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III: 1&1 ... III o ::& ::& SECTION 10 OF THE INTEREST ACT z w V) w c:: 'W :'i: w c:: ode to (l f(lfmef c. Common Sense, Common Practice As a fanner's daughter having been brought up in the sweet rolling hills of Southwestem Ontmio, and always drawn to real estate, I took pmticulm' notice to Section 10 of the Interest Act when I first struted practicing law more thml 30 yem's ago. Section 10 of the Interest Act, for those who m'e not familim' with the same, was enacted in the 1880s to give relief to fmmers who were locked into long telm mortgages at exorbitant rates by money lenders who were "eating up the vitals of yeomalllY of the counhy" (House of Common Debates, Mm'ch 31, 1880). BY VERNA E. CUTHBERT LAWVER FASKEN MARTINEAU DUMOULIN s,e,n.c.r.i., s.r.1. there would not be any prepayment right? The n essence, Section 10(1) of the Interest fact is that due to the complexity of the Income Act limits the time that a borrower may be prevented from repaying a real Tax Act, a large number oftoday's lending transactions are conducted through non-corporate estate mortgage loan by allowing borentities such as partnerships or trusts. REITs rowers to prepay a mortgage loan at any time after 5 years from the date of the (real estate investment trusts), income trusts loan, by tendering 3 months interest and limited partnerships are "the players" of the present real estate industry, particularly payment plus the outstanding principal and interest on the loan. This favourable with foreign investors who Section was seen as a remedy wish their real estate investments to be for farmers who were caught tax efficient. From a tax point of view, with 20 or 30 year mortgages these non-corporate vehicles are no at exorbitant rates. Some 10 years doubt advantageous but from a Section later after the enactment of Section 10(2) point of view they create a dilem10(1), namely in 1890, Section 10(2) ma as trusts and partnerships under the was added to limit the class of borrowCivil Code of Quebec, and in many of ers that may rely on the prepayment the common law Provinces, are not VERNA E. CUTHBERT rights of Section 10(1). This was considered to be legal entities "persondeemed an economic necessity at the time as ne morale" and hence do not fall within the prolenders had become reluctant to provide long tective lending ambit set out in Section 10(2). term financing to railway companies in the face This in effect inhibits these vehicles from beneof the mandatory right of borrowers to prepay fiting from all time low interest rates now availtheir loans. Section 10(2) denies the right of a able for long term loans. Consequently, as corporation or a joint stock company, which ridiculous as it may be, we legal counsel , has given a mortgage or a hypothec on real whether acting for lender or borrower, may be property or has issued a debenture secured by required to design a series of structures in order a mortgage or a hypothec on real property, to to ensure that borrowers and lenders obtain prepay the loan under Section 10(1). what they bargained for, namely a long term Fast-forwarding to today, you may ask why is loan having a term greater than 5 years. the impact of Section 10 of particular signifiTo many on the outside these various struccance in today's financing markets? Are not tures may seem to be simply a "lawyer's game" most commercial lending transactions consince, as indicated above, with interest rates at ducted through corporate vehicles and hence historical lows surely the likelihood of prepay- ment would be slim. However, if you consider the increasing value of real estate and the lack of quality product for resale, it is not difficult to imagine that borrowers may be tempted to refinance their properties or to have an unencumbered title available for sale. The various structures chosen by counsel to protect lenders against the unintended impact of Section 10(1) may be as simple as having the property held in the name of a nominee corporation acting for the trust or partnership or may be much more complex. Some involve issuing a debenture by a corporation under the provisions of a universal hypothec, delivering the debenture to the lender and having the payment of the debenture guaranteed by a hypothec on real property given by a non-corporate entity (such as a trust or a partnership) property owner. Others may involve multi levels of transfers. Needeless to say, these structures can be complex and costly and the most frustrating aspect of these mechanisms is that without a final and binding court decision there is no certainty that any of them work. Take for example the relatively simple structure of a nominee corporation referred to above. It may be argued, and has been argued, that this simple structure does not work since a loan made to a nominee is really a form of mandate under Quebec law and therefore it is really the principal through its agent that has hypothecated