Late payment interest in Canada: the Interest Act and your invoices

Waiting on a client who hasn't paid is one of the worst parts of running a small business. Unlike the UK, Canada has no general late payment law that sets an interest rate for overdue invoices. Interest comes from what you and your client agreed, and a short federal statute, the Interest Act, decides whether the rate you wrote down can actually be collected.

This guide explains the Interest Act's two key rules, how to word a late interest clause so it holds up, the 35% criminal rate, and why there's no GST/HST on late fees. The free invoice generator turns your monthly rate into the yearly rate for you.

No statutory rate, so agree one

There's no Canadian equivalent of a statutory late payment rate for business invoices. Net 30 is the customary term, but nothing makes interest run automatically when a client pays late. If you want to charge interest:

• agree it up front, in your contract, quote or terms, not only on the invoice;
• state the rate clearly, including the yearly rate (see below);
• put a due date on every invoice, so it's clear when the payment became late.

Whether a clause that appears only on an invoice binds a client is a contract question, so ask a lawyer if a large amount depends on it.

The Interest Act: two rules that matter

Section 3: no rate stated means 5%. If interest is payable but no rate is fixed, the rate is 5% a year.

Section 4: state the yearly rate. If your rate is expressed per day, week or month, you can't recover more than 5% a year unless the agreement also states the equivalent yearly rate. So:

That bracket is the whole point of the section. Many invoice templates leave it out.

How Invoice Native words it

You enter a monthly rate for your business or for a single invoice, and the invoice prints the yearly equivalent next to it, worked out as simple interest (monthly × 12):

Overdue balances bear interest at 2% per month (24% per annum).

The wording is the same on every invoice, and it's off unless you turn it on.

The 35% criminal rate

Section 347 of the Criminal Code makes it an offence to charge interest at an annual percentage rate above 35%. The calculation counts more than the headline rate, so leave a wide margin. In monthly terms, 35% a year is about 2.9% a month, so anything around 3% a month or higher is out of bounds.

A worked example

You invoice a client $2,400.00 on Net 30 terms with "1.5% per month (18% per annum)". They pay one month after the due date.

Without the "(18% per annum)" in your terms, the Interest Act would limit you to 5% a year, or about $10.00 for the month.

No GST/HST on late payment charges

The CRA's RC4022 says late payment surcharges are not subject to GST/HST, so bill the interest without tax, even when the original invoice carried GST, HST, PST or QST. An early-payment discount works the other way round: it doesn't reduce the tax on the original invoice.

A side note: construction in Ontario

If you work in construction in Ontario, the Construction Act has its own prompt payment rules: an owner generally has to pay a contractor's "proper invoice" within 28 days. A proper invoice has set contents, such as the contract or purchase order reference, the period it covers and the payee's contact details. Invoice Native doesn't produce prompt-payment invoices yet, but you can add a PO number and the period to any invoice. Check Ontario's rules or a lawyer for your contract.

Checklist

• ✅ Interest agreed with your client up front
• ✅ A due date on every invoice
• ✅ Monthly rate with the yearly rate in brackets, such as "1.5% per month (18% per annum)"
• ✅ Well below the 35% criminal rate
• ✅ No GST/HST on the interest you bill

This isn't legal advice. For a large or disputed debt, talk to a lawyer or accountant.