Promissory Note Canada: How It Works + Free Sample Template
Quick Answer
A promissory note in Canada is a legally binding written promise by a borrower to repay a specific sum of money to a lender under agreed terms. It is governed by the federal Bills of Exchange Act (RSC 1985, c. B-4). A valid promissory note must be unconditional, in writing, signed by the borrower, and specify an exact amount. Promissory notes are commonly used for personal loans between family or friends, business financing, and real estate transactions. Download our free promissory note template to get started.
Lending money — whether to a family member, friend, business partner, or startup — is one of the most common financial transactions in Canada. Yet many Canadians hand over thousands of dollars with nothing more than a verbal agreement and a handshake. When things go wrong, they have no legal recourse. A promissory note changes that. It creates a written, enforceable record of the debt that protects both the lender and the borrower.
This guide explains how a promissory note works in Canada, what the law requires for it to be valid, the different types available, and how to write one yourself using our free template. We also cover how promissory notes differ from loan agreements, what happens when a borrower defaults, and important tax and securities law considerations that most online guides overlook. If you are involved in a private sale, our guide to the bill of sale template may also be helpful.
What Is a Promissory Note in Canada?
A promissory note is a financial instrument containing a written, unconditional promise by one party (the maker or borrower) to pay a specific sum of money to another party (the payee or lender) either on demand or at a fixed future date. In Canada, promissory notes are governed by the federal Bills of Exchange Act, RSC 1985, c. B-4, which defines the legal requirements and establishes the rights of the parties involved.
Section 176(1) of the Bills of Exchange Act defines a promissory note as: “an unconditional promise in writing made by one person to another person, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person or to bearer.”
Unlike a simple IOU, a promissory note is a formal legal document that can be presented as evidence in court, transferred (negotiated) to third parties, and enforced through legal proceedings if the borrower fails to pay.
Types of Promissory Notes Used in Canada
There are several types of promissory notes, and the right one depends on the nature of the loan, the relationship between the parties, and whether collateral is involved.
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Simple / Unsecured Note
No collateral backing. Based on the borrower’s promise to repay. Most common for personal loans between family, friends, or small informal business arrangements.
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Secured Note
Backed by collateral such as property, vehicles, equipment, or inventory. If the borrower defaults, the lender can claim the secured asset. Often paired with a general security agreement.
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Demand Note
The lender can request full repayment at any time rather than on a fixed schedule. Provides the lender with maximum flexibility but less predictability for the borrower.
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Installment Note
Repayment is made through regular installments (monthly, quarterly) over an agreed period, typically including interest. The most structured type, commonly used in business financing.
💡 Pro Tip: For business purchases, a promissory note is frequently used alongside a business asset purchase agreement or share purchase agreement when the buyer cannot pay the full price upfront. The promissory note formalizes the deferred payment portion of the transaction.
Promissory Note vs. Loan Agreement: Which Do You Need?
Both documents serve to record a debt, but they differ in complexity and scope. Understanding the distinction helps you choose the right document for your situation.
Promissory Note
✅ Signed by the borrower only
✅ One-way obligation (borrower → lender)
✅ Shorter, less detailed
✅ Best for informal or straightforward loans
✅ Can be transferred to a third party
Loan Agreement
✅ Signed by both parties
✅ Mutual obligations (conditions on both sides)
✅ Longer, more comprehensive
✅ Best for complex or large loans
✅ Includes representations, warranties, covenants
In general, a promissory note is sufficient for personal loans, family loans, and simple business lending. A more detailed loan agreement is recommended when the loan is large, involves collateral, includes complex repayment terms, or where both parties have conditions that need to be documented.
Legal Requirements for a Valid Promissory Note in Canada
Under the Bills of Exchange Act, a promissory note must meet specific legal requirements to be valid and enforceable. If any of these elements are missing, the document may not qualify as a promissory note under the Act:
In writing. A verbal promise to pay does not constitute a promissory note. The promise must be documented on paper or in electronic form.
Unconditional promise. The promise to pay cannot depend on any conditions being met. It must be absolute — “I promise to pay,” not “I will pay if my business succeeds.”
Sum certain in money. The exact dollar amount must be specified. Vague references like “a reasonable amount” or “the balance owed” are insufficient.
Signed by the maker. The borrower (maker) must sign the note. Electronic signatures are generally accepted in Canada under the federal and provincial electronic commerce Acts.
Payable on demand or at a determinable time. The note must state when repayment is due — either “on demand” or at a specified future date (e.g., “on or before December 31, 2027”).
Payable to a specified person or bearer. The note must identify who is entitled to receive payment. It can be made payable to a named individual, to their order, or to the bearer of the note.
