Charging Interest on Overdue Invoices in Canada: The 5% Trap

If your invoice says "1.5% per month" and does not also state the equivalent annual rate, section 4 of the Interest Act caps you at 5% per annum - and interest already collected can be recovered back by the customer. The fix is to write the yearly equivalent alongside the monthly rate.

The 60-second version

• "Interest at 1.5% per month on overdue accounts" is the single most common late-payment clause in Canada, and on its own it is worth 5% per year, not 18% [3].
• Section 4 of the Interest Act caps you at 5% per annum whenever a contract states interest at a rate for any period less than a year without also stating the equivalent yearly rate [3].
• The fix is one clause: state both. "1.5% per month (18% per annum)" [3].
• Interest already collected under a clause that fails section 4 can be recovered back by the payer or deducted from what they owe [4].
• At the top end, the criminal rate is now an annual percentage rate exceeding 35%, reduced from the 60% that most published guidance still quotes [6].

The clause almost everybody gets wrong

Look at the bottom of your invoice template. If it says something like "interest charged at 2% per month on overdue balances" and stops there, you have a problem that has nothing to do with whether your customer agreed to it.

Section 4 of the Interest Act reads, in relevant part:

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 [3].

Read that slowly, because every clause in it is load-bearing. If you express interest per day, per week, per month, or over any period shorter than a year, and you do not also expressly state the equivalent yearly rate, then nothing above 5% per annum is chargeable, payable or recoverable.

Not merely unenforceable in court. Not recoverable. And a customer who has already paid at the higher rate is not stuck with it either - section 5 says any sum paid on account of interest not chargeable under section 4 may be recovered back, or deducted from any principal or interest payable under the contract [4].

So the business that has been quietly collecting 2% a month for years on the strength of a template footer has, on those facts, been collecting something its customers can ask for back.

The fix takes four words

Add the annual equivalent:

• 1% per month (12% per annum)
• 1.5% per month (18% per annum)
• 2% per month (24% per annum)

That is the whole remedy. Section 4 does not cap the rate you may charge - it penalises a failure to disclose the annual equivalent. Section 2 of the Act is explicit that, except as otherwise provided by an Act of Parliament, any person may stipulate for and exact any rate of interest that is agreed on [1].

One caution on the arithmetic. If you compound monthly, 1.5% per month is not exactly 18% per annum - compounded, it is closer to 19.56%. If your clause says one thing and your system does another, you have created a discrepancy someone can argue about. The clean approach is to state the yearly rate you actually intend to charge and make sure your invoicing software calculates that.

What if you never said anything about interest?

Section 3 provides that whenever interest is payable by agreement of the parties or by law, and no rate is fixed by the agreement or by law, the rate is five per cent per annum [2].

Note the condition at the front of that sentence. Section 3 sets a rate where interest is already payable and the rate is simply missing. It does not by itself create a right to interest where your agreement is silent on the subject entirely. If your terms never mention interest, your entitlement is a separate question, and it usually turns on provincial law and on what a court will award as prejudgment interest rather than on anything in your invoice.

The practical lesson is the same either way: put it in writing, before the work, on the document the customer accepts.

The ceiling at the other end

Section 347 of the Criminal Code makes it an offence to enter into an agreement to receive interest at a criminal rate, to advertise such an offer, or to receive payment at a criminal rate [6].

The number changed, and a lot of guidance has not caught up. The Criminal Code now defines a criminal rate as an annual percentage rate, calculated in accordance with generally accepted actuarial practices and principles, that exceeds 35 per cent on the credit advanced [6]. The long-standing figure was 60 per cent. The amendment history on the section includes 2023, c. 26, s. 610 and 2024, c. 17, s. 336.

Two features of the definitions matter to anyone setting late-payment terms. First, "interest" is defined broadly: it is the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge, paid or payable for the advancing of credit [6]. A flat "$50 late fee" is not outside the calculation just because you called it a fee.

Second, because it is an annual percentage rate, small balances paid slightly late are where the arithmetic gets dangerous. A $50 charge on a $400 invoice paid two weeks late is a very large annualised number.

Whether ordinary trade credit on an unpaid invoice amounts to "credit advanced" under an "agreement or arrangement" for the purposes of section 347 is not something to assume in either direction - it depends on the facts and on how your terms are drafted. The sensible posture is not to treat 35% as a target to approach. Keep late-payment charges proportionate, and get advice before layering a flat penalty on top of a monthly rate.

Do you charge GST/HST on a late payment fee?

This one has a clean answer in the Excise Tax Act. Section 161 provides that where property or services are supplied and the invoice amount may be reduced for early payment, or an additional amount is charged if the consideration is not paid within a reasonable period specified in the invoice, the consideration due is deemed to be the amount of consideration shown in the invoice [7].

