What is a promissory note in Canada?

A promissory note is a written promise by one party to pay a sum of money to another on demand or at a specified time.

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

What a promissory note is

A promissory note is a written promise by one party to pay a sum of money to another on demand or at a specified time. In Canada it is a form of negotiable instrument, which is a document that can be transferred from one person to another with the right to payment travelling along with it.

The person who promises to pay is called the maker. The person who is to be paid is called the payee. A note can be payable on demand, meaning the payee can ask for payment at any time, or at a specified time, meaning a set date or a set period.

What makes a promissory note valid

Canadian law sets out specific requirements. Under the Bills of Exchange Act, a promissory note must be in writing and signed by the maker, and it must contain an unconditional promise to pay a sum certain in money. If those elements are missing, the document may not operate as a promissory note under the Act.

In practical terms, a well-drafted note usually includes the following:

A note that omits the interest rate may still be enforceable, but the Interest Act can limit how much interest can be charged. Where a contract provides for interest but does not state an annual rate, interest is not chargeable at more than 5% per annum.

Negotiable instruments explained

The term negotiable instrument matters because it affects who can enforce the note. A negotiable instrument can be transferred by delivery or endorsement, and a holder in due course may be able to enforce it even if the original parties had a dispute. That quality is part of why notes are used in commerce.

Not every IOU is a negotiable instrument. A casual note that lacks the required elements may still be evidence of a debt, but it may not carry the special features of a promissory note under the Act.

Common uses in Canada

Promissory notes appear in several everyday situations:

• A private loan between family members or friends.
• Seller financing, where a buyer of a business or property pays over time.
• A short-term business loan between companies.
• A loan from an individual to a corporation.
• Bridge financing while a larger loan is arranged.

They are popular because they are simple. A single page can record the promise to pay without the full machinery of a formal loan agreement.

Demand notes versus time notes

A demand note is payable whenever the payee asks. A time note is payable on a specific date or after a set period. Demand notes give the payee flexibility but can create uncertainty for the maker, who may need to pay on short notice. Time notes give both sides a clear schedule but leave the payee waiting if the maker struggles.

Some notes combine features, such as a set schedule with an acceleration clause that makes the full balance due if the maker misses a payment.

Interest on a promissory note

If the note charges interest, the rate is subject to Canadian law. The Criminal Code sets a criminal rate of interest, which has been 35% APR since 1 January 2025. A rate above that ceiling can be a criminal offence, so notes that charge high interest need careful legal review.

The Interest Act adds another limit. Where a contract provides for interest but does not state an annual rate, interest is not chargeable at more than 5% per annum. This is why stating the annual rate clearly on the note matters.

Enforcing a promissory note

If a maker does not pay, the payee can sue on the debt. The time limit for suing is set by provincial limitation legislation, and it is typically two years in many provinces, but the rule varies. Confirm your province's limitation period rather than assuming a single number applies across Canada.

Courts look at the note itself, along with evidence of the loan, the payments made and any communications between the parties. A clear, signed note makes enforcement far easier than an informal arrangement.

How a promissory note differs from a loan agreement

A promissory note records the promise to pay. A loan agreement sets out the full relationship: the repayment schedule, interest, default terms, security and any covenants. The two often work together, with a note as the simple promise and an agreement as the detailed contract. For a fuller comparison, see the guide on promissory notes versus loan agreements.

Transferring a promissory note

Because a promissory note is a negotiable instrument, it can be transferred. The payee may endorse it to another person or deliver it so that the new holder can collect. That flexibility is useful in commerce, but it also means a maker may end up owing a party they did not originally deal with.

Before you sign a note, understand whether it can be transferred and what that would mean for you. If you want to limit transfer, ask a lawyer how to word the note so it stays between the original parties.

Before you use a promissory note

Promissory.ca is not a lender and does not provide legal or tax advice, and it charges consumers no fee. A promissory note is a legal document, and the right wording depends on your situation. Have a qualified lawyer review any note before you sign, especially if the amount is large or the terms are unusual.