What to Include in a Canadian Promissory Note
Beyond the minimum legal requirements, a well-drafted promissory note should include additional practical terms to protect both parties:
⚠️ Interest Rate Warning: Under Section 347 of the Criminal Code of Canada, charging an effective annual interest rate exceeding 35% (reduced from 60% in 2024) is a criminal offence punishable by imprisonment. Always calculate the true effective annual rate including all fees and charges to ensure compliance. This applies to all promissory notes, including those between private individuals.
Free Promissory Note Template for Canada
Below is a general-purpose promissory note template that can be customized for personal or business use across Canada. For a downloadable version, visit our promissory note template page.
PROMISSORY NOTE
$[AMOUNT] Date: [DATE]
FOR VALUE RECEIVED, the undersigned, [BORROWER FULL NAME] of [ADDRESS, CITY, PROVINCE] (the “Borrower”), hereby unconditionally promises to pay to the order of [LENDER FULL NAME] of [ADDRESS, CITY, PROVINCE] (the “Lender”), the principal sum of [AMOUNT IN WORDS] dollars ($[AMOUNT]) in lawful money of Canada.
Interest: The unpaid principal balance shall bear interest at the rate of [X]% per annum, calculated [monthly / annually], from the date hereof until paid in full.
Repayment: [OPTION A: The entire outstanding balance, together with accrued interest, shall be due and payable on or before [DATE].] [OPTION B: The Borrower shall make monthly payments of $[AMOUNT] beginning on [DATE] until the principal and interest are paid in full.]
Prepayment: The Borrower may prepay this Note in full or in part at any time without penalty.
Default: If the Borrower fails to make any payment within [X] days of its due date, the entire remaining balance, including accrued interest, shall become immediately due and payable at the option of the Lender.
Governing Law: This Note shall be governed by the laws of the Province of [PROVINCE] and the federal laws of Canada applicable therein.
_________________________ _________________________
Borrower (Maker) Signature Witness Signature
_________________________ _________________________
Lender (Payee) Signature Witness Signature
Need a Customized Promissory Note?
A lawyer can draft a promissory note tailored to your specific loan terms, interest structure, and security requirements. Free 10-minute consultation.
What Happens If a Borrower Defaults on a Promissory Note?
When a borrower fails to meet the repayment terms of a promissory note, the lender has several legal options available in Canada:
Demand immediate repayment: Most well-drafted promissory notes include an acceleration clause, which makes the entire remaining balance (plus accrued interest) immediately due and payable upon default.
Sue in court: The lender can file a lawsuit to recover the amount owed. For amounts under $35,000 in Ontario (or the provincial small claims limit), this can be done through Small Claims Court. For larger amounts, the lender would file in Superior Court. A default on a promissory note may also constitute a breach of contract, entitling the lender to damages beyond the principal amount.
Seize collateral (if secured): If the promissory note is secured by collateral, the lender can exercise their rights to claim the secured asset after proper notice. This process is governed by the provincial Personal Property Security Act (PPSA).
Send a demand for payment: Before initiating legal proceedings, the lender can send a formal demand for payment letter. This often resolves the matter without the cost and time of litigation.
Securities Law Considerations for Promissory Notes
One important but often overlooked aspect of promissory notes in Canada is their potential classification as securities. Under provincial securities legislation (such as the Ontario Securities Act), “notes or other evidence of indebtedness” may qualify as securities. If a promissory note is classified as a security, both the issuer and the note itself become subject to securities regulations — including registration and prospectus requirements — which can be extremely costly and complex.
In general, a promissory note is less likely to be classified as a security if it has a term of nine months or less, does not give the lender an equity interest in the business, and is used for a straightforward loan purpose rather than as an investment instrument. If you are using promissory notes to raise capital from multiple investors, consult with a securities lawyer to ensure compliance.
Tax Implications of Promissory Notes in Canada
Interest income earned on a promissory note is taxable in Canada. The lender must report all interest received as income on their tax return. For businesses, a promissory note appears on the balance sheet — as a liability (notes payable) for the borrower and as an asset (notes receivable) for the lender.
For personal loans between family members, the Canada Revenue Agency (CRA) may impute interest on loans made at below-market rates under the income attribution rules. This is particularly relevant when a promissory note is used as part of an income-splitting strategy. Consult with a tax professional or use a free consultation to understand the tax implications for your specific situation. If you need a broader overview of financial documents used in Canadian business, see our financial agreements page.
Common Mistakes When Using Promissory Notes in Canada
Making the promise conditional. Adding conditions like “if the project succeeds” or “subject to approval” disqualifies the document as a promissory note under the Bills of Exchange Act.
Charging illegal interest. Any effective annual rate above 35% is criminal under Section 347 of the Criminal Code. This includes all fees, charges, and penalties — not just the stated interest rate.
