Interest on Overdue Invoices:
What BC Businesses Need to Know

If you are a business owner dealing with unpaid invoices in BC, interest clauses can be a powerful tool. But under Canadian law, they only work if they are drafted correctly. Many businesses assume that listing interest on an invoice is enough. It is not.
For companies pursuing business debt collection, understanding how interest must be stated in a contract can make the difference between recovering what you are owed or losing the right to claim interest altogether.

Annual Rate of Interest Is a Required Term

With one exception, if you enter into a contract with another party that requires interest to be paid in certain circumstances, such as when an invoice is overdue, the interest rate must be stated as an annual rate. While interest can also be expressed as a daily, weekly, or monthly rate, the annual equivalent must be clearly set out.

The Canada Interest Act, RSC 1985, I-15 states:

4 Except as to mortgages on real property … 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 … 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.

By way of example, where a contract provides for interest on overdue invoices at 2 percent per month, the amount recoverable will be limited to 5 percent per year unless the equivalent annual rate is clearly stated in the contract. On paper, 2 percent per month looks like a modest number. Left unconverted, it works out to roughly 24 percent per year, a figure most business owners would want spelled out and agreed to up front rather than discovered after the fact in a dispute over unpaid invoices.

Why Invoice-Only Interest Clauses Do Not Hold Up

It is also important to understand that interest cannot be imposed retroactively. Simply adding a line to an invoice stating that interest applies to overdue accounts is not enough.
If the customer did not agree to interest terms before the transaction was completed, that invoice wording is unenforceable. Courts require proof that both parties agreed in advance to the interest rate and how it would be calculated. This issue commonly arises in debt recovery and business disputes, where informal or incomplete contracts create enforcement problems. It ties back to a broader principle in BC contract law: a term only binds a party if they agreed to it before the deal was struck, not after. See A Handshake Isn’t Enough: BC’s Legal Requirements for Enforceable Contracts for more on what makes a term enforceable in the first place.

How Much Interest Can You Legally Charge on Overdue Invoices in BC?

Separate from the annual-disclosure rule above, businesses often ask whether there is a hard ceiling on the interest rate itself. There is. Canada’s Criminal Code sets a maximum lawful rate of interest, and that ceiling changed on January 1, 2025. The former flat 60 percent per year cap was replaced with a floating rate tied to the Bank of Canada’s benchmark rate plus 20 percentage points, recalculated quarterly.

In practice, this ceiling rarely affects ordinary commercial invoice terms. Most businesses charge somewhere in the range of 12 to 24 percent per year on overdue accounts, well under the current threshold. For most BC businesses, the real risk isn’t hitting the criminal rate, it’s failing the Interest Act’s annual-disclosure rule and losing the right to claim anything above 5 percent. Assumption: the current numeric ceiling moves with the Bank of Canada’s rate, so if you want an exact figure to cite in a client-facing answer, that should be confirmed before publishing rather than taken from this draft.

What If Your Contract Doesn’t Mention Interest at All?

If your contract or credit terms are silent on interest, you cannot start charging it after the debt is already overdue, for the reasons set out above. That doesn’t leave you with nothing.
Once a matter proceeds to court, the Court Order Interest Act allows a judge to award interest on the amount owed, running from the date the debt became payable to the date of judgment, at a rate the court sets periodically. This is a court-awarded remedy, not a contractual one, and it is generally lower than a well-drafted contractual interest clause would produce over the same period. This gap is one of the reasons many BC businesses bring in a debt collection lawyer once an account goes unpaid rather than waiting: see When Do You Need a Debt Collection Lawyer in Vancouver? A Guide for Creditors.

How a Debt Collection Lawyer Can Help

Well-drafted contracts and credit terms are essential for effective business debt collection. Our lawyers can help ensure your agreements comply with the Interest Act and are enforceable if court action becomes necessary.