A Canadian IOU (I Owe You) is a written acknowledgment of debt in which the debtor formally confirms that they owe a specific amount of money to a creditor and promises to repay it. Unlike a promissory note, which is a formal negotiable instrument governed by the Bills of Exchange Act (R.S.C. 1985, c. B-4), an IOU is a simpler document that serves as evidence of a debt and a contractual promise to repay. It is enforceable as a simple contract under Canadian common law (or civil law in Quebec) but cannot be endorsed or transferred as a negotiable instrument.

IOUs are commonly used for informal loans between friends, family members, or acquaintances where the formality of a promissory note or full loan agreement is unnecessary. Despite their simplicity, IOUs are legally binding when properly executed — they contain an identified creditor and debtor, a specific dollar amount, a promise to repay, and the debtor's signature.

Canadian law imposes important restrictions on debt agreements. Criminal Code section 347 (as amended effective January 1, 2025) caps the criminal interest rate at 35% annual percentage rate (APR). Charging interest above this threshold is a criminal offence punishable by up to five years' imprisonment on indictment or a fine of up to $25,000 and/or two years less a day on summary conviction. If no interest rate is specified in the IOU, the Interest Act (R.S.C. 1985, c. I-15) section 3 provides a default rate of 5% per annum. Provincial limitation periods determine how long the creditor has to commence legal proceedings — ranging from two years in Ontario, British Columbia, and Alberta to six years in Manitoba.

A Canadian IOU is needed whenever one person lends money to another and wants written documentation of the debt. This is most common in informal lending situations — a parent lending money to an adult child, friends splitting the cost of a purchase, colleagues covering each other's expenses, or small personal loans for emergencies such as vehicle repairs, medical bills, or rent shortfalls.

An IOU is appropriate when the loan amount is relatively small and the parties know each other personally. For larger amounts, more complex terms, or secured loans, a formal Loan Agreement or Promissory Note may be more appropriate. However, even for small amounts, having a written IOU protects both parties by establishing a clear record of the amount owed, any interest charges, and the repayment schedule.

An IOU is particularly important when there is a risk of future disputes about whether money was a gift or a loan. In family relationships, the CRA may also scrutinize transfers between family members — a written IOU helps establish that the transfer was a bona fide loan rather than a gift (which could have tax implications under the Income Tax Act attribution rules).

Beyond personal loans, IOUs can document debts arising from goods sold, services rendered, or shared expenses. A landlord might use an IOU for unpaid rent, or a small business owner might use one for an outstanding invoice between individuals operating without formal business structures.

A comprehensive Canadian IOU should include the full legal names and addresses of both the creditor and debtor to clearly identify the parties. The date of the IOU is critical because it establishes the starting point for calculating the limitation period under provincial legislation — the clock starts ticking from the date the debt is acknowledged or the date a payment was last made.

The principal amount must be stated clearly in Canadian dollars (CAD). Include a brief description of the reason for the debt (e.g., personal loan, goods purchased) to provide context and evidence of the underlying obligation. If interest is being charged, the annual rate must be stated clearly and must not exceed the Criminal Code s.347 criminal rate of 35% APR as of January 1, 2025. The Interest Act s.4 requires that interest be expressed as a per-annum rate; otherwise, only 5% per annum may be recovered.

Repayment terms should specify whether the debt is payable as a lump sum by a specific date, in periodic instalments, or on demand. For instalment payments, state the amount, frequency, start date, and final payment date. Include the payment method (Interac e-Transfer, cheque, bank deposit) and note that all payments are in Canadian dollars.

Default provisions protect the creditor by specifying a grace period and the consequences of non-payment, such as acceleration of the entire balance and the right to pursue legal action. A governing law clause identifies the province whose laws apply, which determines the limitation period and court jurisdiction. While not legally required, including a witness strengthens enforceability — the witness observes the signing and can testify in court. The IOU should note that it is not a negotiable instrument under the Bills of Exchange Act, as this distinction matters for transferability and the legal remedies available.