Where a written note makes interest payable per month, per week or per day, section 4 of the Interest Act allows no more than five per cent per annum to be recovered unless the contract also states the equivalent yearly rate. Section 5 lets the payer take back interest already paid above that ceiling.
Key takeaways
SECTION 01 OF 10
One sentence, under the marginal note When per annum rate not stipulated. Section 4 reads: “Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.”
Four parts: an exception for mortgages; a trigger, a sub-annual rate in writing; a consequence, a five per cent ceiling; a cure, the yearly equivalent. Treadstone Law describes the Act as capping “the rate that can be recovered where a contract states interest per period without an equivalent annual rate”.
SECTION 02 OF 10
A note reading 12 per cent per annum, payable in equal monthly instalments is not caught. A note reading 1 per cent per month is. Identical cash flow; only the second states a rate for a period shorter than a year. Per-diem wording is worse: 0.04 per cent a day is sub-annual on its face and annualises to 14.6 per cent.
That is how vendor paper gets into trouble: deferred price is discussed in monthly terms from the first conversation about why a vendor finances part of their own sale. Section 4 also reaches only interest fixed “by the terms of any written or printed contract, whether under seal or not” — an unwritten arrangement is outside its words, no strategy, as suing on a promissory note shows.
SECTION 03 OF 10
Promissory notes were the original target. In Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONCA 727, the Ontario Court of Appeal recorded that “Parliament’s concern when it enacted the predecessor provision of s. 4 in 1897 was that promissory notes were stating a daily or weekly interest rate but not a nominal annual interest rate”.
The analysis runs document by document. There the master loan agreement carried an annualizing formula and complied; the separate promissory notes did not, and “as the Promissory Notes do not contain an annualizing formula, they do engage s. 4”. A yearly rate in the purchase agreement will not rescue a note that omits one: see also documenting a loan by note.
SECTION 04 OF 10
A note can breach section 4 through a charge nobody called interest. The test in ClearFlow has three elements: “Interest is the return or consideration or compensation for the use or retention of money that is owed to another person”; it must relate to a principal amount; and it must accrue over time.
So a one-time administration fee charged on advance was held not to be interest, while a “discount fee” of 0.003 per cent of the balance for every day the loan stayed outstanding was. Vendor notes carry both. Treadstone Law on late-payment interest clauses does not analyse section 4: practice guidance, not the rule.
SECTION 05 OF 10
A number is the safe answer, not the only one. The Court of Appeal read the words “rate or percentage” deliberately: by using that phrase rather than percentage alone, “Parliament has used language indicating that the effective annual interest need not be expressed as a numerical percentage”. A formula converting a sub-annual rate to a yearly one can therefore satisfy it.
Nor will the section demand the impossible. Where compounding turned on whether a loan was renewed, which neither party could know at signing, “it was sufficient for the purposes of s. 4 to provide, through the annualizing formula, an equivalent nominal rate” — because “It cannot be the case that s. 4 is engaged when a lender fails to provide information that it is impossible to provide.”
SECTION 06 OF 10
Twelve times a monthly rate is not always the yearly equivalent, and the leading Ontario case turns on it. A promissory note charged two per cent a month, calculated monthly, and stated no annual figure. In a passage reproduced in the 2018 reasons, the Court of Appeal held: “To simply multiply the 2 per cent by 12 months and show 24 per cent as an annual rate would not correctly describe the true annual rate intended. The annual rate of interest when compounded monthly would be 26.8 per cent per annum.”
The purpose, from the same reasons: “The very object of the provisions of s. 4 of the Interest Act is to make the per annum rate clear to the borrower and, in the case of promissory notes, to any holder in due course.” That last clause matters to a seller who may later assign the note. One per cent compounded monthly is 12.68 per cent a year, not 12.
