Small Business Loans Regulations, 1993 (SOR/93-169)

Short Title

1 These Regulations may be cited as the Small Business Loans Regulations, 1993.

Interpretation

2 In these Regulations,

Act

Act means the Small Business Loans Act; (Loi)

health care industry

health care industry means a business enterprise of a type found under the heading Major Group 86 - Health and Social Service Industries, of the Standard Industrial Classification, 1980 published by Statistics Canada; (industrie des soins médicaux)

hospitality industry

hospitality industry means a business enterprise of a type found under the headings Major Group 91 - Accommodation Service Industries, and Major Group 92 - Food and Beverage Service Industries, of the Standard Industrial Classification, 1980 published by Statistics Canada; (industrie hôtelière)

mini-storage industry

mini-storage industry means a business enterprise of a type found under the heading 479 - Other Storage and Warehousing Industries, of the Standard Industrial Classification, 1980 published by Statistics Canada; (industrie du mini-entreposage)

prescribed class

prescribed class means one of the classes of loans prescribed pursuant to section 6; (catégorie)

responsible officer of the lender

responsible officer of the lender means

• (a) the manager or assistant manager of the lender or a branch thereof,

• (b) the credit committee of the lender or a branch thereof, and

• (c) any person duly authorized by the lender to supervise the granting of loans. (responsable du prêteur)

Equipment

3 The following equipment is prescribed as included in the definition equipment in section 2 of the Act:

• (a) computer software;

• (b) any ship, boat or other vessel used or to be used in navigation; and

• (c) water supply systems.

Application

4 Subject to section 24, these Regulations apply to a guaranteed business improvement loan made after March 31, 1993.

Fiscal Period

5 Where the fiscal period of a business enterprise is less than 365 days, the fiscal period of the business enterprise shall, for the purposes of the Act, begin on the first day of the fiscal period and end on the three hundred and sixty-fifth day.

Prescribed Classes of Guaranteed Business Improvement Loans

6 The following classes of guaranteed business improvement loans are hereby prescribed:

• (a) land loans;

• (b) equipment loans;

• (c) premises loans; and

• (d) fee loans.

Land Loans

7 A loan is a land loan where

• (a) it is made to a proprietor who

  • (i) will become the owner of land necessary for the operation of a business enterprise for the purposes of financing the purchase of land, including any building or structure on the land, or

  • (ii) is or will become the owner or tenant of land, including any building or structure on the land, necessary for the operation of a business enterprise for the purpose of financing the acquisition of existing improvements to the land, including any building or structure on the land;

• (b) it is made

  • (i) during the period beginning on April 1, 1993 and ending on December 31, 1995 in an amount that does not exceed 100 per cent of the cost of the purchase or acquisition, or

  • (ii) after December 31, 1995 in an amount that does not exceed 90 per cent of the cost of the purchase or acquisition; and

• (c) it is made in respect of land, including any building or structure on the land, that is necessary for the operation of the business enterprise, that is not intended, within three years after the day on which the loan is made, for

  • (i) resale; or

  • (ii) lease or sublease, except in the case of business enterprises in the hospitality industry, health care industry and mini-storage industry.

Equipment Loans

8 A loan is an equipment loan where

• (a) it is made to a proprietor for the purpose of financing the purchase, installation, renovation, improvement or modernization of equipment necessary for the operation of a business enterprise; and

• (b) it is made

  • (i) during the period beginning on April 1, 1993 and ending on December 31, 1995 in an amount that does not exceed 100 per cent of the cost of the purchase, installation, renovation, improvement or modernization of the equipment, other than the cost of labour attributed to the proprietor, or

  • (ii) after December 31, 1995 in an amount that does not exceed 90 per cent of the cost of the purchase, installation, renovation, improvement or modernization of the equipment, other than the cost of labour attributed to the proprietor.

