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.

Procedure for Claims

• 19 (1) A lender may not submit a claim to the Minister for loss sustained as a result of a loan of a prescribed class before taking all of the applicable steps described in subsection 18(2).

• (2) Subject to subsection (3), the lender shall submit any claim for loss within a period of 36 months following the day on which default in repayment of the loan occurred.

• (3) The Minister may, at the lender’s request, extend the period referred to in subsection (2) by not more than six months.

• (4) A claim for loss shall be certified by a responsible officer of the lender and shall be accompanied by

  • (a) documentation substantiating

    • (i) the cost of the equipment, premises or land in respect of which the loan was made, and

    • (ii) the amount of the loan advanced by the lender in accordance with the Act; and

  • (b) the loan record.

• (5) A loss sustained by the lender in respect of a loan of a prescribed class shall be calculated by determining the aggregate of the following and deducting from that aggregate any proceeds realized from the steps taken that are referred to in subsection 18(2):

  • (a) the principal outstanding on the loan on the day on which the loan became due and payable;

  • (b) interest accrued on the principal outstanding on the loan during the period beginning on the day after the day on which the last instalment was made and ending on the day before the day on which the loan became due and payable;

  • (c) for loans with a rate of interest calculated in accordance with paragraph 14(a), interest on the principal outstanding on the loan during the period beginning on the day on which the loan became due and payable and ending on the earlier of the day on which the Minister compensates the lender and the last day of the thirty-sixth month following the day on which the loan became due and payable

    • (i) in respect of the first 12 months, at the rate of interest set out in the loan agreement, and

    • (ii) in respect of the 24 months following the 12 months referred to in subparagraph (i), at a rate of interest equal to one-half the rate of interest referred to in subparagraph (i);

  • (d) for loans with a rate of interest calculated in accordance with paragraph 14(b), interest on the principal outstanding on the loan during the period beginning on the day on which the loan became due and payable and ending on the earlier of the day on which the Minister compensates the lender and the last day of the thirty-sixth month following the day on which the loan became due and payable

    • (i) in respect of the first 12 months, at the rate of interest set out in the loan agreement, and

    • (ii) in respect of the 24 months following the 12 months referred to in subparagraph (i), at a rate of interest equal to one-half the rate of interest referred to in subparagraph (i);

  • (e) uncollected taxed costs for, or incidental to, any legal proceedings in respect of the loan;

  • (f) legal fees and disbursements, other than the costs referred to in paragraph (e), incurred by the lender for services rendered to the lender by persons other than employees of the lender, for the purpose of collecting, or attempting to collect, the loan from the borrower or the guarantor, as the case may be; and

  • (g) other costs incurred by the lender for the purpose of collecting, or attempting to collect, the loan from the borrower or the guarantor, as the case may be, other than costs incurred by the lender or its employees in the administration of the loan prior to default.

Reports to Minister

20 Any lender who has made a loan of a prescribed class shall provide, before June 1 of any year, a report to the Minister on the total amount of the loans of all prescribed classes unpaid on March 31 of the year.

Subrogation

21 Where the Minister compensates a lender for all or any part of the loss sustained by the lender as a result of a loan of a prescribed class, Her Majesty is subrogated to the rights of the lender in respect of that loan.

Registry

22 For the purposes of these Regulations, the registry established by the Minister pursuant to the Small Businesses Loans Regulations, made by Order in Council P.C. 1960-1764 of December 22, 1960, in order to provide for the recording of loans made under the Act, is hereby continued.

Loan Registration Request and Required Fees

• 23 (1) The lender shall within three months following the day on which the initial disbursement of a loan of a prescribed class is advanced in accordance with the terms of the loan, request, in writing, that the Minister register the loan.

• (2) Where the Minister is unable to register a loan of a prescribed class because the lender has inadvertently failed to request registration within the period set out in subsection (1), or to pay the fee required by paragraph 3(4)(b) of the Act, the Minister may, if the borrower is not in default, extend the period for registration to a day not more than one year after the day on which the initial disbursement was advanced.

23.1 For the purposes of paragraph 3(4)(b) of the Act, the registration fee in respect of a loan, other than a fees loan, made after December 31, 1995 is two per cent of the amount of the loan and is payable at the time the loan is submitted for registration.

23.2 For the purposes of paragraph 3(4)(c) of the Act, the annual administration fee in respect of a loan made after December 31, 1995 is 1.25 per cent of the yearly average of the end-of-month loan balances and is payable at the time of filing of the report referred to in section 20.

Acquisition of Loans by Another Lender

• 24 (1) Where a lender who has made loans of a prescribed class discontinues its lending business and sells all loans of the prescribed class outstanding on its books to another lender who is the successor lender, or amalgamates with one or more other lenders so as to form a new lender, the Minister’s liability under the Act continues in favour of that successor lender or the new lender, and on the day of the sale or the amalgamation

  • (a) the loans made under these Regulations, and the Small Businesses Loans Regulations by the selling lender and successor lender, or by the amalgamating lenders, if previously registered by the Minister pursuant to section 23 of the Small Businesses Loans Regulations or section 23 of these Regulations are consolidated and transferred to the successor lender or the new lender; and

  • (b) all claims for loss already paid by the Minister to the selling lender and the successor lender, or to the amalgamating lenders, under these Regulations and the Small Businesses Loans Regulations are consolidated and are losses paid to the successor lender or the new lender.

• (2) A lender may, at the request of the borrower, transfer to another lender a land, premises or equipment loan and its related fees loan, which when taken with all other loans transferred to or by each of the lenders do not exceed respectively in the aggregate the greater of 20 loans and one per cent of the number of loans outstanding for each lender as of the last preceding March 31.

• (3) A lender who acquires a loan under subsection (2) shall, within three months after the acquisition of the loan, notify the Minister of the acquisition and of the amount outstanding on the loan.

• (4) The liability of the Minister under the Act continues to the lender who acquires the loan.