Solar Power. v. ClearFlow - Ontario Court of Appeal confirms that a daily discount fee had the 3 attributes of 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. 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:
[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.
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 ONCA 727 under s. 20(1)(c).