“2% per month”: the four words that cut your interest to 5%

Look at the bottom of your invoice template. There is a very good chance it says something close to this: “Overdue accounts are subject to interest at 2% per month.”

That clause has been on Canadian invoices for fifty years. It looks like it is doing something. On a $40,000 account that sits unpaid for fourteen months, it looks like it is doing about $11,000 worth of something.

In most cases it is doing nothing at all above 5% per year.

The provision

Section 4 of the Interest Act, R.S.C. 1985, c. I-15, provides that except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.

Read it twice, because every word is load-bearing.

• It is triggered by the monthly rate itself. Not by the amount, not by the borrower, not by whether anyone is a consumer. Any rate expressed per day, per week, per month, or for any period shorter than a year.
• The penalty is a hard 5% ceiling. Not “the clause is void and reasonable interest applies”. Five per cent per annum, on any part of the principal money.
• The cure is one sentence: an express statement of the equivalent yearly rate.

And then section 5 adds the part that turns a dead clause into a live liability: if any sum is paid on account of any interest not chargeable, payable or recoverable under section 4, the sum may be recovered back or deducted from any principal or interest payable under the contract.

So the customer who did pay you 2% per month for eight months before the relationship soured can ask for the excess back — or deduct it from what they still owe you.

What the cure requires — and the myth to ignore

Here the usual advice goes wrong, and it goes wrong in a direction that costs businesses money for no reason.

You will read that “2% per month (24% per annum)” is itself a trap, because 2% compounded monthly is really 26.824% effective, so writing 24% is a false statement and the clause still fails.

That argument has been rejected by binding appellate authority. A nominal annual rate satisfies section 4; there is no effective-rate disclosure requirement. The Ontario Court of Appeal said so in McHugh v. Forbes (1991), 4 O.R. (3d) 374, and the Supreme Court of Canada reached the same place in Bank of Nova Scotia v. Dunphy Leasing Enterprises Ltd., [1994] 1 S.C.R. 552.

The modern authority is Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONCA 727. A motion judge had applied the strict effective-rate theory and capped all of the lender's interest at 5%. The Court of Appeal reversed: section 4 does not require a numerical percentage, a conversion formula can satisfy it, and the section cannot demand disclosure of something impossible to state in advance. The Supreme Court of Canada refused leave to appeal on 28 March 2019.

So the fix is neither complicated nor expensive: “Overdue accounts are subject to interest at 2% per month, not compounded, which is equivalent to 24% per annum.” One clause. One line. The trap is the clause that states a monthly rate and no annual rate at all — which is nearly every invoice in the province.

The harder problem: is your invoice even a contract?

This is the part almost nobody addresses, and it is where most Ontario suppliers actually lose.

Section 4 applies to “the terms of any written or printed contract”. An interest line printed at the foot of an invoice is not automatically a contract term. The invoice is a demand for payment issued after the bargain was struck. If the rate was never agreed to — not in a credit application, not in a signed quotation, not in terms of sale the customer accepted — there may be no contractual interest entitlement to argue about in the first place.

Courts have sometimes found that a long, consistent course of dealing on identical invoice terms brings the rate into the contract. That is a fact fight you do not want to be having.

The practical consequence is a two-part test for your own paperwork. First: is the rate in a document the customer agreed to — a credit application, a signed terms-of-sale page, an accepted quotation, not only the invoice? Second: does that document state the equivalent annual rate, in the same clause, in words? If the answer to either is no, assume you are at 5%.

What 5% actually costs

Take a $60,000 account, eighteen months overdue. With “2% per month” and nothing more, your recoverable interest is roughly $4,500. With “2% per month, not compounded (24% per annum)”, it is roughly $21,600.

The difference is $17,000, and it was decided by a sentence someone did not write.

It also changes settlement dynamics in a way that is easy to underestimate. A debtor whose counsel spots the section 4 problem knows your interest claim is worth a fraction of what you have been invoicing — and knows you may be exposed to a section 5 claw-back on amounts already collected. That is leverage, and it arrives before anyone files anything.

There is a second ceiling above this one

Fixing section 4 is necessary, not sufficient. The rate you disclose still has to be lawful under section 347 of the Criminal Code, which was overhauled on 1 January 2025: the baseline criminal rate dropped from 60% effective annual rate to 35% APR, with tiered exemptions for commercial borrowers under the Criminal Interest Rate Regulations, SOR/2024-114.

Two points matter for an Ontario supplier. First, the commercial exemptions do not help you when your customer is a natural person — a sole proprietor, an unincorporated partner, or an individual who signed a personal guarantee. Those accounts are capped at 35% APR no matter how large.

Second, “interest” for section 347 purposes is broad. It captures late-payment penalties and administrative charges, not only the stated rate. A flat $250 “late administration fee” on a $4,000 invoice paid forty days late is an enormous annualized rate once you do the arithmetic, and it stacks on top of whatever percentage you are charging.

The combination that survives both statutes, on ordinary commercial accounts, is a disclosed annual rate in the 18%–24% range and no flat-dollar late fees on small invoices.

What to do this week

1. Pull your credit application and your terms of sale — not your invoice. That is where the rate has to live.
2. Find every periodic rate and write the annual equivalent beside it, in the same sentence: “1.5% per month, not compounded (18% per annum)”.
3. Delete flat-dollar late fees on invoices below roughly $10,000, or convert them into the disclosed percentage.
4. Check your personal guarantees. They are separate contracts with their own interest clauses, and they are frequently the document nobody updated.
5. Look at your open accounts. If the rate on an aged file is unenforceable above 5%, you want to know that before you quote a settlement figure, not after.

The whole exercise is an hour of work on four documents. It is the cheapest hour available to a business that sells on credit in Ontario — and the natural place to start is the credit-application form.