If you are a business owner dealing with unpaid invoices, 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.
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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.
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.
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.
If you are dealing with unpaid invoices or need help enforcing interest clauses, speak with a debt collection lawyer Vancouver businesses rely on. Learn more about debt collection in Vancouver and how McKechnie & Company supports creditors through strategic legal recovery.