Personal loans between family members and friends are one of the most common forms of private lending in Ontario — and one of the most frequently underdocumented. Whether you are lending your adult child money for a down payment, helping a sibling start a business, or formalizing a loan between business partners, a written loan agreement is essential for tax planning, dispute prevention, and estate administration. This guide walks through the legal requirements and practical considerations for personal loan agreements in Ontario.
The Criminal Code Interest Cap: 60% Annual Rate
Section 347 of Canada's Criminal Code makes it a criminal offence to enter into an agreement to receive interest at a criminal rate — defined as an effective annual rate exceeding 60% per year. This ceiling applies to all private lending, regardless of the lender's relationship to the borrower or the purpose of the loan.
The calculation of "interest" under s. 347 is broader than just the stated interest rate — it includes fees, commissions, fines, penalties, and any other charges or expenses paid or payable in connection with the advance of credit. A loan that charges a low interest rate but high fees can still exceed the criminal rate when all charges are included in the annual rate calculation.
Family Loans and CRA Prescribed Interest Rates
When lending money to a family member — particularly a lower-income family member — at a below-market interest rate, the Canada Revenue Agency's income-splitting rules may attribute the investment income earned by the lower-income borrower back to the higher-income lender. To avoid attribution, the loan must bear interest at least at the CRA's prescribed rate in effect at the time the loan is made.
The CRA prescribed interest rate is set quarterly. Historically low (as low as 1% during low interest rate periods), the rate has increased in recent years as interest rates rose. Key points:
- The prescribed rate in effect at the time the loan is made is locked in for the life of the loan — you do not need to adjust the rate when CRA changes it, as long as the original loan documentation is in place.
- The borrower must actually pay the interest by January 30 of the following calendar year for the loan to qualify under the prescribed rate rules.
- Both lender and borrower must report the interest — the lender as income, and the borrower may be able to deduct it against income from investments made with the loan proceeds.
Loan Structure: Demand vs. Term
Ontario personal loans are structured as either demand or term (installment) loans. The choice has significant practical implications:
A demand loan is repayable immediately upon the lender's written demand, with no fixed repayment schedule. Demand loans offer maximum flexibility for the lender but can create uncertainty for the borrower's financial planning. They are common for shareholder loans, intra-family loans that are expected to be repaid over flexible timeframes, and bridge loans.
A term loan specifies fixed repayment amounts and dates — monthly, quarterly, or annual installments over a defined period (e.g., 5 years). Term loans provide both parties with a clear payment schedule and are better suited for larger loans where the borrower needs time to repay from investment returns or income.
Important: The Limitations Act, 2002 (Ontario) applies differently to demand and term loans. For a demand loan, the limitation period generally starts when demand is made. For a term loan, it starts when each missed payment becomes overdue. Always consider how the structure interacts with Ontario's 2-year limitation period when deciding on loan structure.
Essential Terms of a Personal Loan Agreement
A properly documented Ontario personal loan agreement should include:
- Parties: Full legal names and addresses of lender and borrower.
- Principal amount: The amount being lent, stated clearly in dollars.
- Interest rate: The annual rate of interest, expressed as an effective annual rate or as a rate per period (e.g., X% per annum, calculated monthly). If the loan is interest-free, state so explicitly.
- Repayment terms: When and how the loan is to be repaid — on demand, on a specific date, or by installments on specified dates.
- Default provisions: What events constitute a default and what happens when a default occurs (entire balance becomes immediately due).
- Governing law: Specify Ontario law governs.
- Signatures: Both lender and borrower must sign, with dates.
Personal Guarantees
When lending to a corporation or a borrower whose creditworthiness you are uncertain about, a personal guarantee from a creditworthy individual (often a spouse, parent, or business partner) provides additional security. A guarantor promises to pay the debt if the primary borrower defaults.
In Ontario, guarantees must be in writing and signed by the guarantor to be enforceable. Key guarantee terms include:
- Whether the guarantee is absolute/unconditional (guarantor can be sued immediately on default) or conditional (lender must first exhaust remedies against the primary borrower).
- Whether the guarantee is limited (up to a maximum amount) or unlimited.
- Whether the guarantee survives changes to the underlying loan (changes to interest rate, term, or principal can discharge a guarantor if not addressed).
- The guarantor's right to subrogation — to step into the lender's shoes and recover from the borrower after paying under the guarantee.
Enforcement in Ontario Courts
When a personal loan goes into default in Ontario, the lender has several enforcement options:
- Demand letter: A written demand for repayment is typically the first step and often resolves the matter without litigation.
- Small Claims Court: For loans up to $35,000, Small Claims Court is the most cost-effective forum. The process is designed for self-represented litigants and typically concludes within 12 months.
- Superior Court — Simplified Procedure: For loans between $35,000 and $200,000. A well-documented loan agreement significantly simplifies the plaintiff's case.
- Summary judgment: For clearly documented loans where the defendant has no real defence, a motion for summary judgment avoids a full trial and can be obtained within months of commencing proceedings.
Post-judgment enforcement options include garnishment of bank accounts and wages, writs of seizure and sale against real property, and examination of the debtor in aid of execution.