SECTION 07 OF 10
Take a $600,000 vendor note at one per cent a month, interest only, five-year term, and no yearly rate stated. These are parameters of my own choosing, not market data. As written the seller collects $6,000 a month, $72,000 a year, $360,000 over the term. If section 4 applies, the recoverable rate is five per cent: $30,000 a year, $150,000 over the term, a gap of $210,000 produced by nothing but the drafting.
The exposure is wider than it looks, because the ceiling attaches to what is “chargeable, payable or recoverable”, not to what is charged. A seller who never sues still holds a note whose interest is unenforceable above five per cent. That changes the calculus in setting the rate and term on a seller note too: a negotiated rate is worth nothing if the way it is written makes it unrecoverable.
SECTION 08 OF 10
Read literally, section 4 caps all interest under a non-compliant contract. The application judge in ClearFlow read it that way and called his own result harsh and draconian. The Court of Appeal rejected that reading: absent evidence of an attempt to circumvent the section, it confined the cap to interest actually expressed sub-annually.
It went further on the arithmetic: “s. 4 imposes a 5% annual cap on non-annualized interest but does not affect an interest rate that is already less than 5% when annualized”. It is a ceiling, never a floor lifting a small rate up to five — which the court tied to section 3, fixing five per cent only where “no rate is fixed by the agreement or by law”. Two limits: the narrowing cannot help where the note’s only rate is the sub-annual one, and the court framed its result on its facts, as “a commercial transaction between parties of equal bargaining power who inadvertently and only marginally ran afoul of s. 4”.
SECTION 09 OF 10
Section 5, marginal note Recovery of sums paid otherwise, is the enforcement half: “If any sum is paid on account of any interest not chargeable, payable or recoverable under section 4, the sum may be recovered back or deducted from any principal or interest payable under the contract.”
The problem is not only prospective. On the illustration above, a buyer who has paid $6,000 a month for two years has paid $144,000 where $60,000 was recoverable, and the $84,000 difference is expressly recoverable back or available as a set-off. Default interest on a late VTB payment must be an express term; section 5 is how a buyer in arrears arrives with a claim of its own, before what happens when a buyer defaults is even reached.
SECTION 10 OF 10
It does not reach the land. It opens “Except as to mortgages on real property or hypothecs on immovables”, so a take-back charge on the premises sits in a stricter regime. Section 6 provides that on a blended or sinking-fund plan “no interest whatever shall be chargeable, payable or recoverable on any part of the principal money advanced, unless the mortgage or hypothec contains a statement showing… the rate of interest chargeable on that money, calculated yearly or half-yearly, not in advance”. Section 4 reduces the rate; sections 6 to 8 can remove it altogether.
One deal can straddle both: a note for goodwill and equipment under section 4, a take-back mortgage on the building under sections 6 to 8. Treadstone Law covers the mortgage side on the five-year prepayment rule — section 10, whose right does not extend to a mortgage “given by a joint stock company or any other corporation”. Section 4 draws no such line between corporate and individual borrowers. Which instrument carries which is a question about the collateral a seller can register.
It sets no maximum rate. Section 2 says the opposite: “any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on”. Section 4 is a disclosure rule with a penalty, not a usury cap. The ceiling is Criminal Code section 347, which defines a criminal rate as “an annual percentage rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 35 per cent on the credit advanced”, measured on an aggregate of charges and fees rather than the stated rate alone. See also vendor financing and take-back terms.
Not unless the note also states the yearly equivalent. Under Interest Act section 4, a rate stated per day, week, or month with no yearly rate given collapses to a maximum recoverable rate of five per cent per annum, regardless of what rate the parties actually agreed.
Not accurately. The Ontario Court of Appeal held that multiplying a 2% monthly rate by 12 to show 24% understates the true compounded annual rate, which in that case was actually 26.8% per annum. The yearly figure has to reflect compounding, not simple multiplication.
No. Section 4 expressly excepts mortgages on real property, which are instead governed by the stricter rules in sections 6 to 10. A single deal can have a promissory note governed by section 4 and a take-back mortgage governed by the mortgage sections at the same time.
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