the property. Consequently, if the principal is a non-corporate entity the nominee is incapable of contracting for a loan for greater than 5 years. The courts have addressed on numerous occasions Section 10 of the Interest Act. However, neither the Supreme Court of Canada nor the various appellate courts of L'ARTICLE 10 DE LA LOI SUR L'INTERET Larticle 10 de Ia Loi slIr l'illteret a ete adopte dans Ies atlnees 1880 afin de soulager les fermiers etouifes fin ancierement par eI(,S prNs h)pothecaires a long tenne it des taux d'interet exorbitants, En effd, I'aliicle 10(1) permet a nil emprunteur de remhourser un pret hypotlH$caire illll110hilier en tout kmps, 5 ans apres la date d1l prN, Ce droit de rem boursement avant echeance et apres une periode de ,5 ans est cq1('ndant nil" am: societes par actions ou persollnes morales, Oll en SOllll\leS-I\ O IlS e ll 2007 ? La realite d'aujourd'hui est que les transactions de fillancement se concluent par Ie biais cl'entites sans pe rsonnalite morale, comllle les societes ou les tJducies, qui, selon Ie Code civil dll Quebec, ne constituent pas des personnes morales, Par consequent, ces entites jUridiques peuvent difficil ement contracter des emprunts de plus de 5 <Ins et sou\'ent Ill' ppU\"ent pas beneficier de tallx d'interet peu eleves offelis pour les prHs it long term t', Ainsi, pour satisfaire les besoins des prNe urs et des elllprllnteurs et afi n d'eviter Ies repercussions de l'article 10(1) de la Lai sur "interet, les joueurs n'ont autre choix que d'etablir des stlllctures de tlnan ~e lll ent am: mecan ismes complexes qui s'averent coGtetLx et incertains . A ce jour, Ies tribll naux n'ont pas pH resoudre Ies d ifficultes soule\'ees par eet article, L"auteure sou met qu'i! est grand te mps que Ie gou\'ernement federal re~isite la Loi Stir "illten~t qui est de\'enue une loi arcliaique face allx \'ehieules legallx llloclernes, et qu'il reconnaisse les realites du monde des prNs commerciaux, notamment Ie fai t que les societes en commandi te, Ies fldllcies et autres entites sans personnalite jUli cliqlle n'ont pas besoin de la protection d'une Ioi cow;'lIe un ique ment pour proteger Ie conS01l1l11ateur, 48 Premieres en affaires AUTOMNE 2007 AUTOMNE 2007 Premieres en affaires 49 ode to Q fQ[me[ It is time to bring cel1ainty to our lending transactions so that both borrowers and lenders can be assured that they obtain what they bargained for. numerous provinces have been able to resolve completely the Section's difficulties through their respective interpretations. Hence, for more than 20 years, we have been dealing on a very real day-to-day basis with the implications of Section 10 of the Interest Act. Today, a borrower's counsel and a lender's counsel need to address a myriad of thorny issues. For example, • does the fact that th~ lender is aware that the loan is really being made to a non-corporate entity render any structure useless when faced with legislation that is of public order? • does the contemporaneous giving of an "offtitle" hypothec or mortgage by the non-registered owner or the intervention of an unregistered owner in the hypothec or mortgage "taint" the transaction? • would a structure, where there is a subsequent almost contemporaneous transfer of the property to and the assumption ofthe loan by a non-corporate entity, lead the court to look through the transaction as a loan being made to a non-corporate entity? TELlO RESSOURCES Votre ariena re de I empol There are no absolute answers to these myriad of questions but, as legal counsel to many financial institutions over the years, I can assure you that we legal counsel have well reasoned and thoroughly researched opinions on these matters. So where does that leave us? I suggest it is time for the federal government to clarify Section 10 of the Interest Act. It is time to recognize the realities of the commercial lending world, namely that limited partnerships, trusts and other non-corporate tax designed vehicles have no need of consumer protection legislation. It is consumers (and of course our farmers) who arguably require such protection (although even for them given the low interest rate environment, it may be questionable as to whether it is in their interest to deny access to long term rates). It is time to bring certainty to our lending transactions so that both borrowers and lenders can be assured that they obtain what they bargained for. It is time to make common sense common practice! 0 Depuis plus de 20 ans, Tele-Ressources est Ie partenaire privilegie de maintes entreprises canadiennes desireuses de relever les nombreux defis d'adaptation et de creativite propres ala gestion et au recrutement du capital humain. Grace asa structure ataille humaine, Tele-Ressources est en mesure de vous proposer rapidement des solutions de partenariats ala fois pertinentes, innovantes, economiques et integrees. Placement temporaire Recrutement permanent Gestion a la carte Impartition Retro-ActionMD