Delayed Payment Penalties:

Question: Is a late fee on a loan or unpaid invoice in Ontario illegal if it effectively charges interest above 60% per year?

Answer: A late fee can become an unlawful penalty in Ontario when it functions like disguised interest on overdue payments that exceeds the 60% per annum threshold in Criminal Code, R.S.C. 1985, c. C-46, s. 347; courts look at how the charge is calculated, even if the contract labels it as a “late fee,” and a severability clause or a genuine link to actual collection disbursement costs may affect the analysis.  For clear next steps, Legacy Legal Services can help legal professionals assess your contract terms and payment calculations in a practical, consumer-focused way, and you can call (226) 246-3825 to discuss your situation.

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When Is a Late Fee An Illegal Penalty

A business will sometimes use the threat of additional fees as a financial motivator to encourage customers to make timely payments; however, a contract may become unlawful and unenforceable if a contract contains an illegal late fee.  A late fee is illegal, if the amount violates the Criminal Code, R.S.C. 1985, c. C-46, section 347, wherein it is prescribed that charging interest rate beyond a rate of sixty (60%) percent per annum is a criminal act.   Any contract that prescribes an interest rate in excess of the maximum allowable sixty (60%) percent is therefore an illegal contract; Garland v. Consumers' Gas Co., [1998] 3 S.C.R. 112.  Do note that a severability clause may save the entire contract from becoming void.

While a business may attempt to disguise interest as a late fee, courts will view a late fee for what a late fee is - an interest charged as an additional amount of money due, and arising from, the extension of credit for an outstanding balance of monies owed.  An exception applies if it is shown that the late fee genuinely correlates to the recovery of a disbursement cost incurred in the collection of the debt rather than as an additional fee correlated to the further advancement of the debt; De Wolf v. Bell ExpressVu Inc., 2009 ONCA 644; Garland, supra.

As an example, consider the business that charges a ten 00/00 ($10.00) dollar late fee when a monthly payment of one hundred 00/00 ($100.00) is overdue by seven (7) days.  This late fee actually calculates as a ten (10%) percent additional charge upon the actual amount due.  This ten (10%) percent late fee imposed upon a one week overdue account produces an exorbitant, and unlawful, five hundred twenty (520%) percent annual interest rate.  Note that the fact that this interest appears lower, and actually does calculate lower, over a greater period of time, it is the trigger date that causes the unlawfulness.  While the $10.00 late fee charged on the 7th day is unlawful, it might appear that if six months later the same $10.00 is still outstanding that the amount, by then, is a lawful twenty (20%) percent interest; however, the very fact that the amount was unlawful when originally imposed continues to make the amount unlawful.  What was at first unlawful fails to become lawful.

Conclusion

When an agreement contains a clause for late fees or other form of delayed payment penalty, such is viewed as an attempt to charge interest on monies due.  Where the late fees, as a disguised interest, calculate to an interest rate beyond the legally allowable interest rate, the late fees are viewed as unlawful.  Furthermore, even if the interest rate may be legal, late fees or a payment penalty that goes beyond the costs of recovering the genuine amount due are, generally, deemed unenforceable.