Solar Power v. ClearFlow – Ontario Superior Court finds that a “discount fee” was interest

A typical loan made by the lender (ClearFlow) to the borrower bore base interest rate of 12% p.a. compounded monthly, an administration fee that was charged when the Loan was initially advanced, and each time it renewed (of, say, 1.81% of the loan balance), and a “discount fee” of 0.003% per day of the outstanding principal. McEwen J found that the administration fee was not interest (it “was compensation for the considerable costs incurred to negotiate, conduct due diligence, set-up, and administer the Loans, and was not simply compensation for ClearFlow not having the use of the money”).

However, the discount fee was interest – as to which he stated his acceptance of the conclusion in Sherway Centre that “an amount paid as compensation for the use of money for a stipulated period can be said to accrue day-to-day.”

He went on to find that because the discount fee was interest, s. 4 of the Interest Act capped the total loan interest at 5% p.a. A clause, that purported to comply with s. 4 by effectively providing a verbal formula for multiplying the stipulated rate by 365 (or 366, as applicable), did not suffice. Furthermore, the formula was defective in that it excluded the effect of compounding.

For a borrower whose business in not money-lending or something similar, the distinction between a fee and interest informs whether deductibility of a lender's charge is to be analysed under s. 20(1)(e) or (e.1), or under s. 20(1)(c).

Neal Armstrong. Summary of Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONSC 7286 under s. 20(1)(c).