Loan Agreement (Canada)

A Loan Agreement in Canada sets the loan amount, interest rate, and repayment terms binding lender and borrower, governed primarily by the federal Interest Act (R.S.C. 1985, c. I-15) and provincial contract law.

Canadian loan agreements are subject to federal legislation that imposes strict limits on interest and disclosure. The Criminal Code of Canada (s. 347) makes it a criminal offence to charge an effective annual interest rate exceeding 60%, including all fees and charges. The federal Interest Act (R.S.C. 1985, c. I-15) requires that the interest rate be clearly expressed as an annual rate — if a loan agreement states interest on any other basis (such as monthly) without disclosing the equivalent annual rate, the lender can only recover interest at 5% per annum under s. 4 of the Act.

For secured loans — those backed by collateral such as vehicles, equipment, or inventory — the lender must register the security interest under the applicable provincial Personal Property Security Act (PPSA) to establish priority over other creditors. Each province maintains a PPSA registry (Ontario's is administered by ServiceOntario, BC uses the BC Personal Property Registry). Failure to register means the lender's security interest may be subordinated to other creditors in the event of the borrower's insolvency.

The agreement should also address the tax treatment of interest payments. Business borrowers may deduct interest under Section 20(1)(c) of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.)) if funds are used to earn income from a business or property. The Canada Revenue Agency examines loans between related parties for compliance with arm's length pricing under Section 247 of the Income Tax Act. The Bills of Exchange Act (R.S.C. 1985, c. B-4) governs promissory notes — Section 176 sets out the requirements for a valid promissory note, and Section 177 addresses liability. For intercompany loans, transfer pricing rules under Section 247 of the Income Tax Act require that interest rates reflect what arm's length parties would charge. The Financial Consumer Agency of Canada administers consumer protection provisions of the Bank Act (S.C. 1991, c. 46) Section 627 for federally regulated lenders. Provincial superior courts — including the Ontario Superior Court of Justice and British Columbia Supreme Court — have jurisdiction over loan enforcement actions. The forms-legal.com Loan Agreement template covers mandatory Canadian requirements including the Criminal Code Section 347 interest cap, Interest Act Section 4 annual rate disclosure, and provincial PPSA registration procedures.

When lending money to a friend, family member, or associate, and both parties want enforceable terms governing repayment, interest, and default consequences to protect the relationship and the lender's legal position.

When a small business borrows from a private lender, investor, or shareholder rather than a bank, and needs a formal agreement that complies with the Interest Act and Criminal Code interest cap provisions.

When providing seller financing in a business sale or real estate transaction, where the purchase price is partially paid through a loan from the seller to the buyer with a structured repayment schedule.

When a secured loan involves collateral (vehicle, equipment, accounts receivable, or inventory) and the lender needs to document the security interest before registering it under the provincial PPSA.

When a company makes an intercompany loan to a subsidiary or related entity and needs documentation to satisfy CRA transfer pricing rules and demonstrate the loan is at arm's-length terms.

Without a written loan agreement, the lender has no enforceable right to interest, no documented default remedies, and may face challenges recovering the principal in court. The Canada Revenue Agency may also reclassify undocumented advances as gifts or income under Section 15 of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.)), creating unintended tax consequences for both parties. Section 15 shareholder benefit rules and Section 80.4 imputed interest rules apply when a corporation makes a loan to a shareholder at below-market rates. Ontario's Limitations Act, 2002 (S.O. 2002, c. 24, Sch. B) Section 4 imposes a two-year limitation period for commencing court proceedings to recover a loan — a written agreement with a clear default date is essential for establishing when the limitation period begins. British Columbia's Limitation Act (S.B.C. 2012, c. 13) Section 6 similarly imposes a two-year basic limitation period. Provincial superior courts have jurisdiction over loan disputes. The Personal Information Protection and Electronic Documents Act (S.C. 2000, c. 5) Section 7 governs disclosure of borrower personal information to third parties such as collection agencies or credit bureaus.

Principal Amount and Disbursement — The exact amount being lent, the currency (CAD), and the method and date of disbursement. For loans disbursed in instalments, include a draw schedule with conditions for each advance.

Interest Rate and Disclosure — The annual interest rate expressed as required by the Interest Act. If interest is calculated monthly or daily, the equivalent annual rate must be disclosed. The total effective rate, including all fees, must not exceed 60% per annum under Criminal Code s. 347. Specify whether the rate is fixed or variable and, for variable rates, the benchmark rate used (e.g., Bank of Canada prime rate).

Repayment Schedule — Payment amounts, frequency (weekly, bi-weekly, monthly), maturity date, and whether payments are interest-only, blended (principal and interest), or a lump sum at maturity. Include the total number of payments and the final payment amount.

Prepayment Rights — Whether the borrower may repay the loan early, in whole or in part, without penalty. The Interest Act s. 10 gives borrowers the right to prepay certain loans after five years with a three-month interest penalty, but the agreement should address prepayment for the specific loan term.

Security and Collateral — If the loan is secured, describe the collateral in sufficient detail for PPSA registration. Include the borrower's obligation to maintain the collateral, insure it, and not encumber it with additional security interests without the lender's consent.

Default and Remedies — Define what constitutes default (missed payment, breach of covenant, insolvency, material adverse change) and the lender's remedies, including acceleration of the entire balance, seizure of collateral, and appointment of a receiver under provincial law.

Representations and Covenants — The borrower's confirmation of their legal capacity to borrow, the accuracy of financial statements provided, and ongoing obligations such as maintaining insurance, providing periodic financial reports, and notifying the lender of adverse events.

Governing Law — The province whose laws govern the agreement, determining the applicable PPSA regime, limitation periods, and court procedures. Ontario's Personal Property Security Act (R.S.O. 1990, c. P.10) Section 45 governs financing statement registration. British Columbia's Personal Property Security Act (R.S.B.C. 1996, c. 359) Section 30 governs perfection. Alberta's Personal Property Security Act (R.S.A. 2000, c. P-7) Section 24 governs priority rules. Quebec secured loans are governed by Civil Code of Quebec Articles 2660–2802 (movable hypothec). The forms-legal.com Loan Agreement template is designed to comply with the Criminal Code (R.S.C. 1985, c. C-46) Section 347 interest cap, Interest Act (R.S.C. 1985, c. I-15) Section 4 annual rate disclosure requirement, and provincial PPSA registration requirements across all Canadian provinces. Related documents to consider alongside a Loan Agreement include a Promissory Note, a Payment Plan Agreement, and a Personal Guarantee — all available at forms-legal.com. The Canada Revenue Agency administers Section 20(1)(c) interest deductibility claims and Section 247 transfer pricing rules for intercompany loans. The Financial Consumer Agency of Canada (FCAC) enforces federal consumer protection provisions for regulated lenders under the Bank Act (S.C. 1991, c. 46).