In Garland v. Consumers Gas Co.,Mr. Garland took his fight for the return of late payment penalties paid on his gas bills all the way to the Supreme Court of Canada, and prevailed. The Supreme Court concluded that such penalties contravened the criminal interest provisions in the Criminal Code. In another case, Transport North American Express Inc. v. New Financial Solutions,the Supreme Court in a split decision read down the effective rate of interest from over 90 per cent per annum to 60 per cent per annum, the maximum permitted. The generally favourable reception Mr. Garland received reflects the nature of his transaction: a consumer contract that was not "negotiated." In such cases, serious consequences for violations of section 347 are likely. By contrast, where the court is faced with negotiated commercial contracts between two relatively sophisticated parties (as in Transport North American Express), the court has been more willing to find a solution that preserves interest for lenders who may, nonetheless, be in breach of the Criminal Code.

What both cases highlight is how broad a definition courts are prepared to give to the term "interest." In section 347, "interest" is defined to mean "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," with exceptions made for certain specific types of fees and charges, most notably insurance and overdraft charges.

The credit agreement for $500,000 that Transport North American Express Inc. entered into with New Financial Solutions had the following provisions:

• interest at a rate of 4 per cent per month, calculated daily and payable monthly in arrears (i.e. 60.1 per cent per annum);
• a monthly monitoring fee of $750;
• a 1 per cent standby fee;
• payment of legal and other fees; and
• a commitment fee of $5,000.

The trial judge found-and the Supreme Court agreed-that all the payments with the exception of the standby fee were "interest" under the wide definition of the term in section 347(2) of the Criminal Code.

Other recent case law illustrates the latitude with which the courts have interpreted the term "interest" for the purposes of the Criminal Code. In each of these cases, the underlying transaction was a fairly straightforward loan with what appeared to be an equity component. What otherwise might have been characterized as a return on an equity investment was, however, considered by the courts to be "interest" for the purposes of section 347. In 677950 Ontario Ltd v. Artell Developments Ltd (1992), the lender received a second mortgage in the amount of $1,675,000 to secure a $375,000 loan, plus $1,300,000, representing 50 per cent of the estimated profits to be earned from the eventual development and resale of the underlying real estate. The trial judge concluded that the $1,300,000 represented a collateral arrangement for profit-sharing that was unrelated to the loan. The Ontario Court of Appeal disagreed, on the basis that the term "interest" is "all inclusive and covers charges of any kind," including the sum in question. The Supreme Court of Canada confirmed the Ontario Court of Appeal's analysis.

Similarly, in Boydv. International Utility Structures Inc. (2001), the BC Supreme Court considered a loan to a corporate borrower to finance the acquisition of technology to be used in the manufacture of metal utility poles. In addition to interest on the loan, the borrower was entitled to a royalty payment for every pole made with the technology. The court concluded that the royalty payments, which survived the repayment of the loan, did not represent a profit-sharing equity relationship, but were "in substance if not in form, charges paid or payable for the advancing of the loan" and hence "interest."

These cases serve to confirm the importance of calculating all components of compensation paid to a lender in connection with a loan-including, for example, interest, monitoring fees, commitment or other fees, legal-expense reimbursement, nominal cost shares or warrants and other profit-sharing payments-to ensure that the 60 per cent per annum threshold is not exceeded.