Loan Agreement Template Canada: Personal & Business Loans
Quick Answer
A loan agreement is a legally binding contract between a lender and a borrower that sets out the loan amount, interest rate, repayment schedule, and consequences of default. In Canada, every loan — whether a personal loan between family members, a private business loan, or a formal commercial credit facility — should be documented in writing. Since January 1, 2025, the criminal interest rate under Criminal Code s.347 was lowered to 35% APR for most loans, with tiered exceptions for commercial loans. Download our free loan agreement template or book a free consultation with a lawyer.
Whether you are lending money to a friend, financing a family member’s home purchase, providing a business loan to a partner, or setting up a formal credit facility, a properly drafted loan agreement protects both the lender and borrower. Without a written loan contract, disputes about repayment terms, interest rates, and default remedies become extremely difficult to resolve — and nearly impossible to enforce in court.
This guide covers everything you need to know about loan agreements in Canada: what to include, the critical difference between personal and business loans, the 2025 criminal interest rate changes, how a loan agreement differs from a promissory note, and the tax implications of lending money. If you are securing a loan with property, see our guides on general security agreements and mortgage agreements.
What Is a Loan Agreement?
A loan agreement (also called a loan contract or lending agreement) is a legally binding document that governs the terms of a loan between a lender and borrower. Unlike a promissory note, which is a one-sided promise to pay, a loan agreement is a bilateral contract that sets out the obligations of both parties — including the lender’s obligation to advance funds and the borrower’s obligation to repay.
A comprehensive loan contract should address every aspect of the lending relationship: how much is being lent, when and how it will be repaid, what interest is charged, what happens if the borrower defaults, and what security (if any) the lender holds. Getting these terms in writing is not just good practice — it is essential for enforceability in Canadian courts.
Personal Loan vs. Business Loan Agreement: Key Differences
The type of loan determines both the legal requirements and the maximum interest rate you can charge. Here is how personal and business loan agreements differ in Canada:
What Every Loan Agreement Must Include
A well-drafted loan agreement should include the following essential terms:
Parties
Full legal names and addresses of the lender(s) and borrower(s). For business loans, include the corporate name, jurisdiction of incorporation, and any guarantors.
Loan Amount (Principal)
The exact amount being advanced. For revolving credit facilities, specify the maximum credit limit and draw-down conditions.
Interest Rate
Fixed or variable rate, expressed as an annual percentage rate (APR). Must not exceed the criminal interest rate under s.347 of the Criminal Code. Specify whether interest compounds and how frequently.
Repayment Schedule
Monthly, quarterly, or lump-sum repayment. Include specific due dates, the amount of each payment, and the final maturity date. Specify how payments are applied (interest first, then principal).
Prepayment Terms
Can the borrower repay early without penalty? Specify whether prepayment is allowed, any prepayment fees, and notice requirements.
Security / Collateral
If the loan is secured, describe the collateral — real property (mortgage), business assets (general security agreement), shares, equipment, or personal guarantees. Specify registration requirements (PPSA).
Events of Default
Define what constitutes a default: missed payments, insolvency, breach of covenants, material adverse change. Specify the cure period (if any) before the lender can accelerate the loan.
Default Remedies and Acceleration
What happens upon default? Typically, the lender may demand immediate repayment of the entire outstanding balance (acceleration), enforce security, charge a default interest rate, and pursue legal remedies. A demand for payment is usually the first step.
Governing Law and Dispute Resolution
Specify which province’s laws govern the agreement and how disputes will be resolved — courts, mediation, or arbitration.
Criminal Interest Rate: The 2025 Changes You Must Know
⚠️ Critical Legal Update — January 1, 2025
The criminal interest rate under Criminal Code s.347 was reduced from 60% effective annual rate (EAR) to 35% annual percentage rate (APR) for most loans. This is a major change: the previous 60% EAR was approximately 48% APR, so the new cap is significantly lower. Charging interest above the criminal rate is a criminal offence punishable by up to 5 years imprisonment or a $25,000 fine on summary conviction.
The new regime introduces a tiered system based on loan type and amount:
⚠️ Important: “Interest” under s.347 includes all charges and expenses — fees, commissions, penalties, bonuses, and any other cost of borrowing. Even if your stated interest rate is below 35%, additional fees could push the total APR above the criminal threshold. Have a lawyer calculate the all-in APR before finalizing your loan agreement.