Premises Loans

9 A loan is a premises loan where

• (a) it is made

  • (i) to a proprietor who is or is to become the owner of premises necessary for the operation of a business enterprise for the purposes of financing the construction or purchase of the premises, or

  • (ii) to a proprietor who is or is to become the owner or tenant of premises necessary for the operation of a business enterprise for the purposes of financing the renovation, improvement or modernization of the premises;

• (b) it is made in respect of premises that are not intended, within three years after the day on which the loan is made, for

  • (i) resale, or

  • (ii) lease or sublease, except in the case of business enterprises in the hospitality industry, health care industry and mini-storage industry;

• (c) it is made

  • (i) during the period beginning on April 1, 1993 and ending on December 31, 1995 in an amount that does not exceed 100 per cent of the cost of the construction, purchase, renovation, improvement or modernization of the premises, other than the cost of labour attributed to the proprietor, or

  • (ii) after December 31, 1995 in an amount that does not exceed 90 per cent of the cost of the construction, purchase, renovation, improvement or modernization of the premises, other than the cost of labour attributed to the proprietor.

Fees Loan

10 A loan is a fees loan where it is made to a proprietor for the purpose of financing the payment of the fee required by paragraph 3(4)(b) of the Act in conjunction with a loan referred to in section 7, 8 or 9.

Appraisal

11 Where a borrower uses, or intends to use, the amount of a loan of a prescribed class, or a portion of the loan, to acquire assets from a person not at arm’s length, within the meaning of that term in the Income Tax Act, the lender shall, at the time of making the loan, require an independent appraisal of the value of those assets and shall base the amount of the loan on the lesser of the amount of the appraisal and the cost of the purchase or acquisition.

Terms of Loans of a Prescribed Class

• 12 (1) A lender shall, at the time of making a disbursement on a loan of a prescribed class, require that the borrower sign a promissory note that sets out the principal amount of the disbursement, the rate of interest payable on the loan and the repayment terms.

• (2) Where the repayment terms set out in the promissory note referred to in subsection (1) provide that a loan is payable by instalments, at least one instalment shall be paid annually.

• (3) Where the amount of a loan of a prescribed class is advanced by more than one disbursement, the first instalment on the principal amount of the loan shall be payable no later than on a day which is one year after the day on which the initial disbursement is advanced.

• (4) Where a loan has a term of less than 10 years, the lender may renew it for additional terms, at an interest rate not exceeding the maximum rate calculated under section 14 as at the renewal date, to an aggregate maximum term of ten years, calculated as of the date of the first scheduled principal instalment under the loan.

• (5) A loan made with an interest rate calculated in accordance with paragraph 14(a) may, with the consent of the borrower, be converted to a loan with an interest rate calculated in accordance with paragraph 14(b).

• (6) A loan made with an interest rate calculated in accordance with paragraph 14(b) may, with the consent of the borrower, be converted to a loan with an interest rate calculated in accordance with paragraph 14(a) and the lender may impose a charge for the conversion in an amount not exceeding the greater of

  • (a) three months interest on the outstanding principal balance of the loan, and

  • (b) the amount by which

    • (i) the net present value of the loan for the remainder of its term calculated at the date of prepayment and discounted at the Bank of Canada Bank Rate as of the date of the calculation,

    exceeds

    • (ii) the net present value of a loan of the outstanding balance that would be made on the prepayment date for the remainder of the term of the loan and discounted at the Bank of Canada Bank Rate as of the date of the calculation.

• (7) Where the borrower prepays the loan other than by means of instalments of up to 10 per cent per annum of the original amount of the loan on the anniversary date of the loan and on a non-cumulative basis, the lender may charge a prepayment penalty in an amount not exceeding the greater of

  • (a) three months interest on the outstanding principal balance of the loan, and

  • (b) the amount by which

    • (i) the net present value of the loan for the remainder of its term calculated at the date of prepayment and discounted at the Bank of Canada Bank Rate as of the date of the calculation,

    exceeds

    • (ii) the net present value of a loan of the outstanding balance that would be made on the prepayment date for the remainder of the term of the loan and discounted at the Bank of Canada Bank Rate as of the date of the calculation.

Revision of Repayment Terms

• 13 (1) Where there is actual or impending default in the repayment of a loan of a prescribed class, the lender and the borrower may agree to alter or revise the repayment terms of the loan.

• (2) Where the lender and the borrower agree to revise the repayment terms of a loan of a prescribed class by extending the time of the repayment beyond the period provided for in paragraph 3(2)(e) of the Act, it is a condition of the Minister’s liability under the Act that the approval of the Minister shall be obtained in writing prior to the extension.

