Seller note interest rate (VTB interest rate)

When a seller finances part of the price, BDC describes the seller agreeing to be paid a portion of the purchase price over a period of time, with interest. The rate is a term of the note, alongside the repayment schedule and any security. See vendor take-back financing explained for how the pieces fit together.

Federal rules that touch the rate

• Criminal Code s.347 makes it an offence to enter or offer to enter into an agreement to receive interest at a criminal rate, or to receive a payment of interest at that rate. The section defines both terms, and interest includes fees and other charges. Subsection (8) sets an exception. Read the current text.
• Income Tax Act s.12(1)(c) brings interest received or receivable into income, to the extent not included in a preceding year, subject to subsections (3) and (4.1).
• Income Tax Act s.20(1)(c) sets the conditions for deducting interest the borrower is legally obliged to pay on borrowed money used to earn business or property income, or on an amount payable for property acquired for that purpose, with exclusions such as property earning exempt income, and only up to a reasonable amount, subject to other limits in the Act, including some in section 18.

What to check or ask

Ask whether the rate is fixed or can change, when interest is payable, and whether the note is secured. If the buyer’s bank also lends, ask how the seller’s claim ranks against the bank’s. Ask whether early repayment carries a prepayment penalty. An accountant can say how the interest is taxed for each party.