Need a Loan Agreement That Complies With Canadian Law?
A lawyer can draft or review your loan agreement to ensure it complies with the criminal interest rate, includes proper security provisions, and is enforceable in your province. Free 10-minute consultation.
Loan Agreement vs. Promissory Note: Which Do You Need?
Many people confuse loan agreements with promissory notes. Both document a debt, but they serve different purposes:
Loan Agreement
Bilateral contract — both parties have obligations. The lender agrees to advance funds; the borrower agrees to repay. Contains detailed terms: security, covenants, events of default, representations, and warranties.
Best for: complex loans, secured loans, business loans, loans with covenants or conditions.
Promissory Note
Unilateral promise — only the borrower promises to pay. A negotiable instrument under the Bills of Exchange Act. Simpler document with fewer terms. Can be transferred to third parties.
Best for: simple loans, personal loans between family/friends, vendor financing.
For significant loans — especially business loans or secured loans — you typically need both: a loan agreement that governs the detailed terms, plus a promissory note as evidence of the debt that can be enforced independently. For simple personal loans, a promissory note alone may suffice.
Tax Implications of Loan Agreements in Canada
Loans in Canada have important tax consequences that should be addressed in your loan agreement:
Interest income is taxable: Any interest you earn from lending money is considered income and must be reported to the CRA. This applies to personal loans between family members as well as formal business loans.
Interest expense may be deductible: For business borrowers, interest paid on money borrowed for the purpose of earning income is generally deductible under the Income Tax Act. Proper documentation — including a written loan agreement with a stated interest rate — is essential to support the deduction.
CRA attribution rules for family loans: If you lend money to a spouse or minor child at a below-market interest rate, the CRA may “attribute” the investment income back to you — meaning you pay tax on it as if you earned it yourself. To avoid attribution, the loan must charge interest at least equal to the CRA prescribed rate at the time the loan is made, and the borrower must actually pay the interest by January 30 of each year.
Shareholder loans: Loans between a corporation and its shareholders are subject to specific rules under s.15 of the Income Tax Act. A shareholder loan that is not repaid within one year after the end of the corporation’s tax year may be included in the shareholder’s income. Your corporate contracts and partnership agreements should address these lending arrangements.
Common Mistakes in Canadian Loan Agreements
Not putting the loan in writing. Verbal loan agreements are technically enforceable, but proving the terms in court is extremely difficult. Even loans between family members or close friends should be documented — this protects the relationship, not just the money.
Exceeding the criminal interest rate. Many private lenders are unaware that the criminal rate was lowered to 35% APR on January 1, 2025. When you include all fees and charges, the effective rate may exceed the cap even if the stated rate appears compliant. This is a criminal offence.
No default provisions. If the agreement does not define what constitutes a default or what remedies are available, the lender may need to go to court to enforce repayment — a costly and time-consuming process. Always include clear default triggers and acceleration clauses.
Ignoring CRA attribution rules on family loans. Lending to a spouse or child without charging the prescribed interest rate can result in the investment income being attributed back to the lender. This is one of the most common tax planning mistakes in Canada.
No security for large loans. For any significant loan, the lender should take security — a general security agreement, mortgage, or personal guarantee. Without security, the lender is an unsecured creditor in the event of the borrower’s insolvency.
How to Secure a Loan in Canada
For loans of significant value, lenders should take security to protect their position in the event the borrower defaults or becomes insolvent. The type of security depends on the nature of the loan and the borrower’s assets:
A General Security Agreement (GSA) grants the lender a security interest in all of the borrower’s personal property — accounts receivable, inventory, equipment, and intangible assets. This is the standard security instrument for business loans and should be registered under the applicable provincial Personal Property Security Act (PPSA).
A mortgage agreement grants the lender a security interest in real property. If the borrower defaults, the lender can enforce the mortgage through power of sale or judicial foreclosure, depending on the province.
A personal guarantee from the business owner or a third party provides an additional layer of security. If the borrower is a corporation, a personal guarantee makes the guarantor personally liable if the corporation defaults. Combined with a share pledge or assignment of key contracts, these security arrangements can provide comprehensive protection for the lender.
