question for…

    Read More
    Publication
  • A Closer Look at the Regulations Under the New Brunswick Franchises Act

    Oct 1, 2010

    McInnes Cooper franchise lawyer Michael Melvin highlights some of the significant features of the Disclosure Documents Regulation and the…

    Read More
    Publication
  • What are electronic disclosure documents and why and how may they be used?

    May 31, 2010

    In Franchise Canada’s May/June 2010 “Ask A Legal Expert” feature, McInnes Cooper franchise lawyer Michael Melvin answers this question for…

    Read More
    Publication

Stay Updated

Subscribe to McInnes Cooper to stay current with our leading insights on legal updates, trends, news, events, and services.

Connect With Us:
  • Follow us on Twitter @mcinnescooper
  • Like us on Facebook @mcinnescooperlaw
  • Join us on LinkedIn @mcinnes-cooper
  • 1.866.439.6246
  • Privacy Policy
  • Copyright © 2023 — McInnes Cooper
Lex Mundi Logo MC Advisory Logo