Rate of Interest

14 The maximum annual rate of interest payable as set out in the first promissory note signed pursuant to subsection 12(1) shall not exceed

• (a) in the case of a floating rate loan made after March 31, 1995, the aggregate of three per cent and the prime lending rate that is in effect at that lender on each day of the period of the loan, beginning on the day on which that promissory note is signed; or

• (b) in the case of a fixed rate loan made after March 31, 1995, the aggregate of three per cent and the residential mortgage rate in effect at that lender, for the period of the loan, on the day on which that promissory note is signed.

Insurance Costs

• 15 (1) Where a lender, under the terms of a loan of a prescribed class or an agreement in connection with the loan, pays an insurance premium under a policy which provides that a benefit is or may become payable to the lender, the lender may charge the amount of the premium to the borrower.

• (2) Where an insurance premium is expressed as a percentage of the outstanding amount of a loan of a prescribed class, it may be combined with the rate of interest, where the resultant rate of interest, as set out in the promissory note referred to in subsection 12(1), does not exceed the maximum rate prescribed in section 14.

Security

• 16 (1) Subject to subsection (2) a lender shall, at the time of making a loan of a prescribed class other than a fees loan, take, as security for the repayment of the loan, a mortgage, conditional sales contract, pledge, debenture, general security agreement or other similar security on the assets of the business enterprise that will be financed by the loan.

• (2) Where the loan is a land or premises loan and the borrower is a tenant, the lender may take, as security for the repayment of the loan, security on any other assets of the business enterprise.

• (3) Where there is existing security on the assets to be secured, the security referred to in subsections (1) and (2) shall be a fixed charge of the highest available rank.

• (4) Where there is no existing security on the assets to be secured, the security referred to in subsections (1) or (2) shall be a first fixed charge, or a fixed charge equal in priority to other sources of financing.

• (5) A lender, in addition to the security referred to in subsection (1), (2) or (6), may take unsecured personal guarantees for an amount that in the aggregate does not exceed 25 per cent of the amount of a loan.

• (6) A lender, in addition to the security referred to in subsection (1), (2) or (5), may take corporate guarantees.

• (7) A lender may substitute any security taken in accordance with subsection (1), (2), (5) or (6) for any other security referred to in any of those subsections and may substitute for assets secured thereby any other assets if the value of the substituted assets is not less than the value of the assets that are released from the security.

• (8) In an equipment loan, any assets secured by the lender may be released by the lender if

  • (a) the loan is not in default;

  • (b) two years have elapsed since the final disbursement of the loan; and

  • (c) the outstanding balance of the loan has been reduced by the extent of the original cost of the assets of the business enterprise that are to be released.

• (9) In a land or premises loan, any assets secured by the lender under subsection (1), (2) or (6) may be released if the assets are expropriated, provided that the proceeds of the expropriation are applied to the loan.

• (10) A lender may release an unsecured personal guarantee taken in accordance with subsection (5) if the loan is in good standing and the borrower has repaid to the lender at least 50 per cent of the principal amount of the loan.

Default

17 Subject to subsection 13(1), where a borrower is in default in respect of any payment due on a loan of a prescribed class, the balance outstanding on the loan shall be due and payable.

Procedure on Default

• 18 (1) Where the balance outstanding on a loan of a prescribed class is due and payable pursuant to section 17, the lender shall demand repayment of the balance owing by the borrower within such period as specified in the demand.

• (2) Where the repayment demanded under section (1) is not made within the period specified in the demand, the lender shall take all of the following applicable steps;

  • (a) collect the principal and interest outstanding on the loan;

  • (b) obtain security on any assets not secured by any security described in subsection 16(1) or (2);

  • (c) subject to subsection (3), realize upon any security referred to in section 16; and

  • (d) effect a compromise settlement with the borrower or with another person on the borrower’s behalf.

• (3) Where the borrower is a partnership or a sole proprietor, the lender may realize upon the assets, other than the assets of the business enterprise, of the partners or sole proprietor in an amount not exceeding in aggregate 25 per cent of the amount of the loan.