Promissory Note or IOU: Which Document Fits Your Situation?

A promissory note is a signed, unconditional promise to pay a set sum, while an IOU only acknowledges that a debt exists. Use a note when terms matter.

By Promissory.ca Editorial Team Reviewed against official Canadian sources Last updated: 2026-09-16

What a Promissory Note Actually Is

A promissory note is a written, signed, unconditional promise to pay a sum certain in money. That definition comes from Part IV of the federal Bills of Exchange Act, and each element in that sentence does real work.

In everyday Canadian lending, the note is the document that says who borrowed, who lent, how much is owed, and when it must be repaid. Because the promise is unconditional, the borrower cannot escape payment by pointing to a condition that never happened. If the note also meets the technical requirements for negotiability, it can be transferred to another holder.

The elements that make a note a note

• A sum certain. The amount must be determinable from the face of the document.
• An unconditional promise. Not “I will pay if something else happens first”.
• A signature. Without the maker's signature, you have a draft, not a note.
• Payment terms. A due date, on-demand wording, or an instalment schedule.
• Identified parties. The maker, meaning the borrower, and the payee, meaning the lender.

What an IOU Is — and Is Not

An IOU is a written acknowledgement that a debt exists. It is evidence, not a promise with terms. A note on the back of an envelope saying “I owe you” and signed is an IOU. It confirms the debt, but says nothing about when repayment is due, whether interest applies, or what happens if a payment is late.

An IOU is not a negotiable instrument. It cannot be endorsed and passed along the way a promissory note can, and it does not sit inside the same statutory framework. In practice, an IOU may help you prove a debt existed, but it gives you little to enforce if the other person stalls. You would be relying on general contract and debt-collection law. A post-dated cheque can support your case, but it is not a promissory note.

One rule that applies to both documents

The Criminal Code caps the criminal rate of interest at 35% APR, reduced from 48%. Charging above that ceiling in a credit agreement is an offence, and no wording in a note or an IOU can make an unlawful rate lawful. When a document blends fees, penalties and interest into one number, the effective annual cost is what matters, not the label.

Promissory Note vs IOU: Side-by-Side

When Each Document Is Used in Canada

When a promissory note is the right tool

Reach for a note when money changes hands and both sides need the terms in writing. Common situations include a private loan between individuals, family help with a down payment or a vehicle, seller financing on the sale of a small business, and advances between a company and its shareholders or directors.

Notes also suit instalment arrangements: a fixed number of payments, a set due date, and a defined end date. If you are lending to someone whose circumstances could change, that specificity is the point.

When an IOU is enough

An IOU suits small, short-term, low-risk arrangements between people who trust each other, such as splitting a group gift, covering a colleague's lunch, fronting a hotel deposit, or tracking expenses on a shared project. The amount is modest, the repayment window is short, and everyone expects the debt to clear quickly.

The trouble starts when an IOU is used for something that deserved a note. Once the amount grows, the repayment date slips, or a relationship sours, an IOU leaves both sides arguing about terms nobody wrote down.

Where an IOU is clearly the wrong choice

• Any loan secured against property, a vehicle or business assets.
• Any arrangement lasting longer than a few weeks.
• Any loan where interest, fees or penalties are contemplated.
• Any advance large enough that you would need to sue to recover it.
• Any loan involving a co-signer or a guarantor.

Enforceability, Interest and Consumer Rules

The missing-rate rule

If a mortgage or agreement for sale provides for interest but does not state an annual rate, section 4 of the Interest Act means interest is not chargeable above 5% per annum. It is a narrow rule aimed at particular secured arrangements, but it illustrates a wider point: vague interest wording hurts the lender far more than the borrower. If interest is intended, state the annual rate plainly.

Mortgages, down payments and stress testing

A promissory note is not a mortgage. Where a purchase relies on mortgage financing from a federally regulated lender, that lender qualifies the borrower under OSFI Guideline B-20, using the greater of the contract rate plus 2 percentage points or 5.25%. Down payment rules and mortgage default insurance requirements also apply, and an insured mortgage is capped at a 25-year amortization. Borrowed down payment money must still be disclosed, and it still affects the borrower's ratios.

Payday lending rules do not transfer

Provincial payday lending regimes cap the cost of borrowing at $14 per $100, cap dishonoured-payment fees at $20, and set a maximum payday loan of $1,500. Quebec does not permit payday lending, and the maximum rate of credit there is 35% per year. The FCAC illustrates a 14-day $500 payday loan at $14 per $100 costing $70, which works out to roughly 365% APR. None of that framework governs a private promissory note, but the criminal interest rate does, so a note cannot be used to sidestep the 35% ceiling.

Credit Files, Privacy and Tax

Private loans are not automatically reported to the credit bureaus. Equifax Canada and TransUnion Canada are the two national credit bureaus, and a note between individuals usually never reaches either. If someone asks to run a credit check, know the difference: a hard inquiry may affect a credit score, while a soft inquiry does not.

Identity documents and banking details collected during a loan need careful handling, and PIPEDA governs how organisations handle personal information in Canada. Interest income is taxable, and a private lender may be moved onto the CRA instalment system: individual instalments are due 15 March, 15 June, 15 September and 15 December, and the obligation can arise once net tax owing exceeds $3,000 (Quebec $1,800) for the current year and either of the two prior years. Farmers and fishers have a single due date of 31 December. This is general information, not tax advice.

Before You Sign: A Practical Checklist

1. Write down the full legal names of the maker and the payee.
2. State the principal amount in figures and in words.
3. Set out the repayment schedule or a clear due date.
4. State the annual interest rate, or state plainly that there is none.
5. Describe what happens on late payment or default.
6. Note whether the loan is secured and, if so, against what.
7. Date the document and have every party sign it.
8. Keep a copy for each party, plus a record of how the funds moved.

Where Promissory.ca Fits In

Promissory.ca is a Canadian loan comparison and information site. It is not a lender, does not draft documents, and does not provide legal or financial advice. If a private note is not the right fit, the site can connect you with licensed lending partners, each of which holds the appropriate provincial licence, so you can compare options. For anything involving significant money, get independent legal advice before signing.