Late Payment Charges on Accounts Receivable.
September 13th, 1997, Last updated 26 April 2006
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Canadian Business people have a problem complying with Canadian law when charging interest on Accounts Receivable. Most of the computer programs and spreadsheets that we use are made in the USA, for USAsians, and do not comply with Canadian Law. Canadian law requires interest to be ALWAYS stated as a yearly effective rate for comparison purposes. See the Canadian Interest Act. Every invoice, bill or statement must contain an express statement of the effective annual rate being charged. Canadian Banks, Visa, MasterCard and others advancing credit are using the USAsian method, which, as you will see, is not correct in law or in fact.
Most businesses charge interest each month on accounts receivable, and the computer program may ask for the monthly interest rate or the annual interest rate. Click here if you are interested in Interest on Accounts Receivable. Sometimes a late payment charge of one, two or five dollars is made in addition to the interest charges. There may be two problems with these late payment charges.
The first is Section 5 of the Interest Act. That section seems to indicate that any charge above the stated interest rate may be recovered back.
The second is under section 347, subsection 2 of the Criminal Code, that makes any interest over 60% a "criminal rate."
As everyone does, we can ignore the first problem. The amounts recoverable using the Interest Act are two small to be bothered with. Someday someone in a jurisdiction that allows class actions may get enough people interested in this issue to have the Courts decide. Meanwhile, not an issue, but now you know the provision is there.
The second problem cannot be ignored. Your computer program must be written so that 60% interest is not charged under any circumstance. We can demonstrate that a late payment charge arbitrarily applied can result in a 60% or greater interest rate. Lets say that you pay your account with a company that charges one dollar late payment charge, by paying all but one dollar of the amount owing and you make no purchases after that. The next month you receive your bill for one dollar owing plus one dollar late payment charge (plus another interest charge that should only be on the dollar owing, but for many companies is not), a total of two dollars. The Criminal Code treats the one dollar late penalty charge as interest. Assuming a 30 day charge period you will pay 100% interest for one month, or 1200% per year. Is this an arrangement to receive a criminal rate? Of course it is. This is a trivial example, but there is no doubt that these circumstances can occur and therefore a criminal rate is being charged. The only way out of this delema is to program the computer to determine if the legal rate is being exceeded and then to not charge it, or to only charge the rate stated on the invoice, statement or bill.
NOTES: Terracan Corporation v. Pine Projects Ltd(1993), 100 D.L.R. (4th) 431 (B.C.C.A.), affirming (1991), 60 B.C.L.R. (2d) 384 (S.C.), held that an effective annual rate of interest must be calculated by compounding annually.
In February 1992 the Canadian Institute of Actuaries stated that annual compounding is the only way to calculate an effective annual rate of interest in accordance with generally accepted actuarial practices and principles.
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