Interest Rate Considerations

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At least two points relating to interest rates need to be considered when structuring Canadian securitization transactions. First, under the Interest Act (Canada), most legal agreements that contemplate the payment of interest must include an express statement of the annual interest rate. This is relevant for many legal agreements in the securitization space, as interest is often calculated on the basis of a 360-day year, rather than a 365-day year. In these agreements, it is common to include a provision that sets out a formula for converting the non-annual rate of interest into an annual rate of interest. The omission of this type of provision is significant, as the Interest Act (Canada) provides that a failure to state that the annual rate of interest means that a creditor is only entitled to charge interest at a rate of 5% per annum.