How Promissory Note Interest Works in Canada and Where the Legal Ceiling Sits

Promissory note interest in Canada follows the note's terms, capped by the criminal rate of interest.

By Promissory.ca Editorial Team Reviewed against official Canadian sources Last updated: 2026-09-16

What a promissory note is, and why the interest wording matters

A promissory note is a written, signed, unconditional promise to pay a sum certain in money, and the Bills of Exchange Act sets out the formal requirements. In Canada, notes of this kind usually appear in private loans between individuals, seller financing on a vehicle or a small business, informal business lending and some short-term credit arrangements.

The note is the contract. Unlike a mortgage from a federally regulated lender, which comes with prescribed disclosure and underwriting standards, a private note may be one typed page. If the interest clause is vague, borrower and lender are left to argue about what they meant.

How promissory note interest is stated and calculated

The clauses that decide the real cost

• The stated rate and its time base. A figure described as an annual rate is not the same as the same figure applied every month. Check whether “per annum” appears.
• Compounding. Interest added to the balance before the next period costs more than simple interest on the original principal. Compounding more often than once a year produces an effective annual rate higher than the nominal rate.
• Payment timing. Interest-only payments, blended instalments and a single balloon payment all change how much interest accrues before the principal starts to fall.
• Interest taken in advance. When the finance charge is deducted from the amount advanced, you receive less than the face amount but repay the full sum, which raises the effective cost above the quoted figure.
• Default provisions. A higher rate after a missed payment still has to stay under the criminal ceiling.
• Prepayment terms. Whether you can pay early without a penalty affects the total cost.

When the note says nothing about a rate

Silence is risky. Under section 4 of the Interest Act, where a mortgage or agreement for sale provides for interest but does not state an annual rate, interest is not chargeable above 5% per annum. For other kinds of promissory notes, the outcome depends on the facts, on provincial law and on how a court reads the parties' dealings — which is exactly the sort of dispute a clearly drafted note avoids.

The legal limit on promissory note interest in Canada

The ceiling is federal and criminal rather than merely a consumer-protection rule. Section 347 of the Criminal Code makes it an offence to enter into an agreement for, or to receive payment for, credit at an effective annual rate above the criminal rate of interest, which is 35% APR and was reduced from 48%. The limit applies to private lenders, family members and businesses, not only to licensed financial institutions.

Because the test is the effective annual rate, packaging matters. Fees, charges and compounding can push a short agreement past the ceiling even when the stated rate looks modest, and a very short term magnifies whatever cost is attached to it.

Payday loans: a narrow, regulated exception

Certain short-term payday loans are exempt from the criminal rate where the province has a payday lending regime and the loan meets the conditions in the regulations. In those provinces, the cost of borrowing is capped at $14 per $100 advanced, the fee for a dishonoured payment is capped at $20, and the maximum payday loan is $1,500. The Financial Consumer Agency of Canada illustrates the arithmetic with a 14-day $500 payday loan at $14 per $100: it costs $70, which works out to roughly 365% APR.

Quebec does not permit payday lending, and the maximum rate of credit there is 35% per year. Outside a permitted payday regime, the general criminal ceiling applies to the whole agreement.

Provincial layers on top of the federal ceiling

Provinces can add licensing requirements, disclosure obligations and cooling-off rights for certain types of credit. None of those rules permits a rate above the criminal limit, and some provinces impose stricter caps of their own.

Checking a promissory note interest clause: a comparison table

What borrowers and private lenders should confirm before signing

1. Convert every quote into an effective annual rate rather than relying on the nominal figure.
2. Add fees, administration charges and any interest deducted in advance to the real cost.
3. Put the compounding frequency in writing.
4. Spell out what happens after a late or missed payment.
5. State whether the note is secured, and against which asset.
6. Confirm the identity of the lender and whether provincial licensing rules apply.
7. Keep the signed note, the payment schedule and every receipt or bank record.

Credit reports, privacy and the consequences of default

Equifax Canada and TransUnion Canada are the two national credit bureaus. A hard inquiry, the kind generated when you apply for credit, may affect your credit score, while a soft inquiry does not. A private promissory note is not normally reported to the bureaus, but an amount that is placed with a collection agency or that becomes a court judgment can appear on your file and influence future borrowing.

PIPEDA governs how organisations handle personal information in Canada, including details collected during a credit application. If a private lender asks for sensitive information, ask how it will be stored, used and shared, and whether it will be passed to anyone else.

When payments stop, a lender's remedies depend on the wording of the note and on whether it is secured. Enforcing an unsecured note usually means demand letters, collection activity and, for larger amounts, a civil claim — slow and costly enough that it shapes how private credit is priced in the first place.

Tax and record-keeping for private notes

Interest you receive from a promissory note is generally treated as income for tax purposes, and interest you pay may be deductible in limited circumstances, so records of principal, interest and payments matter. If you owe tax, the Canada Revenue Agency may require instalments due 15 March, 15 June, 15 September and 15 December. Instalments may be required where net tax owing exceeds $3,000, or $1,800 in Quebec, for the current year and either of the two prior years, while farmers and fishers have a single due date of 31 December. This is general information, not tax advice.