Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONCA 727

The typical loan agreement for a loan (a “Loan”) by ClearFlow to Solar Power Network (“SPN”) provided for a base interest rate of 12% p.a. compounded and calculated monthly, an administration fee that was charged when the Loan was initially advanced, and if it was not paid off, again each time it renewed (either 1.81% or 3.55% of the balance, depending on the terms of the specific Loan Documents), and a “discount fee” of 0.003% of the outstanding principal of the Loan which was calculated on a daily basis for every day that the Loan was outstanding. The application judge had found that the discount fee (albeit, not the administration fee) constituted interest. As such “interest” was not expressed as a numerical annual rate, s. 4 of the Interest Act was not complied with, so that all interest under the Loan was capped at 5% p.a.

After confirming the finding below that the administration fee was not interest, Sharpe J.A. also went on to confirm that the discount fee was interest, stating (at paras. 42-43):

[McEwen J] found that the discount fee was not linked to the creation or renewal of a loan, the amount of the fee did not vary according to the administrative work required by the loan as in the case of the administrative fee, and the fee was charged at a daily fixed rate unrelated to any ongoing or specific events… and concluded that “[t]he layering of an additional charge, accruing day-to-day without any demonstrable link to the actual management of the Loan, cannot reasonably be described as a fee”.

It was open to [him] to conclude that the discount fee bore all the hallmarks of the test for interest: it was consideration or compensation for the use of money, it related to the principal amount, and it accrued over time.

However, Sharpe J.A. went on to find that the disclosure of the “rate” of such interest through the provision of a simple formula complied with s. 4, and also found (at para. 83) that s. 4 merely “imposes a 5% annual cap on non-annualized interest but does not affect an interest rate that is already less than 5% when annualized.”

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. Sharpe JA confirmed the finding of the application judge that the administration fee was not interest, as well as his finding that the discount fee was interest, stating (at paras. 42-43):

[T]he amount of the fee did not vary according to the administrative work required by the loan as in the case of the administrative fee, and the fee was charged at a daily fixed rate unrelated to any ongoing or specific events… [It] bore all the hallmarks of the test for interest: it was consideration or compensation for the use of money, it related to the principal amount, and it accrued over time.

He went on to find that the disclosure of the “rate” of such interest through the provision of a simple formula complied with s. 4 of the Interest Act. For this and other reasons the borrower was unsuccessful in its arguments that the total interest under the loan was subject to a 5% cap imposed under s. 4.