Canada Small Business Financing (Establishment and Operation of Capital Leasing Pilot Project) Regulations (SOR/2001-527)

8 The Minister is not liable to make any payment to a lessor in respect of any loss sustained as a result of a lessee’s default on a capital lease, if the aggregate outstanding balance in respect of the lessee or a related lessee or borrower exceeds $250,000, when that amount was disclosed to the lessor by the lessee or the lessor had actual knowledge of it on or before the day on which the capital lease is entered into.

Loss-sharing Ratio

9 The liability of the Minister in respect of losses sustained as a result of a lessee’s default on a capital lease is limited to 85% of the lessor’s eligible loss, calculated in accordance with subsection 44(7).

10 The Minister is not liable to make any payment to a lessor unless the lessor has

• (a) paid to the Minister the registration fee referred to in subsection 14(1);

• (b) paid to the Minister the administration fee referred to in subsection 14(2); and

• (c) complied with the other requirements of these Regulations.

Capital Lease Registration with the Minister

• 11 (1) Subject to subsection (2), a lessor shall submit a capital lease to the Minister for registration within four months after the day on which the capital lease is entered into.

• (2) If non-compliance with subsection (1) is inadvertent, the Minister shall extend the period by two months.

• 12 (1) The registration of a capital lease shall be done on a form that shall be signed by the lessor and the lessee and contain the following information:

  • (a) the lessor’s name, address and an identification number assigned by the Minister;

  • (b) the lessee’s name and the address and telephone number of the small business;

  • (c) the day on which the capital lease is entered into;

  • (d) a statement setting out

    • (i) the total financing amount of the capital lease,

    • (ii) the registration fee referred to in subsection 14(1), if it is financed,

    • (iii) the cost of the equipment, and

    • (iv) the value of the bargain purchase option or the residual value of the equipment;

  • (e) any charges and insurance premiums referred to in section 16, that the lessee is required to pay;

  • (f) the lessor’s acknowledgement that the lessee was not required to pay any fees or charges other than those authorized by these Regulations;

  • (g) the lessee’s consent to

    • (i) the audit, by the Minister, of the capital lease approval and administration file held by the lessor,

    • (ii) the release, by the Minister, of information in respect of the lessee’s outstanding capital leases registered with the Minister in accordance with these Regulations to another lessor to whom the lessee applied for a capital lease,

    • (iii) the release by the Minister, of information in respect of the lessee’s outstanding loans made under the Act and the lessee’s outstanding guaranteed business improvement loans made under the Small Business Loans Act, to another lessor to whom the lessee applied for a capital lease, and

    • (iv) the release by the Minister, of information in respect of the lessee’s outstanding capital leases registered with the Minister in accordance with these Regulations to a lender to whom the lessee applied for a loan;

  • (h) the lessor’s acknowledgement that, before entering into the capital lease, the lessor verified within their organization, that the aggregate outstanding balance in respect of the lessee or a related lessee or borrower did not exceed $250,000;

  • (i) the lessee’s acknowledgement that the aggregate outstanding balance in respect of the lessee or a related lessee or borrower does not exceed $250,000;

  • (j) the lessor’s acknowledgement that the capital lease does not provide for any matter referred to in paragraphs 4(a) to (e); and

  • (k) the lessor’s acknowledgement that, before approving the capital lease, the lessor acted in accordance with the due diligence requirements referred to in section 19.

• (2) The registration form referred to in subsection (1) shall be accompanied by a capital lease cost form signed by the lessor which contains the following information:

  • (a) the annual imputed rate of interest used in the calculation of the scheduled payments;

  • (b) a complete breakdown of the calculation of the scheduled payments; and

  • (c) in the case of used equipment, the fair market value of the equipment on the day on which the capital lease is entered into.

Fees

13 Every capital lease is subject to the condition that no fee or charge is payable by a lessee other than

• (a) the registration fee referred to in subsection 14(1);

• (b) the administration fee referred to in subsection 14(2); and

• (c) any other fee or charge authorized by these Regulations.

• 14 (1) A registration fee in respect of a capital lease shall be paid by the lessor to the Minister when the capital lease is submitted for registration. This fee, which is 2% of the financed cost of the equipment, may be included in the total financing amount of the capital lease.

• (2) An administration fee in respect of a capital lease shall be paid by the lessor to the Minister. It is calculated at the end of each month at the annual rate of 1.25% applied to the outstanding balance of the capital lease minus the present value of the lesser of

  • (a) the residual value of the equipment set out in the registration form referred to in subsection 12(1), and

  • (b) the bargain purchase option price of the equipment set out in the capital lease.

• (3) The administration fee is payable quarterly, within two months after the end of each quarter.

• (4) With each payment under subsection (3), the lessor shall submit to the Minister a statement that substantiates the basis on which the payment was calculated.

• (5) When the lessor is unable to provide one or more of the statements required by subsection (4) in respect of a year, the Minister shall notify the lessor

  • (a) that for that year, the lessor may make the payments referred to in subsection (3), except the payment for the last quarter, on the basis of estimates of the amounts payable; and

  • (b) that for that year, the lessor shall submit the statement required by subsection (6) rather than the statements required by subsection (4).

