A promissory note is one of the simplest yet most powerful financial instruments in Canadian law. When money changes hands — whether between family members, business partners, or investors and companies — a properly drafted promissory note creates an enforceable legal obligation to repay. This guide explains when you need a promissory note, what the federal Bills of Exchange Act requires, and how to draft one that will hold up in court.

What Is a Promissory Note Under the Bills of Exchange Act?

Under the federal Bills of Exchange Act, RSC 1985, c B-4, a promissory note is an unconditional promise in writing, made by one person (the maker) to another (the payee), signed by the maker, undertaking to pay on demand or at a fixed or determinable future time a certain sum in money to, or to the order of, a specified person or to bearer.

The key statutory requirements are:

Note: The Bills of Exchange Act is federal legislation, meaning the basic framework for promissory notes is consistent across all provinces. However, enforcement — suing on a promissory note — is governed by provincial rules of civil procedure and limitation periods.

When Do You Need a Promissory Note?

Promissory notes are appropriate in several common situations:

A promissory note is not a substitute for a full loan agreement in complex transactions involving security, covenants, and multiple advances — those situations call for a more comprehensive credit facility agreement. But for simple, single-advance loans, a promissory note is often sufficient.

Demand Notes vs. Installment Notes

The two most common structures for Canadian promissory notes are demand and installment (term) notes.

A demand note is payable immediately upon the holder's written demand. The maker has no right to insist on any advance notice beyond what the note specifies (often a demand is effective immediately). Demand notes are common for intra-family loans and shareholder loans to corporations — they give the lender maximum flexibility but create a potentially destabilizing obligation for the borrower.

An installment note specifies fixed repayment dates — monthly, quarterly, or annually — over a defined term, with a final maturity date. This structure provides predictability for both parties and is more appropriate for business loans where the borrower needs to plan cash flows.

Limitation Period Alert: For demand notes, the limitation period for suing begins to run from the date the demand is made (not from the date the note was signed). For installment notes, each missed payment triggers its own limitation clock. In most provinces, the basic limitation period is 2 years from when the cause of action arose.

Interest Rate Provisions

A promissory note can include an interest rate or can be non-interest-bearing. If the note is silent on interest, no interest accrues — courts will not imply an obligation to pay interest. Always specify the interest rate if you intend to charge interest.

Canada's Criminal Code (s. 347) makes it a criminal offence to enter into an agreement to receive interest at a criminal rate — currently defined as an effective annual rate that exceeds 60% per year. This ceiling applies to all forms of credit, including promissory notes. Calculating the effective annual rate includes not just stated interest but fees, commissions, and other charges related to the advance.

For family loans, consider using the CRA's prescribed interest rate to document the loan properly for income tax purposes. Using at least the CRA prescribed rate allows the lender to attribute income from the loan to the borrower rather than having the interest-free benefit attributed as income to the lender or triggering income splitting rules.

Default and Demand Provisions

A well-drafted promissory note should clearly define what constitutes a default and what happens when a default occurs. Standard default provisions include:

Upon default, the note should provide that the entire outstanding balance becomes immediately due and payable, and specify the interest rate that applies to the defaulted amount (often a higher "default rate"). Including a costs clause — requiring the maker to pay the holder's legal costs in enforcing the note — is also standard practice.

Negotiability and Transfer

One of the important features of a promissory note under the Bills of Exchange Act is that it can be a negotiable instrument — the payee can transfer (endorse) the note to a third party, who then becomes entitled to payment. A holder in due course (a person who takes the note for value, in good faith, without notice of defects) takes the note free of most defences the maker might raise against the original payee.

However, most private loan notes include a restriction on transfer without the maker's consent, which prevents negotiability and keeps the enforcement relationship bilateral. Always specify whether the note is transferable or non-transferable.

Enforcement: Suing on a Promissory Note

One of the practical advantages of a promissory note over an informal loan is ease of enforcement. In most provinces, a properly executed promissory note is prima facie evidence of the debt, simplifying the plaintiff's burden in a collection action. The defendant bears the burden of establishing any defence (payment, incapacity, forgery, etc.).

Small claims court is often the most practical forum for notes under the small claims limit (currently $35,000 in Ontario; $50,000 in BC). For larger amounts, a simplified procedure (summary judgment) is often available in superior courts, given the documentary nature of the evidence.