Ontario's Courts of Justice Act codifies a default set-off defence, but it requires an actual, ascertainable debt and can be excluded by clear contrary wording in the note itself — which is exactly what most vendor take-back notes contain.
Short answer
Usually not unilaterally, and often not even after the claim is proven, because a vendor take-back note is typically drafted to be paid absolutely and unconditionally, free and clear of any set-off, counterclaim or deduction of any kind — language that excludes both the purchase agreement's own set-off clause and Ontario's default statutory set-off defence.
Ontario does have a real, on-point statute here: the Courts of Justice Act, R.S.O. 1990, c. C.43, s.111, codifies a default legal set-off defence. Subsection (1) provides that “in an action for payment of a debt, the defendant may, by way of defence, claim the right to set off against the plaintiff's claim a debt owed by the plaintiff to the defendant,” and subsection (2) allows “mutual debts” to be set off “even if they are of a different nature.”
Two features keep s.111 from rescuing a buyer who simply stops paying. First, it is a defence raised inside an action the plaintiff has already brought, not a licence to withhold payment unilaterally in advance of one. Second, it requires an actual debt owed by the plaintiff, read as a liquidated or readily ascertainable sum — not a merely asserted and disputed indemnity claim that has not yet been finally determined under the purchase agreement's own claims process. And like equitable set-off, statutory set-off under s.111 can be excluded by clear contrary language, which is exactly what a note promising payment free of set-off, drafted independently of the purchase agreement, does.
If the note is silent on set-off, or expressly cross-references the purchase agreement's own set-off clause, the analysis flips — the buyer's contractual set-off right can reach the note directly once a claim is finally determined. The clean, free-standing wording lenders typically insist on for a note they may assign is precisely what removes that option.
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