Personal Loan Agreement (Canada)

As of January 1, 2025, Criminal Code s.347 sets the criminal interest rate at 35% annual percentage rate (APR) for most consumer loans between individuals in Canada. This cap was reduced from approximately 48% APR by amendments enacted through Bill C-69, the Budget Implementation Act 2024. The 35% cap applies to all credit agreements and includes all fees, charges, fines, penalties, and expenses in the APR calculation — not just the nominal interest rate. Exceeding this rate is a criminal offence punishable under Section 347 of the Criminal Code (R.S.C. 1985, c. C-46). Exemptions from the 35% cap exist for commercial loans: loans above CAD $10,000 made for business purposes are capped at 48% APR, and loans above $500,000 for commercial purposes have no cap. These exemptions do not apply to personal loans between individuals for personal, family, or household purposes. If no interest rate is specified in the loan agreement, the Interest Act (R.S.C. 1985, c. I-15) Section 3 default rate of 5% per annum applies. The Interest Act Section 4 also requires that if interest is expressed on any basis other than per annum (such as per month or per week), the equivalent annual rate must be disclosed — otherwise the maximum recoverable rate is 5% per annum. Provincial consumer protection legislation — including Ontario's Consumer Protection Act 2002 (S.O. 2002, c. 30, Sch. A) and British Columbia's Business Practices and Consumer Protection Act (S.B.C. 2004, c. 2) — may impose additional disclosure requirements and cooling-off periods for consumer credit agreements.

Lenders who receive interest payments on a personal loan must report that interest as income on their T1 General Income Tax Return filed with the Canada Revenue Agency (CRA). The CRA scrutinizes loans between related individuals — family members, spouses, or business partners — to determine whether the arrangement is a genuine loan or a disguised income-splitting arrangement. If CRA finds the transfer was not a bona fide loan, it applies the attribution rules under Sections 74.1 through 74.5 of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.)), attributing income back to the lender. For the borrower, interest is deductible under ITA Section 20(1)(c) only if the borrowed funds were used to earn income from a business or property. Interest on personal-use loans is not tax-deductible. The CRA requires that the interest rate on loans between related parties be at least equal to the CRA's prescribed rate under Section 4301 of the Income Tax Regulations to avoid income attribution. Both parties should retain the loan agreement and all payment records for at least six years, as CRA may audit loan transactions during that period.

The lender can register a security interest in personal property (vehicle, equipment, investments, or other collateral) under the applicable provincial Personal Property Security Act (PPSA) to perfect the interest and establish priority against other creditors. Ontario's Personal Property Security Act (R.S.O. 1990, c. P.10), British Columbia's Personal Property Security Act (R.S.B.C. 1996, c. 359), and Alberta's Personal Property Security Act (R.S.A. 2000, c. P-7) each maintain their own registries. The financing statement is registered in the province where the borrower has their primary residence — through ServiceOntario, BC Registry Services, or Alberta's ACOL portal. Registration perfects the lender's interest, making it enforceable against third parties and taking priority over unsecured creditors in bankruptcy under the Bankruptcy and Insolvency Act (R.S.C. 1985, c. B-3). Consumer loan registrations are valid up to five years and renewable. In Quebec, secured transactions are governed by Articles 2660–2802 of the Civil Code of Quebec; a movable hypothec must be published in the Register of Personal and Movable Real Rights (RPMRR) to be enforceable against third parties.

To register a PPSA security interest on a personal loan in Canada, the lender files a financing statement with the provincial Personal Property Security Act registry in the province where the borrower has their primary residence. In Ontario, registration is through ServiceOntario under Section 45 of the Personal Property Security Act (R.S.O. 1990, c. P.10). In British Columbia, registration is through BC Registry Services under the PPSA (R.S.B.C. 1996, c. 359). In Alberta, registration uses the ACOL portal under the PPSA (R.S.A. 2000, c. P-7). Saskatchewan uses the PPSA Registry under the Personal Property Security Act (S.S. 1993, c. P-6.2), and Manitoba uses the Personal Property Registry under the PPSA (C.C.S.M. c. P35). Consumer loan registrations last a maximum of five years and must be renewed before expiry. The financing statement must describe the collateral by specific description or general category. Registration costs are typically under $20 per province. An unperfected security interest ranks behind all perfected interests and certain other creditors in a bankruptcy or insolvency proceeding under the Bankruptcy and Insolvency Act (R.S.C. 1985, c. B-3).

When a borrower defaults on a personal loan in Canada, the lender's remedies depend on whether the loan is secured or unsecured. For an unsecured loan, the lender may invoke the acceleration clause to declare the full balance due, charge contractual late fees (provided the total rate stays below the Criminal Code Section 347 cap of 35% APR), and sue in the applicable provincial court. Small claims limits are $35,000 in Ontario (Courts of Justice Act, R.S.O. 1990, c. C.43), $35,000 in British Columbia (Civil Resolution Tribunal Act), and $50,000 in Alberta (Provincial Court Act, R.S.A. 2000, c. P-31). Larger amounts go to the Superior Court of Justice (Ontario), BC Supreme Court, or Court of King's Bench of Alberta. For a secured loan, the lender can enforce the security interest under the applicable provincial PPSA. In Ontario, Sections 59–67 of the Personal Property Security Act (R.S.O. 1990, c. P.10) govern enforcement, including seizure and disposal of collateral. Section 63 requires a notice of default and cure period before seizing consumer goods. After judgment, the lender may garnish wages or register the judgment against real property. The borrower remains liable for any deficiency after collateral sale.

The Interest Act (R.S.C. 1985, c. I-15) establishes mandatory disclosure rules for every personal loan agreement in Canada. Section 4 requires that whenever interest is charged at a rate calculated on any basis other than yearly — per month, per week, or per day — the agreement must also express the equivalent yearly rate. Failure to state the annual equivalent limits the creditor to recovering no more than 5% per annum, regardless of what the agreement states. For example, writing "2% per month" without stating the annual equivalent of 26.82% means the lender is capped at 5% per annum. Section 6 of the Interest Act addresses mortgage prepayment: after five years on a fixed-rate mortgage, the mortgagor may repay the outstanding principal with a maximum penalty of three months' interest, regardless of any contrary term in the mortgage. Section 3 sets the default interest rate at 5% per annum when a contract refers to interest but specifies no rate. Lenders using the forms-legal.com Personal Loan Agreement template should state both the nominal interest rate and the annual percentage rate (APR) to comply with the Interest Act and avoid the 5% penalty cap.