• (6) On or before June 1 following a year in respect of which a lessor makes the payments referred to in subsection (5), the lessor shall pay any amount owing for the year, or claim any overpayment for the year, and submit to the Minister a statement that substantiates the basis on which the amount of the administration fee was calculated.

• (7) On application by a lessor within one year after a capital lease registered with the Minister in accordance with these Regulations is entered into, the Minister shall

  • (a) if the lessor has not provided to the lessee all of the equipment that is the subject of the capital lease, refund to the lessor that portion of the registration fee paid that is attributable to the portion of the equipment and subtract the value of that portion of the equipment from the total financing amount of the capital lease; or

  • (b) if the lessor determines that the capital lease is not in compliance with the requirements of these Regulations, refund to the lessor the registration fee and the administration fee and delete the total financing amount of the capital lease from the registry, which terminates the Minister’s liability in respect of the capital lease.

• (8) The lessor shall not charge the lessee for the administration fee except through the imposition of an annual imputed rate of interest.

Maximum Annual Imputed Interest Rate

15 The maximum annual imputed rate of interest used to calculate the scheduled payments on a capital lease shall not exceed the aggregate of 13.25% and the rate of interest on Government of Canada bonds.

Additional Amounts Payable by Lessee

16 A lessor may require a lessee to pay, in addition to the registration fee referred to in subsection 14(1) and the administration fee referred to in subsection 14(2),

• (a) any charge to register the lessor’s security interest or to publish their rights;

• (b) any premium paid by the lessor in respect of a capital lease under a life or disability insurance policy that provides that a benefit is or may become payable to the lessor;

• (c) any charge by the lessor for the handling of a cheque presented or issued by a lessee that is subsequently returned because there are not sufficient funds, if stipulated in the capital lease;

• (d) any cost related to the inspection of the equipment, if stipulated in the capital lease;

• (e) any fee for changes to the capital lease requested by the lessee;

• (f) any expense incurred by the lessor to preserve their security in the event of default;

• (g) any fee or charge related to maintaining the equipment in good condition, if stipulated in the capital lease; and

• (h) any premiums for equipment liability, physical damage and replacement insurance, if required under the capital lease.

Designation of Lessors

17 The Minister is authorized to designate organizations as lessors.

Maintaining Status as Lessor

18 A lessor that is a leasing company or a lease funder shall, in order to maintain their status as a lessor, provide proof to the Minister on an annual basis that they

• (a) maintain a rating of “BBB” or better issued by a Canadian bond rating agency; or

• (b) participate in a securitization program approved by a Canadian bond rating agency.

Due Diligence Requirements

19 Before entering into and administering a capital lease, the lessor shall apply the same due diligence and business procedures as those applicable to a capital lease of the same amount that is not subject to these Regulations, including

• (a) obtaining credit references or conducting a credit check on the lessee;

• (b) completing an assessment of the ability of the lessee to pay, taking into account all other financial obligations of the lessee;

• (c) providing for a term similar to the term of a capital lease of the same amount that is not subject to these Regulations; and

• (d) in the case of used equipment, substantiating in writing the fair market value and economic life of the equipment on the day on which the capital lease is entered into.

Payment Terms

• 20 (1) A capital lease shall set out the total financing amount, the payment terms, the frequency of the scheduled payments and the date on which the capital lease is entered into. It shall set out either the bargain purchase option price or the residual value of the equipment, as the case may be.

• (2) If the term of a capital lease in good standing is less than the maximum period specified in section 5, the lessor may renew it for one or more additional terms, at an annual imputed rate of interest that does not exceed the maximum annual imputed rate referred to in section 15 as of the renewal date, to an aggregate maximum term of 10 years, including all renewal terms, beginning on the day on which the capital lease is entered into.

Revision of Payment Terms

• 21 (1) A lessor and a lessee may, at any time, agree to revise the payment terms of a capital lease.

• (2) If a lessor and a lessee agree to revise the payment terms of a capital lease by extending the term beyond the maximum period specified in section 5, it is a condition of the Minister’s liability under these Regulations that the approval of the Minister shall be obtained in writing prior to the extension. The Minister shall approve the extension if it is likely to decrease the risk of default by the lessee on the capital lease.

Improvements

• 22 (1) A lessor and a lessee may, at any time, agree to improve the original equipment that is the subject of a capital lease. The improvements do not include the replacement of the original equipment in its entirety.

• (2) If a lessor and a lessee agree to improve the original equipment that is the subject of a capital lease and to amend the capital lease, the Minister’s liability under these Regulations continues if the capital lease is amended accordingly and if

  • (a) the capital lease as amended has a term that does not extend beyond the maximum period specified in section 5;

  • (b) the annual imputed rate of interest used in the calculation of the scheduled payments is the same as the annual imputed rate of interest used in the original capital lease;

  • (c) the lessor notifies the Minister in writing of the improvements made to the equipment within three months of the day on which the amendment to the capital lease was made, and provides the Minister with the following information, namely,

    • (i) the detailed cost of the improvements,

    • (ii) a detailed calculation of the revised payments,

    • (iii) the additional cost of the equipment that has been financed, and

    • (iv) the new outstanding balance of the capital lease; and

  • (d) the lessor sends to the Minister, with the notice referred to in paragraph (c), an additional registration fee that is calculated on the basis of the additional cost of the equipment that has been financed.