Section 4 of the Interest Act or: When 2 x 12 = 5
Posted on: November 28th, 2018 by

It is not uncommon to see invoices or purchase orders that provide for interest on overdue accounts at a rate of 2 per cent per month with nothing written about the rate of interest per year. The assumption being that anyone with a basic facility with arithmetic understands that this means that interest is payable on over due accounts at a rate not less than 24 per cent per year (with monthly compounding it is closer to 27 per cent).

Surprisingly, the Interest Act, an often overlooked, short piece of federal legislation, assumes otherwise. It has the effect of capping a creditor’s right to recover interest at 5 per cent per year where a non-mortgage debt recorded in writing expresses interest at a daily, weekly, monthly, or quarterly rate.

The result is that if your terms of sale (or quotation, purchase order, invoice, etc.) stipulates interest at a rate of 2 per cent per month on overdue accounts (and nothing more), the purchaser fails to pay, you sue to recover the debt owed, and you get judgment, then you will only be entitled to interest at a rate of 5 per cent per year (which is at least 19 per cent per year less than you intended).

Happily (or sadly, depend on when you are reading this), complying with the Interest Act is simple: state the rate of interest per year only or state both a monthly rate and its yearly equivalent. So, if you want to recover 2 per cent interest each month on overdue accounts, be sure to state the yearly rate of 26.824 per cent at the same time.

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