Can a financial institution’s “overdraft charges” be considered criminal “interest”? That was the question facing the B.C. Court of Appeal in Bodnar v. Community Savings Credit Union, a class action alleging that several B.C. credit unions’ fees associated with assessing customers’ overdraft requests constituted “interest” under the Criminal Code. The B.C. Court of Appeal, confirming the wide breadth of the definition of “interest” under s. 347 of the Criminal Code, answered in the affirmative. Bodnar stands as an important reminder for Canadian financial institutions and businesses engaged in extending credit that any fees charged in relation to that process are at risk of being characterized as criminal interest, regardless of the intent of the fees and whether or not the credit arrangement resembles a “loan-shark” situation.
Several B.C. credit unions entered into agreements with their members that gave members the ability to submit overdraft requests. Should a member tender a cheque or other financial instrument in an amount exceeding the amount available in the member’s account, the credit union would assess whether to honour the overdraft or instead reject the instrument due to insufficient funds. That assessment process was both time-sensitive and labour-intensive. Accordingly, each credit union charged an overdraft fee exceeding $5 that was levied whether or not the credit union ultimately decided to honour the overdraft.
In December 2004, Mr. Bodnar brought a class action against the credit unions on behalf of their members who had paid the fee and had ultimately seen their overdrafts honoured. He alleged that the fees amounted to criminal interest under the Criminal Code. The action was certified in September 2014. Joined by another representative plaintiff, Mr. Bodnar then brought a summary trial application seeking determination of a common issue: Did the overdraft fees constitute “interest” under the Criminal Code, such that they might theoretically form the basis for a finding of a criminal interest rate?
The relevant provision of the Criminal Code, s. 347, stipulates that “every one who enters into an agreement or arrangement to receive interest at a criminal rate, or receives payment or partial payment of interest at a criminal rate,” is guilty of an offence. “Interest” is defined as:
the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement … but does not include any … overdraft charge … .
“Overdraft charge” is defined as “a charge not exceeding five dollars for the creation of or increase in an overdraft”.
Summary Trial Decision
The credit unions’ main argument before the summary trial judge was that the fees were not paid “for the advancing of credit” but rather “for” the assessment of whether to advance credit. They emphasized that the fees were simply administrative fees charged whether or not the overdraft was ultimately honoured.
The judge rejected this argument, finding that the credit unions’ decision to levy the fees whether or not they ultimately decided to honour the overdraft was merely a business decision and had no bearing on whether the fees constituted “interest” under the Criminal Code. She concluded that if “the fee was in respect of advancing funds, it falls within the definition of interest.”
The judge reasoned that when a credit union honours a member’s overdraft, it advances credit to that member. Accordingly, unless the fees could be characterized as “overdraft charges” by not exceeding $5, they would constitute “interest”. Given that the fees all exceeded $5, they were not “overdraft charges” and therefore could only be considered “interest”.
Finally, the judge rejected the credit unions’ alternative submission that even if the fees constituted “interest”, the first $5 of each fee should be excluded. She held that the definition of “interest” did not contemplate such an exclusion. Rather, once a charge or expense was found to be “interest”, the definition captured the entirety of the charge or expense.
In the result, the judge declared that the overdraft fees constituted “interest” under the Criminal Code. The credit unions appealed.
Court of Appeal Decision
The Court of Appeal considered two main issues:
- Were the overdraft fees “interest” under the Criminal Code?
- If so, should the first $5 of each fee be excluded?
Were the Overdraft Fees “Interest”?
The Court began by reviewing the leading case on s. 347: Garland v. Consumers’ Gas Co. There, the Supreme Court of Canada held that a late payment penalty imposed on natural gas customers met the definition of “interest” under s. 347. The Supreme Court described the word “interest” under s. 347 as an “an extremely comprehensive term”, capturing many transactions “which would not be considered interest proper at common law or under general accounting principles”. Further, the purpose of the provision’s broad scope is “to prevent creditors from avoiding the statute simply by manipulating the form of payment exacted from their debtors”. Thus, the question of whether a particular charge or expense constitutes “interest” is one of substance, not form, and whether the charge or expense was intended to serve as “interest” is irrelevant.
Based on the guidance offered in Garland, the first question before the Court of Appeal was whether the fees were payable “for the advancing of credit”. Referring to the language used in Garland, the Court stated that this question turned on whether, “in substance”, the fees were “incurred by customers to receive credit”.
The Court answered this question in the affirmative. It rejected the credit unions’ submission that it made a difference that the fees were intended to cover the costs of assessing whether to honour an overdraft. Rather, the Court emphasized, what mattered was whether the fees, in substance, increased the members’ effective cost of borrowing, regardless of intent.
Furthermore, this conclusion was unaffected by the fact that the credit unions had levied the fees whether or not the overdraft was ultimately honoured. The credit unions’ policy of levying the fees in either event was a “business choice” that had no bearing on the characterization of a fee charged to a member whose overdraft was ultimately honoured.
Accordingly, the Court concluded that the fees constituted “interest” under the Criminal Code.
Should the First $5 of the Fees Be Excluded?
The Court took the definitions of “overdraft charge” and “interest” to be mutually exclusive: a given charge or expense could be one or the other, but not both. The Court reasoned that since it had already concluded that the fees constituted “interest”, and there was nothing in the relevant statutory definitions that would permit the first $5 of “interest” to be excluded as an “overdraft charge”, no such exclusion could apply. To allow such an exemption, the Court reasoned, would be “to read a provision in to the criminal interest rate scheme that Parliament did not include.”
Accordingly, the Court concluded that the entire amount of the fees constituted “interest”, and no exclusion for the first $5 could be made. In the result, it dismissed the appeal.
Bodnar illustrates the wide breadth of the word “interest” under s. 347 of the Criminal Code. As noted in the Court’s reasons, the provision is not restricted to the “loan-sharking context”; in fact, “the section has most often been applied to commercial transactions which bear no relation to traditional loan-sharking arrangements”. Though the credit unions revised their overdraft fee policies years ago to ensure compliance with the Criminal Code, Bodnar stands as a reminder that any charge or expense, regardless of its intent, may be susceptible to the prohibition contained in s. 347 if, among other things, it is paid or payable “for the advancing of credit” under an agreement or arrangement, subject to limited exceptions. Accordingly, Canadian financial institutions and businesses that extend credit in one way or another should review their policies carefully to ensure they do not inadvertently fall offside s. 347.
Payday loan companies should take note that under s. 347.1(2) of the Criminal Code, payday loan agreements are generally exempt from the prohibition under s. 347, provided three conditions are met:
- the amount of money advanced under the agreement is $1,500 or less and the term of the agreement is 62 days or less;
- the person making the loan is licensed or otherwise specifically authorized under the laws of a province to enter into the agreement; and
- the province has legislation in place that protect recipients of payday loans and that provide for limits on the total cost of borrowing under the agreements.
As virtually every province in Canada has enacted legislation regulating payday loans, such loans are not subject to s. 347 but are instead subject to the payday loan legislation in the province in which the loan is offered.