When must a seller note state a yearly interest rate?

A seller note, also called a vendor take-back, is the seller’s own financing of part of the price. BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing, and that its business purchase loan can help refinance seller financing. The rate on the note is a matter for the parties, but the federal Interest Act controls how some rates must be written down. Section 4 applies to any written contract, which includes a note.

What section 4 requires

Where interest is made payable at a rate per day, week or month, or for any period less than a year, section 4 says no interest above the annual percentage named in the section is chargeable, payable or recoverable on any part of the principal unless the contract contains an express statement of the yearly rate or percentage to which the other rate is equivalent. A note that quotes interest per month and nowhere says what that is per year is the situation the section targets.

What follows if the statement is missing

The seller does not lose interest altogether, because the section limits what can be charged and recovered to the annual rate it names. Section 5 adds that any sum paid as interest that was not chargeable under section 4 may be recovered back or deducted from any principal or interest payable under the contract. For a seller that can mean earning less than the note promised; for a buyer, a possible credit.

When section 4 does not apply

Section 4 begins by excluding mortgages on real property and hypothecs on immovables. If the note is secured by a mortgage on real property, section 4 does not apply; the Act’s separate mortgage provisions, starting at section 6, are the ones to check. A rate stated as a yearly rate from the start is not what section 4 targets, but how the note then calculates it is worth a lawyer’s read.

The Criminal Code ceiling

Separately, section 347 of the Criminal Code makes it an offence to enter into an agreement or arrangement to receive, or to receive, interest at a criminal rate (it excludes transactions under the Tax Rebate Discounting Act), and defines a criminal rate as an annual percentage rate above a set level on the credit advanced. It counts interest broadly, as all the charges and expenses paid or payable for advancing credit, including fees, fines, penalties and commissions, but not repayment of the credit advanced, insurance charges or official fees, among other exclusions. A lawyer can check how both rules apply to a particular note.