Not getting the note witnessed. While not strictly required, having a witness significantly strengthens the note’s enforceability in court and makes it harder for the borrower to deny signing.
Using vague repayment terms. Phrases like “when I can afford it” or “as soon as possible” make the note difficult to enforce. Always specify exact dates or “on demand.”
Relying on a verbal agreement. Without written documentation, proving the existence of a debt becomes extremely difficult. Even between family members, always get the terms in writing.
Ignoring limitation periods. In most provinces, the limitation period for enforcing a promissory note is two years from the date of default (or the date of the last payment). Missing this deadline can bar recovery entirely.
Using Promissory Notes in Business Purchases
A promissory note is a common financing tool in Canadian business acquisitions. When a buyer cannot pay the full purchase price at closing, the seller may agree to accept a promissory note for the deferred balance — effectively acting as the lender. This arrangement is known as “vendor take-back financing” or “seller financing.”
In a business purchase, the promissory note typically includes the deferred purchase amount, an agreed interest rate, a repayment schedule, security provisions (often the business assets themselves), and default remedies. The seller retains a security interest in the business assets until the note is fully repaid — providing a safety net if the buyer fails to make payments.
Promissory notes in business purchases should always be drafted in conjunction with the main asset purchase agreement or share purchase agreement and reviewed by a lawyer to ensure all parties are properly protected. The buyer should also consider a non-compete agreement with the seller and a non-disclosure agreement to protect sensitive business information during the transition.
Frequently Asked Questions About Promissory Notes in Canada
Are promissory notes legally binding in Canada?
Yes. A promissory note that meets the requirements of the Bills of Exchange Act — written, unconditional, signed, for a sum certain, and payable on demand or at a fixed time — is a legally binding financial instrument that can be enforced in Canadian courts.
Does a promissory note need to be notarized in Canada?
No. A promissory note does not need to be notarized to be valid and enforceable in Canada. However, having the note witnessed by one or two independent witnesses is strongly recommended, as it makes the document harder to dispute in court.
Can a promissory note be transferred to another person?
Yes. A promissory note is a negotiable instrument under the Bills of Exchange Act, meaning it can be transferred (endorsed) to a third party. The original lender endorses the note, and the new holder gains the right to collect on the debt. This is one of the key advantages of a promissory note over a simple IOU.
What is the maximum interest rate allowed on a promissory note in Canada?
Under Section 347 of the Criminal Code of Canada, the effective annual interest rate on any lending arrangement — including promissory notes — cannot exceed 35%. This was reduced from 60% in 2024. Charging interest above this rate is a criminal offence. The calculation includes all fees, charges, and penalties, not just the stated interest rate.
What is the difference between a promissory note and an IOU?
An IOU is an informal acknowledgment that a debt exists. A promissory note is a formal, legally defined financial instrument under the Bills of Exchange Act that contains an unconditional promise to pay. A promissory note is far easier to enforce in court, can be transferred to third parties, and carries greater legal weight than a simple IOU.
How long is a promissory note enforceable in Canada?
The limitation period for enforcing a promissory note varies by province. In Ontario and most common law provinces, the limitation period is two years from the date of default or the last payment. In some provinces like New Brunswick, it can be six years. After the limitation period expires, the lender may lose the right to sue for the debt.
Can I write my own promissory note in Canada?
Yes. You can draft your own promissory note using a template. As long as it meets the requirements of the Bills of Exchange Act — written, unconditional promise, signed, sum certain, payable to a specified person — it will be valid. For larger loans or complex situations, having a lawyer review the note is recommended.
What happens if a borrower cannot repay a promissory note?
If the borrower defaults, the lender can send a demand for payment, sue for the amount owed (plus interest and legal costs), and seize collateral if the note is secured. If the borrower is insolvent, the lender becomes a creditor in any bankruptcy or consumer proposal proceedings. Having the debt documented in a promissory note strengthens the lender’s position.
Is a promissory note the same as a mortgage?
No, though they often work together. A promissory note is the promise to repay the debt. A mortgage agreement is the security instrument that pledges real property as collateral. In a typical home purchase, the borrower signs both a promissory note (the debt) and a mortgage (the security) — two separate documents serving different legal functions.
Where can I get a free promissory note template for Canada?
Canada Business Lawyers provides a free promissory note template that includes all legally required elements and additional protective clauses. You can download it from our template library or visit our promissory note services page. For complex loans or business acquisitions, book a free consultation with a lawyer from our network.
Protect Your Loan With a Proper Promissory Note
Whether you are lending $5,000 to a family member or financing a $500,000 business purchase, a properly drafted promissory note protects everyone involved. Get professional guidance — free.