Business loan fees in Canada: how to work out the true annual cost
Origination, registration, standby, legal and appraisal fees on Canadian business loans, how to convert them into an annual rate, and how fees are treated for tax.
Fees paid at the start of a business loan raise its real cost above the stated rate, and the shorter the loan, the bigger the effect. To compare offers fairly, work out the effective annual rate you pay on the cash you actually receive: a 1% fee on a seven-year loan adds about 0.3 points a year, while a 3% fee on a two-year loan adds more than 3 points. Canadian business borrowers rarely get a standardized cost-of-borrowing disclosure like consumers do, so this calculation is yours to make.
This guide is part of the small business loan requirements and rates overview. All figures are illustrative.
The fees you are likely to see
| Fee | Typical form | When it is paid | Notes |
|---|---|---|---|
| Commitment or origination fee | Percentage of the loan or a flat amount | At acceptance or at funding | Sometimes non-refundable even if you do not draw the loan |
| CSBFP registration fee | 2% of the loan amount | At registration; can be financed | Set by the program; see the CSBFP guide |
| Legal fees | Your lawyer and often the lender's | At closing | Lender's legal costs are frequently charged to you |
| Appraisal, environmental report, equipment valuation | Flat amounts | Before approval or funding | Commercial real estate loans often require both |
| Security registration | PPSA or RDPRM registration, land title | At closing | Small but often several registrations |
| Standby fee | Percentage a year on the unused part of a line | Monthly or quarterly | Can matter on large unused lines |
| Renewal or annual review fee | Flat or percentage | Each year | Common on operating lines |
| Prepayment charge | Months of interest or an interest differential | When you repay early | Mostly on fixed-rate loans |
| Default interest and enforcement costs | Extra rate on overdue amounts, legal costs | Only on default | Read the clause before signing |
Turning fees into an annual rate
The effective rate is the rate at which the payments you make equal the cash you receive. You can approximate it with a spreadsheet's RATE or IRR function: cash in = loan minus fees deducted; cash out = the scheduled payments.
Example 1 (illustrative). A $200,000 term loan at 7.95% over 7 years with a 1% fee ($2,000).
- Monthly payment: about $3,112.
- Cash received: $198,000.
- Effective annual rate on $198,000: about 8.26%, about 0.31 points above the stated rate.
Example 2 (illustrative). A $60,000 online working capital loan at 22% over 2 years with a 3% fee ($1,800) deducted.
- Monthly payment: about $3,113.
- Cash received: $58,200.
- Effective annual rate: about 25.2%, more than 3 points above the stated rate.
Quick rule of thumb. Divide the fee percentage by about half the term in years for a rough idea of the extra annual cost, because on an amortizing loan the average balance is roughly half the original. A 3% fee over 2 years adds about 3 / 1 = 3 points; a 1% fee over 7 years adds about 1 / 3.5 = 0.3 points.
Enter the fee and fixed charges in the fee calculator to see the cash you would actually receive.
The Interest Act and "factor rate" pricing
Section 4 of the federal Interest Act says that, except for mortgages on real property, when a written contract states interest only as a rate per day, week or month (or any period less than a year) and does not state the equivalent yearly rate, no more than 5% a year can be charged. In practice lenders state annual rates. Some alternative products, particularly merchant cash advances, are priced with a "factor rate" (for example 1.35) and present themselves as purchases of future receivables rather than loans. Whether a given product is a loan is a legal question, but you can always convert the cost to an annual rate yourself before deciding.
Fees and the criminal rate
For the criminal interest rate in the Criminal Code, "interest" includes almost all charges and expenses paid for the credit, not just the stated rate. A loan whose stated rate looks legal can exceed the limit once fees are counted. Since 1 January 2025 the limit is calculated as an APR.
Example 3 (illustrative). An $8,000 loan to a sole proprietor at 30% over 12 months with a $600 fee deducted. Cash received is $7,400; the payments at 30% work out to an APR of about 45.7%, above the 35% criminal rate that applies to loans of $10,000 or less and to individuals.
How fees are treated for tax
In general, interest on money borrowed to earn business income is deductible. Under paragraph 20(1)(e) of the Income Tax Act, one-time costs of arranging a loan, such as legal fees and many arrangement or registration fees, are generally deducted over five years, 20% a year (prorated for short tax years), rather than all at once. Recurring charges such as standby, guarantee and service fees that relate to a particular year generally fall under paragraph 20(1)(e.1) and are deducted in that year. The rules have conditions and exceptions, so ask your accountant how they apply to your loan, and check the Canada Revenue Agency's guidance.
Example: if a $7,000 CSBFP registration fee is treated as a cost of arranging the loan, it would be deducted at about $1,400 a year over five years. Confirm the treatment with your accountant.
A fee checklist before you accept an offer
- Ask for all fees in writing, including the lender's legal costs.
- Ask which fees are refundable if the loan does not close.
- Ask whether fees are deducted from the advance or added to the loan.
- Ask for the standby and renewal fees on any line of credit.
- Ask for the prepayment terms on fixed rates.
- Calculate the effective rate on the cash received, and compare offers using the same method; see comparing two loan offers.
Frequently asked questions
Is GST/HST charged on loan fees?
Interest and most lending fees are generally exempt financial services, but legal, appraisal and some advisory fees are taxable services. Your invoices will show which.
Can I negotiate the commitment fee?
Often yes, particularly with competing offers or a long relationship with the lender. Program fees, such as the CSBFP registration fee, are fixed.
Why does the lender charge me for its own lawyer?
It is standard in commercial lending. Ask for an estimate or cap on the lender's legal costs.
Are fees refundable if I repay early?
Usually not. That is why fees hurt most on loans you expect to repay quickly.
Sources
- Justice Laws Website — Interest Act, Criminal Code section 347, Income Tax Act
- Canada Revenue Agency — deductibility of interest and financing expenses
- Innovation, Science and Economic Development Canada — CSBFP registration fee
- Financial Consumer Agency of Canada — general guidance on credit costs
