Promissory Note

Under section 176 of the Bills of Exchange Act, a promissory note is an unconditional promise in writing, made by one person to another and signed by the maker, to pay a sum certain in money on demand or at a fixed or determinable future time, to a specified person, to that person's order, or to bearer. Each element matters:

• Unconditional. A promise to pay only if revenue passes a target is not a note. Contingent payments, such as an earn-out, belong in the purchase agreement.
• Sum certain. The amount must be fixed. The Act confirms that a sum is still certain if it carries interest, is payable by stated instalments, or becomes fully due when an instalment is missed.
• Signed and delivered. The maker must sign, and the note is incomplete until it is delivered to the payee or bearer.
• Payment time. On demand, on a set date, or on a schedule that can be worked out from the note.

A note can also include a pledge of collateral without losing its status. If a note reading "I promise to pay" is signed by two or more people, the Act deems it joint and several, so each signer can be pursued for the full amount.

A document that fails the statutory test can still be an enforceable written contract. What it loses is the special treatment of a negotiable instrument: a true note can be transferred by endorsement and delivery, and a holder in due course, who took a complete and regular note before it was overdue, in good faith, for value and without notice of any defect in title, can enforce it free of defects in title and of personal defences the maker had against the original payee.

A demand note has no maturity date. The holder can call for payment at any time, so the lender keeps control and the borrower has no right to keep the money for a set period. A term note is payable on a fixed date or by instalments, and usually includes an acceleration clause that makes the whole balance due if a payment is missed. Some notes combine the two: regular instalments, but repayable in full on demand.

The choice also changes when the limitation clock starts, as the next section explains. A demand label on a loan everyone expects to run for five years can create accounting, tax and enforcement questions, as our guide to intercompany loans explains.

Ontario's Limitations Act, 2002 sets a basic two-year limitation period that runs from the day a claim is discovered, and an ultimate period of 15 years. For a term note, the claim is usually discovered when a payment is missed.

Demand notes have their own rule. Under section 5(3), the loss on a demand obligation occurs on the first day the debtor fails to pay after a demand is made, and the 15-year ultimate period uses the same starting point. Both rules, added in 2008, apply to demand obligations created on or after January 1, 2004.

So an old demand note is not stale merely because years have passed, but once payment is demanded and refused, the two-year clock runs. For a debt claim, the clock restarts if, before it expires, the debtor:

• signs a written acknowledgment of the debt and gives it to the creditor or the creditor's agent; or
• makes a part payment.

See limitation period in Ontario for the discovery rules and exceptions.

Two federal statutes limit what a note can charge.

State an annual rate. Under section 4 of the Interest Act, if a written contract, other than a mortgage on real property, sets interest at a rate per month or for any other period shorter than a year, no more than 5% a year is recoverable unless the contract also states the equivalent yearly rate. A note charging 1% a month should also say 12% a year. Where interest is payable but no rate is fixed, the Act sets 5% a year.

Stay under the criminal rate. Since January 1, 2025, section 347 of the Criminal Code makes it an offence to offer or agree to receive, or to receive, interest above 35% a year, calculated as an annual percentage rate (APR) on the credit advanced. The old limit was 60% as an effective annual rate. Interest is defined broadly: fees, fines, penalties, commissions and similar charges all count. The Criminal Interest Rate Regulations, SOR/2024-114 set out exemptions that produce three tiers for business lending:

A note signed by an individual, including a sole proprietor, stays at 35% APR whatever its size. Default interest, extension fees and bonus payments can push an ordinary rate over the line, so model the all-in cost.

A note proves the debt; it does not give the lender any claim to the borrower's assets. If the borrower fails, an unsecured noteholder ranks with trade creditors. Lenders improve that position with:

• A general security agreement over the borrower's personal property, perfected by PPSA registration so it ranks by registration date.
• A personal guarantee from the owner.
• A pledge of shares or a charge on land, where available.

In a business sale, the buyer's note for the deferred price is the core document in vendor financing, which explains the usual package: a general security agreement and personal guarantees, ranked behind the buyer's bank under a postponement agreement. Lamba Law's free seller financing calculator models the payment schedule and total interest on such a note, and our vendor take-back and earn-out service prepares the note, the security and the priority terms.

A note is also not a full loan agreement, which adds funding conditions, representations, financial covenants, reporting duties and detailed defaults and remedies.

For a shareholder loan, a note records the terms but does not settle the tax treatment. A convertible note adds a right to convert the debt into shares and is usually documented as a fuller agreement.

In June 2020, Marguerite Doucet lent $90,000 to Ironwood Cartage Inc., a Brampton trucking company owned by her nephew Julien. The company signed a one-page demand note at 7% simple interest a year. Marguerite took no security. The company's bank already held a registered general security agreement.

Marguerite never asked to be repaid. In February 2026, Julien told her the company had agreed to sell its assets. Her lawyer delivered a written demand on March 2, 2026, and the company did not pay. Because the note was a demand obligation, her two-year limitation period started on the first day of non-payment after that demand, not in 2020, so her claim was in time. The balance with interest was about $126,000.

The asset sale closed at $1.4 million. The bank's $610,000 loan was paid first and its registration discharged, because its perfected security ranked first. Marguerite negotiated a direction for her balance to be paid from the remaining funds at closing. Had the company been insolvent, she would have shared what was left with trade creditors; a general security agreement registered in 2020 would have put her second, behind the bank but ahead of them.