Related Financial Agreements Your Business May Need
A loan agreement is often part of a larger suite of financial and legal documents. Depending on your situation, you may also need:
A promissory note — a simpler, negotiable instrument evidencing the debt. Often used alongside a loan agreement for enforcement purposes.
A general security agreement (GSA) — grants the lender a security interest in the borrower’s business assets. Essential for any secured business loan.
A mortgage agreement — secures the loan against real property. Required when real estate is used as collateral.
A service agreement — if the loan is connected to an ongoing business relationship, the lending terms should align with the service terms.
A confidentiality agreement — protects sensitive financial information exchanged during the lending process. Explore our full financial agreements section for more resources.
Frequently Asked Questions About Loan Agreements in Canada
Do I need a written loan agreement in Canada?
While verbal loan agreements can be legally binding, they are extremely difficult to prove and enforce. A written loan agreement protects both parties by clearly documenting the amount, interest rate, repayment schedule, and default consequences. For any loan over a few hundred dollars, a written agreement is strongly recommended.
What is the maximum interest rate I can charge in Canada?
Since January 1, 2025, the criminal interest rate is 35% APR for most loans. Business loans between $10,001 and $500,000 (to non-natural persons for commercial purposes) are capped at 48% APR. Business loans over $500,000 to corporations have no criminal interest rate cap. The 35% cap includes all fees and charges — not just the stated interest rate.
What is the difference between a loan agreement and a promissory note?
A loan agreement is a bilateral contract that sets out the obligations of both the lender and borrower, with detailed terms including security, covenants, and events of default. A promissory note is a unilateral promise by the borrower to pay, is simpler in form, and is a negotiable instrument under the Bills of Exchange Act. For complex or secured loans, you often need both.
Can I lend money to a family member in Canada?
Yes, but you should use a written loan agreement. For tax purposes, if you lend to a spouse or minor child at below the CRA prescribed rate, the income attribution rules may apply — meaning the investment income earned from the loaned funds is taxed in your hands, not theirs. To avoid this, charge interest at least equal to the prescribed rate and ensure the borrower pays it annually by January 30.
What happens if a borrower defaults on a loan in Canada?
If the loan agreement includes default provisions, the lender can typically accelerate the loan (demand full repayment immediately), enforce any security (seize collateral), and pursue a breach of contract claim for damages. The first step is usually a formal demand for payment. If unpaid, the lender may commence legal proceedings within the applicable limitation period (2 years in most provinces).
Are personal guarantees enforceable in Canada?
Yes — personal guarantees are enforceable in Canada if they are in writing and signed by the guarantor. The guarantor becomes personally liable for the borrower’s debt if the borrower defaults. Guarantees should clearly state the maximum amount guaranteed, whether the guarantee is continuing or limited, and any conditions for enforcement.
Do old loan agreements need to comply with the new 35% rate?
No. Loans entered into before January 1, 2025, that complied with the previous 60% EAR cap remain enforceable under the prior rules. Only loans entered into on or after January 1, 2025, must comply with the new 35% APR cap. However, any new loans or refinancing after that date are subject to the new rules.
What should I do if someone owes me money and won’t pay?
Start with a formal demand for payment — a lawyer-drafted letter that puts the debtor on notice and often resolves the matter without litigation. If the debtor still refuses to pay, you can commence a legal action for breach of contract. For amounts under $35,000 in most provinces, you can use Small Claims Court. For larger amounts, you will need to file in Superior Court.
Where can I get a free loan agreement template for Canada?
Canada Business Lawyers provides free loan agreement templates for both personal and business loans. Download from our loan agreement page or visit our template library. For loans involving significant amounts, security, or complex terms, we recommend having a lawyer review or customize the agreement. Book a free consultation to get started.
What is a vendor take-back loan in a business purchase?
A vendor take-back (VTB) loan occurs when the seller of a business finances part of the purchase price — essentially lending money to the buyer. This is documented through a loan agreement and promissory note, typically secured by the assets being purchased. VTBs are common in Canadian business sales where the buyer cannot obtain full bank financing. The terms should be negotiated as part of the purchase of business agreement, often preceded by a letter of intent.
Get Your Loan Agreement Right
Whether you are lending $5,000 to a family member or structuring a $500,000 business loan, a properly drafted agreement protects your money and your rights. Free consultation with a lawyer from our network.