“2% per month”: the interest clause that may be worth nothing

Look at the bottom of one of your invoices. There is probably a line that reads something like: “Interest at 2% per month on any overdue balance.”

That line looks harmless. It is in fact subject to two separate federal ceilings, and a great many Quebec SMEs sit on the wrong side of one or the other. In one case your clause entitles you to 5% per year. In the other, it exposes you to a criminal offence.

Both problems are fixed by changing a few words. You just have to know which ones.

The first ceiling: 5% per year

Section 4 of the federal Interest Act is short, old, and almost nobody applies it. It provides that, except as to mortgages on real property or hypothecs on immovables, where interest is made payable by the terms of a written or printed contract at a rate per day, week, month, or any period less than a year, no interest exceeding five per cent per annum is chargeable, payable or recoverable on any part of the principal money — unless the contract contains an express statement of the equivalent yearly rate.

Read it slowly, because it does exactly what it says. If your contract expresses interest per month and does not state the equivalent annual rate, you can claim 5% per year. Not 24%. Five.

• “2% per month” on its own: 5% per year.
• “2% per month, not compounded (24% per annum)”: 24% per year.

On a $40,000 invoice eighteen months overdue, the difference is roughly $11,400. For a parenthesis.

This is not a theoretical nicety. It is the first argument competent defence counsel will raise, and finding it requires nothing more than reading your invoice.

Add what few people know: section 5 of the same Act lets a debtor who has already paid interest that was not recoverable under section 4 recover it back, or deduct it from principal or interest still owing. A badly drafted clause is therefore not merely ineffective — it can become a claim against you.

The second ceiling: 35% per year, and it is the Criminal Code

Since 1 January 2025, the criminal interest rate under section 347 of the Criminal Code has changed in both nature and level. The ceiling dropped from 60% to 35%, and it is now an annual percentage rate rather than an effective annual rate. The calculation is not the same, and the threshold is markedly lower than before.

Everything you read before 2025 about “60%” is out of date.

What “interest” means here

Section 347 does not capture only the rate you call interest. It reaches the aggregate of all charges and expenses paid or payable for the advancing of credit, whether as a fee, fine, penalty, commission or in any other form. To check whether you are over the ceiling you therefore have to add up:

• your late-payment interest rate;
• monthly administration charges;
• flat late fees;
• NSF cheque charges;
• file-opening, follow-up and management fees.

All of it, in the same calculation.

The commercial exemptions, and their gaps

The Criminal Interest Rate Regulations (SOR/2024-114), in force since 1 January 2025, create exemptions. They are narrower than most people assume. For the 48% ceiling to apply instead of 35%, three conditions must all be met: the borrower is not a natural person, the credit is for a business or commercial purpose, and the credit advanced exceeds $10,000 without exceeding $500,000. Above $500,000 there is no ceiling at all.

Consider what that means for a typical receivables book:

• Is your debtor a sole proprietor or self-employed? That is a natural person. No exemption: the ceiling is 35%, whatever the amount.
• Is your invoice $10,000 or less? No exemption either. 35% ceiling.

And accounts of $5,000 to $10,000 against small operators are precisely the heart of a wholesaler's, a printer's or a subcontractor's book.

The real trap: flat fees are what blow up the rate

A rate of 2% per month is 24% per year. That is below 35%, and it worries nobody. The problem appears when flat fees are added, because a fixed dollar amount is a larger percentage the smaller the invoice.

An $8,000 invoice at 2% per month plus $50 a month in administration charges: 24% + ($600 ÷ $8,000, or 7.5%) = 31.5%. You clear it, barely.

The same clause on a $2,000 invoice: 24% + ($600 ÷ $2,000, or 30%) = 54%. You are well over the criminal ceiling — and if your debtor is self-employed, the applicable ceiling is 35%, not 48%.

The third problem: is your clause even part of the contract?

Both ceilings above assume your interest clause binds the debtor. Often it does not.

A clause printed at the foot of an invoice arrives, by definition, after the bargain was struck and after delivery. A debtor who never signed anything is well placed to say they never agreed to it.

An interest clause belongs in a document accepted before delivery: a credit application form, terms of sale accepted in writing, a signed purchase order. On the invoice it is a reminder — not a source of obligation.

And if you have no valid clause?

You are not without recourse. Absent an agreed rate, interest runs at the legal rate — 5% per year under section 3 of the Interest Act — and the court may add the additional indemnity provided by the Civil Code of Québec. It is not 24%, but it is not zero, and it runs without your having to prove any loss.

What to check this week

1. Open your invoice template. Is the equivalent annual rate written beside the monthly rate? If not, add it today.
2. Add up every charge, then compute the annual percentage on your smallest typical invoice, not your largest.
3. Sort your debtors: corporations or natural persons? The 48% exemption reaches only the first.
4. Identify your accounts of $10,000 and under. No exemption protects them.
5. Move the clause, from the foot of the invoice into a document signed before delivery.

A stated annual rate between 18% and 24%, set out in a signed credit application, will almost always get you more than the aggressive clause printed on your invoice — because it will be enforceable.