Legal Guide · Commercial Contracts

Late Payment Interest in Canada: Legal Rates & Calculator

Santanu Sarma

Economics Researcher · Reviewed by Canadian Commercial Law Advisory Board

Updated: October 19, 2026

The Short Version

Late payment is normal in Canada: over 60% of small businesses carry unpaid invoices at any given time. But unlike in Europe, Canadian law does not automatically grant you a generous statutory interest rate on commercial debts. Your right to charge interest comes almost entirely from your contract.

1. The Canadian B2B Landscape

If you do business in the UK or the EU, you are protected by statutory laws that automatically apply an 8% (or higher) margin above the central bank rate on late invoices. Canada has no universal federal B2B statutory late payment interest rate.

If you don't explicitly document the interest rate in your terms of service or Master Services Agreement (MSA) before the work begins, you generally cannot enforce a late fee. If a dispute goes to court, you may be awarded pre-judgment interest under provincial Courts of Justice Acts, but these rates are usually paltry (often around 0.5% to 3% per annum). The only way to securely claim commercial late payment fees in Canada is by express agreement.

2. The "Section 4" Trap (Canada Interest Act)

This is the most common and devastating mistake Canadian freelancers and agencies make. You add a line to your invoice that says: "Overdue accounts are subject to a 2% per month late fee."

Under Canadian federal law, that clause is essentially void for its intended amount.

Canada Interest Act, Section 4: Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract... 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...

If your contract only states a monthly rate, Section 4 of the Interest Act instantly drops your legally enforceable interest rate down to 5% a year (which is roughly 0.41% a month). To charge 1.5% or 2% a month, you must explicitly state the annualized equivalent.

How to write the clause correctly

To ensure your terms hold up in a Canadian court, your contract and your invoice footer must read exactly like this:

"Overdue balances shall accrue interest at a rate of 2% per month (24% per annum), calculated daily and compounded monthly, from the due date until payment in full."

3. The Criminal Rate of Interest

While you want to incentivize prompt payment, setting a rate too high in Canada crosses from a contract dispute into criminal law.

Section 347 of the Criminal Code of Canada makes it an indictable offence to enter into an agreement to receive interest at a "criminal rate." For decades, this rate was set at an effective annual rate of 60%. However, recent legislative changes lowered this threshold drastically to protect consumers and small businesses.

The criminal rate of interest is now capped at a 35% Annual Percentage Rate (APR). If you try to charge a punitive late fee of "5% per month" (which annualizes to 60%), your entire interest clause will likely be declared void by a judge, and you risk losing the right to collect any interest at all.

4. Calculating Your Claim (Formula & Worked Example)

Courts generally prefer simple interest calculated daily unless compounding is explicitly agreed upon in the contract. The universal formula is:

Daily interest = (Annual Rate ÷ 365) × Invoice Balance
Interest Owed = Daily interest × Days Overdue

Worked Example

You have a $5,000 CAD invoice that is 45 days overdue. Your contract correctly states an interest rate of 1.5% per month (18% per annum).

Daily interest = (0.18 ÷ 365) × $5,000 = $2.4657 per day
Total Interest = $2.4657 × 45 days = $110.96 CAD

5. Provincial Nuances & Construction Laws

While federal law dictates the Interest Act and Criminal Code, provinces have specific legislation that overrides general rules—especially in the construction industry.

• Ontario Construction Act: Implements a strict prompt payment regime. Owners must pay contractors within 28 days of receiving a proper invoice. If late, mandatory statutory interest applies at the prejudgment interest rate determined under the Courts of Justice Act, unless the contract specifies a higher valid rate.
• Alberta & Saskatchewan: Both provinces have enacted similar Prompt Payment and Construction Lien Acts that mandate 28-day payment timelines and statutory interest penalties for late payment in the construction sector.
• Consumer Protection Acts: If your client is an individual consumer (not a corporation), provincial consumer protection laws place severe limitations on the penalties, collection fees, and interest rates you can impose.

6. Deep, Exhaustive FAQ

Can I just add "Late fees apply" to the bottom of my invoice?

No. The mere inclusion of an interest rate provision on an invoice will not obligate a delinquent client to pay it if they didn't agree to it beforehand. The rate must be agreed to in your initial contract, and it must comply with Section 4 of the Interest Act (by explicitly stating the annualized rate).

Who pays the collection agency fees in Canada?

Generally, you do. You cannot arbitrarily add "legal and collection fees" to an invoice unless your original contract specifically states that the client indemnifies you for the costs of recovering late payments. Without that clause, collection costs eat into your profit.

Should I charge interest in CAD or USD?

Whichever currency the original invoice was drafted in. If you billed a US client $5,000 USD, calculate the interest on the USD balance. Do not apply currency conversions before calculating the interest, as exchange rate fluctuations will distort the legal claim amount.

What should I charge on low invoice balances?

On balances under $1,000 CAD, interest is often negligible (e.g., 2% a month on $600 is $12). Many Canadian freelancers instead write a clause allowing for a fixed "administrative late fee" (e.g., $40) to cover the real cost of chasing the payment, provided it doesn't run afoul of the Criminal Code when calculated as an APR over a short period.

7. About the Author

Santanu Sarma is an economics researcher and the creator of GetInvoicePDF.com. His focus is on commercial frameworks for freelancers and small businesses: how payment terms, interest, and contract structure affect cash flow, and how independent professionals can protect themselves legally. He builds free tools for invoicing, tax, and late payment calculations to help freelancers secure their income.