In other words the tax base does not move. A late payment charge does not increase the consideration for GST/HST purposes, and an early payment discount does not reduce it. You calculated the tax on the invoice amount; that stays the tax.

This surprises people in both directions. Businesses offering 2/10 net 30 discounts often incorrectly reduce the GST/HST when the discount is taken. Businesses adding late fees often incorrectly add tax on top. Section 161 disposes of both.

Making the terms actually work

A late payment clause only does its job if the customer is bound by it. That means the terms need to reach them before or with the work, not for the first time on an invoice sent after the fact. Terms that appear only on the invoice are the weakest version, because the customer never agreed to them at the point the deal was struck.

The stronger sequence is: terms stated in the quote or engagement letter, accepted by the customer, then repeated on every invoice as a reminder. Recall that section 4 refers to the terms of a written or printed contract [3].

A workable set of terms states the payment period, the monthly rate together with its annual equivalent, and what happens next if the account stays unpaid. Keep it short and keep it consistent - a clause you enforce selectively is harder to rely on than a modest one you apply the same way every time.

Frequently asked questions

Can I charge 2% per month interest on overdue invoices in Canada?

Yes, but only if your contract also states the equivalent yearly rate. Section 4 of the Interest Act caps interest at 5% per annum where a written contract expresses a rate for any period shorter than a year without an express statement of the equivalent annual rate. Write it as 2% per month (24% per annum) and the cap does not bite.

What happens if my invoice only says 1.5% per month?

Nothing above 5% per annum is chargeable, payable or recoverable on the principal. Worse, section 5 of the Interest Act allows any sum already paid on account of interest that was not chargeable under section 4 to be recovered back by the payer, or deducted from principal or interest still owing.

What is the maximum interest rate I can charge in Canada?

Section 347 of the Criminal Code defines a criminal rate as an annual percentage rate exceeding 35 per cent on the credit advanced. That figure was reduced from 60 per cent, and much published guidance still quotes the old number. The definition of interest includes fees, fines, penalties and commissions, not just the stated rate.

Do I charge GST or HST on a late payment fee?

No. Section 161 of the Excise Tax Act deems the consideration due to be the amount of consideration shown on the invoice, whether an additional amount is charged for late payment or the amount may be reduced for early payment. The tax base stays at the invoiced amount in both directions.

Does the 5% cap apply to mortgages?

No. Section 4 opens with an express exception for mortgages on real property and hypothecs on immovables. Those are governed by their own rules in sections 6 through 10 of the Interest Act, including separate requirements about how the rate must be stated.

Can I add interest if my contract never mentioned it?

Not automatically. Section 3 of the Interest Act sets a 5% per annum rate where interest is payable by agreement or by law but no rate is fixed - it presupposes an entitlement rather than creating one. Where your terms are silent, whether you get interest generally turns on provincial law and prejudgment interest rules.

Sources cited in this article

1. Interest Act, section 2
   No restriction except by statute: parties may stipulate for and exact any agreed rate of interest.
   https://laws-lois.justice.gc.ca/eng/acts/i-15/section-2.html
2. Interest Act, section 3
   Where interest is payable but no rate is fixed by the agreement or by law, the rate is five per cent per annum.
   https://laws-lois.justice.gc.ca/eng/acts/i-15/section-3.html
3. Interest Act, section 4
   The 5% per annum cap where a sub-annual rate is stated without an express statement of the equivalent yearly rate.
   https://laws-lois.justice.gc.ca/eng/acts/i-15/section-4.html
4. Interest Act, section 5
   Sums paid on account of interest not chargeable under section 4 may be recovered back or deducted.
   https://laws-lois.justice.gc.ca/eng/acts/i-15/section-5.html
5. Interest Act, full consolidated text
   Sections 2 to 10, including the separate mortgage and hypothec rules. Act current to 2026-06-17.
   https://laws-lois.justice.gc.ca/eng/acts/I-15/page-1.html
6. Criminal Code, section 347
   Criminal interest rate: an annual percentage rate exceeding 35 per cent. Amendment history includes 2023, c. 26, s. 610 and 2024, c. 17, s. 336. The definition of interest includes fees, fines, penalties and commissions.
   https://laws-lois.justice.gc.ca/eng/acts/c-46/section-347.html
7. Excise Tax Act, section 161
   Early or late payments: the consideration due is deemed to be the amount shown on the invoice, so late fees and early payment discounts do not move the GST/HST base.
   https://laws-lois.justice.gc.ca/eng/acts/e-15/section-161.html
8. CRA - RC4022, General Information for GST/HST Registrants
   CRA's general guide to charging, collecting and remitting GST/HST.
   https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4022.html

All sources verified August 15, 2026. Spotted a link that has moved? Email support@mapleinvoice.com and we will correct it.