Merchant Cash Advances (MCA) in Canada: Recent Court Guidance on When a MCA Becomes a Loan
Authors: Ryan Flewelling, Cindy Ho, Tristan Chheang
Merchant cash advances (MCAs) have become an increasingly popular financing tool for small and medium-sized businesses seeking access to capital outside traditional lending channels. However, recent jurisprudence serves as an important reminder that the legal characterization of a MCA is not determined by its label. Rather, courts will examine the substance of the arrangement to determine whether it is a genuine purchase of receivables or, in reality, a loan subject to Canada's criminal interest rate rules.
A recent Ontario decision, Merchant Opportunities Fund Limited Partnership v. 1000489131 Ontario Inc.[1], provides valuable guidance for MCA providers and other commercial finance participants regarding how courts are likely to assess these arrangements.
The Central Question: Sale of Receivables or Loan?
The key legal issue is whether a MCA constitutes a true purchase and sale of future receivables or whether it is, in substance, an advance of credit.
This distinction is critical because Section 347 of the Criminal Code applies to loans and other credit arrangements that charge interest above the applicable criminal rate threshold. If a MCA is found to be a genuine sale of receivables, Section 347 may not apply at all because the purchaser is not earning interest on a loan but rather acquiring receivables at a discount.
Canadian courts have consistently held that substance prevails over form. As the Supreme Court of Canada confirmed in Garland v. Consumers' Gas Co.[2], courts will look beyond the terminology chosen by the parties and examine the actual economic reality of the transaction.
Risk Allocation Is the Key Determinant
The Ontario Superior Court in Merchant Opportunities Fund Limited Partnership v. 1000489131 Ontario Inc. emphasized that the distinguishing feature of a genuine receivables purchase is the sharing of risk between the funder and the merchant[3].
In a legitimate receivables purchase:
- The purchaser assumes the risk that the merchant's future sales may fluctuate;
- Payments rise or fall in proportion to the merchant's actual receivables;
- Collection depends on the merchant's future business performance;
- The purchaser bears the possibility that repayment may occur more slowly if revenues decline.
Under this model, the purchaser's return is generated through a purchase discount rather than interest. Because the amount and timing of collections are tied directly to actual receivables, there is a strong argument that no loan or extension of credit exists.
The Court described this allocation of risk as the hallmark of a true receivables purchase.
Warning Signs That a MCA May Be Recharacterized as a Loan
Conversely, a MCA agreement may be recharacterized as a loan if the structure effectively transfers repayment risk back to the merchant[4].
Factors that may support a loan characterization include:
- Fixed payment obligations regardless of actual sales performance;
- Personal guarantees from principals;
- Contractual provisions ensuring full repayment irrespective of receivables generated;
- Other mechanisms that eliminate the purchaser's exposure to fluctuations in business revenues.
Where the funder is effectively guaranteed repayment, the transaction begins to resemble a conventional loan rather than a purchase of receivables. In those circumstances, courts may conclude that all fees, commissions, discounts and charges constitute interest for the purposes of Section 347.
That said, courts will not generally rely on any single contractual feature. As the Ontario Court of Appeal noted in Metropolitan Toronto Police Widows and Orphans Fund v. Telus Communications Inc.[5], the presence of some characteristics commonly associated with loans does not necessarily prevent a transaction from being characterized as a sale. The agreement must be examined as a whole.
Québec Law Recognizes Receivables Financing
Québec law similarly recognizes receivables purchases as a legitimate financing mechanism.
Through the assignment of claims framework established under article 1637 of the Civil Code of Québec, businesses may sell receivables to third parties. The Court of Québec acknowledged this principle in Merchant Growth Ltd. c. 9266-7096 Québec inc.[6].
Accordingly, both common law and civil law jurisdictions in Canada recognize receivables financing as a commercially valid structure, provided the transaction genuinely transfers economic risk to the purchaser. However, recognition of assignment and receivables financing does not preclude recharacterization where the substance and economics of the transaction are those of credit.
What Happens If the Arrangement Is a Loan?
If a court determines that a MCA is, in substance, a loan, the next question is whether it qualifies for the commercial loan exemption under Section 1 of the Criminal Interest Rate Regulations.
The exemption is available only where:
- The borrower is not a natural person;
- The borrowing is for business or commercial purposes; and
- The applicable amount of credit advanced thresholds are satisfied.
The relevant thresholds are:
Amount of Credit Advanced Greater Than 10 000 CAD and up to 500 000 CAD
For commercial loans with an amount of credit advanced exceeding 10 000 CAD but not exceeding 500 000 CAD, section 347 will generally not apply provided the annual percentage rate of interest (APR) does not exceed 48% on the amount of credit advanced.
Amount of Credit Advanced Exceeding 500 000 CAD
For commercial loans with an amount of credit advanced exceeding 500 000 CAD, the section 347 prohibition does not apply regardless of the APR.
All Other Loans
For loans that do not qualify for the exemption, including:
- Loans to natural persons, including individuals carrying on business as sole proprietors;
- Loans with an amount of credit advanced of $10,000 or less; or
- Other non-qualifying arrangements, the general criminal interest rate cap remains applicable. Currently, that threshold is 35% APR.
Practical Considerations for MCA Providers
The recent case law highlights the importance of careful product structuring and contract drafting.
Providers should consider whether their MCA programs genuinely allocate risk between the parties and whether payment obligations fluctuate based on actual receivables. Particular attention should be paid to provisions that may effectively guarantee repayment, as these clauses may increase the likelihood that a court will characterize the arrangement as a loan.
At the same time, businesses should recognize that the analysis is highly fact-specific. Courts will evaluate both the contractual language and the practical operation of the transaction. Simply describing an arrangement as a "purchase of receivables" will not be determinative if the underlying economics resemble a loan. The legislator’s intention was to “concentrate on the substance of the transaction, not its mechanics or form”[7].
Conclusion
Recent Canadian jurisprudence reinforces a fundamental principle: merchant cash advances will be judged according to their substance rather than their label. Where the purchaser genuinely assumes the risk associated with fluctuating receivables, the arrangement may properly constitute a sale of receivables outside the scope of section 347 of the Criminal Code. However, where repayment is effectively guaranteed and risk remains with the merchant, courts may recharacterize the transaction as a loan, potentially engaging Canada's criminal interest rate regime.
[1] Merchant Opportunities Fund Limited Partnership v. 1000489131 Ontario Inc., 2026 CanLII 48311 (ONSC).
[2] Garland v. Consumers' Gas Co., [1998] 3 SCR 112, par. 50-51.
[3] Merchant Opportunities Fund Limited Partnership v. 1000489131 Ontario Inc., 2026 CanLII 48311 (ONSC), par. 15 to 19.
[4] Ibid.
[5] Metropolitan Toronto Police Widows and Orphans Fund v. Telus Communications Inc., 2005 CanLII 19664 (ON CA), par. 40.
[6] Merchant Growth Ltd. c. 9266-7096 Québec inc., 2021 QCCQ 4462, par. 35.
[7] Mira Design Co. Ltd. v. Seascape Holdings Ltd., 1981 CanLII 721 (BC SC), par. 16.