Vol. 145, No. 27 — July 2, 2011
ARCHIVED — Prescribed Entities and Classes of Mortgages and Hypothecs Regulations
Department of Finance
(This statement is not part of the Regulations.)
Issue and objectives
The Interest Act (the Act) sets out mandatory mortgage prepayment terms that lenders must include in all mortgages of more than five years. Under the Act, the mandatory prepayment terms provide the ability to pre-pay the full amount of the mortgage after five years, subject to a penalty of three months interest. The Act also provides an exemption for mortgages granted to corporations and joint stock companies, which allows them to negotiate prepayment terms directly with their lender.
Some business and commercial entities, not structured as corporations or joint stock companies, have had difficulties in accessing long-term mortgage financing because the prepayment terms for their mortgages are prescribed by the Act. Some mortgage lenders may not be willing to provide them significant long-term funding with a mandatory mortgage prepayment penalty limited to three months of interest. Furthermore, the courts have ruled that, given the current legislative wording, mandatory prepayment terms cannot be negotiated by these borrowers and must be included in all long-term mortgages.
As modern commerce and finance have evolved, negotiating the prepayment terms is important for businesses securing long-term loans to match the lifespan of the asset. In practice, some commercial enterprises may be able to restructure their affairs in order to qualify for long-term mortgages without mandatory prepayment privileges.
The Government is proposing to broaden the list of entities that can negotiate their own prepayment terms. The Act was amended in 2008 to provide the Government with the regulation-making authority to prescribe entities and associated classes of mortgages, hypothecs and debentures, in order to exempt them from the mandatory prepayment terms in addition to corporations and joint stock companies. This would allow all business entities to have equal opportunities in accessing long-term funding while ensuring that mandatory prepayment terms remain in place for individuals and non-business interests.
Description and rationale
The Government intends to retain the original policy objective of giving all commercial entities the ability to negotiate prepayment terms, by making the Prescribed Entities and Classes of Mortgages and Hypothecs Regulations (the Regulations), in order to identify partnerships, trusts that are settled for business or commercial purposes, as well as unlimited liability entities, as prescribed entities under the Act.
The Government is proposing that partnerships be prescribed under the Regulations, as they exist for the purpose of conducting business and generating business income. Trusts can be settled to carry out a wide range of purposes including personal, charitable, and education affairs, as well as for business or commercial purposes. In line with the policy objective, only trusts that are settled for business or commercial purposes would be prescribed. Unlimited liability entities are defined as legal persons, incorporated under an act of the legislature of a province, the shareholders of which are not limited in the amount of their liability for the debts and liabilities of that entity. Similarly to partnerships, unlimited liability entities exist for the purpose of conducting business and generating business income, and as such would be prescribed under the proposed Regulations.
The Government released a consultation paper in August 2010 to consult broadly on which business entities should negotiate prepayment privileges on their own. Comments were received from key industry and real estate stakeholders, such as the Canadian Bankers Association, The Canadian Bar Association, the Canadian Life and Health Insurance Association Inc. (CLHIA), several notable law firms, and individual Canadians. Overall, the comments were supportive of the proposal.
Implementation, enforcement and service standards
The proposed Regulations would apply to mortgages on real property or hypothecs on immovables entered into after January 1, 2012.
Financial Institutions Division
Department of Finance
L’Esplanade Laurier, East Tower, 15th Floor
140 O’Connor Street
Notice is hereby given that the Governor in Council, pursuant to subsection 10(3) (see footnote a) of the Interest Act (see footnote b), proposes to make the annexed Prescribed Entities and Classes of Mortgages and Hypothecs Regulations.
Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Jane Pearse, Director, Financial Institutions Division, Department of Finance, L’Esplanade Laurier, East Tower, 15th Floor, 140 O’Connor Street, Ottawa, Ontario, K1A 0G5 (tel.: 613-992-1631; fax: 613-943-1334; email: firstname.lastname@example.org).
Ottawa, June 23, 2011
Assistant Clerk of the Privy Council
PRESCRIBED ENTITIES AND CLASSES OF MORTGAGES AND HYPOTHECS REGULATIONS
Prescribed entities, mortgages and hypothecs
1. For the purposes of paragraph 10(2)(b) of the Interest Act,
- (a) the following entities are prescribed:
- (i) partnerships,
- (ii) trusts settled for business or commercial purposes,
- (iii) unlimited liability corporations as defined in the Business Corporations Act, R.S.A. 2000, c. B-9,
- (iv) unlimited liability companies as defined in the Business Corporations Act, S.B.C. 2002, c. 57, and
- (v) unlimited companies as defined in the Companies Act, R.S.N.S. 1989, c. 81; and
- (i) partnerships,
- (b) the prescribed class of mortgages and hypothecs consists of those issued after January 1, 2012.
Coming into force
2. These Regulations come into force on January 1, 2012.
S.C. 2008, c. 28, s. 155
R.S., c. I-15