A loan agreement between family members in Canada is an ordinary contract — no lawyer, no witness, no registration required. What makes it work is the wording. Four federal rules quietly rewrite badly drafted family agreements: the Interest Act caps a monthly rate at 5% a year unless you state the annual equivalent, the Criminal Code counts every fee as interest against a 35% ceiling, the limitation clock behaves completely differently depending on whether you name a repayment date, and Quebec presumes a money loan bears interest. This guide walks the whole agreement, clause by clause, against one real $40,000 example.
Most guides tell you a family loan agreement should “include the amount and the repayment terms.” True, and useless. The interesting part is what Canadian statutes do to the words you actually choose — because in several places they override them. Here is the whole document, clause by clause, with the law sitting behind each one.
The agreement we’re building
One scenario, carried the whole way through, so every clause has something concrete to bite on.
A parent lends their adult child $40,000 for a home renovation. The child repays $750 a month, interest-free, starting 1 September 2026, with any remaining balance due by 1 September 2031. Nothing is secured against the house. Both live in Ontario.
That is a completely ordinary Canadian family loan, and it is enforceable with no lawyer, no witness, no notary and no registration anywhere. A loan agreement is a plain contract: an offer, an acceptance, and consideration — here, the money on one side and the promise to repay on the other. Nothing about the family relationship weakens that.
What the relationship does change is the evidence. When a family loan reaches a courtroom, the argument is almost never “was this contract valid” — it is “was this a loan at all, or was it a gift?” Canadian courts start from the position that money moving from a parent to an independent adult child is repayable rather than given, but that presumption is a starting point, not a shield: undocumented transfers with no repayments and no demands have been found to be gifts. Our guide on what Canadian courts have done with undocumented family money covers that fight in detail. The agreement below is how you avoid having it.
Clauses 1–3: who, how much, and the day the money moved
“The Lender, [full legal name], of [address], agrees to lend the Borrower, [full legal name], of [address], the principal sum of forty thousand dollars ($40,000.00) in lawful money of Canada, advanced by electronic transfer on 1 September 2026.”
Three small things do a lot of work here. Full legal names and addresses matter because the agreement may one day have to be matched to a bank record, a court filing or an estate inventory by someone who never met either of you. Writing the number twice — words and figures — is an old drafting habit that survives because it defeats a decimal-point argument. And the date and method of advance is the single most useful line in the whole document, because it is the one fact a bank statement can independently confirm.
Pay by transfer, never in cash. A family loan that exists only as cash and memory is the fact pattern behind nearly every dispute we see. If the money moves in instalments — $15,000 now, $25,000 in November — say so, and list the dates. An agreement that recites a single lump sum while the bank shows three transfers invites an argument about whether some of them were something else.
The interest clause — and the two federal statutes that rewrite it
Our example is interest-free, which is the simplest possible clause and also the one most people get wrong by omission:
“The principal sum shall bear no interest. For greater certainty, no interest, fee, penalty, commission or other charge of any kind is payable by the Borrower in respect of the credit advanced.”
Say “no interest” expressly. A silent agreement is not automatically interest-free everywhere in Canada — in Quebec it is presumed to be the opposite (below), and even in the common-law provinces the Interest Act supplies 5% per annum where interest is payable but no rate was fixed. One sentence closes both doors.
If you are charging interest, two federal statutes are waiting.
Where a written contract makes interest payable “at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year,” no more than 5% per annum is chargeable, payable or recoverable unless the contract contains an express statement of the equivalent yearly rate. So “interest at 1% per month” — the single most common phrasing in homemade family agreements — is enforceable at 5% a year, not 12%. Add eight words and it works: “1% per month, being 12% per annum.” And s. 5 lets the borrower recover back or set off anything already overpaid.
Since 1 January 2025 the criminal rate of interest is an annual percentage rate exceeding 35% (it was previously a 60% effective annual rate, roughly 48% APR — a real reduction, not a cosmetic one). It applies to “every person,” with no carve-out for private individuals, one-off loans or family. The dangerous part is the definition: “interest” means the aggregate of all charges and expenses — fee, fine, penalty, commission, “or in any other form” — paid for the advancing of credit. A $2,000 loan for three months with a $150 “late fee” is not a small courtesy; annualised against the credit advanced, it is arithmetic you do not want to do in front of a judge.
The practical rule: keep flat fees out of family loans entirely. If you want a return, state a clean annual percentage rate and nothing else. Our guide to charging interest on a family loan works through the arithmetic, and the loan calculator will build the schedule.
The repayment clause: the drafting choice that decides how long you can sue
This is the clause almost nobody thinks about strategically, and it is the one that matters most five years later.
“The Borrower shall repay the principal sum in consecutive monthly instalments of seven hundred and fifty dollars ($750.00), payable on the first day of each month commencing 1 September 2026, with the entire remaining balance due and payable on 1 September 2031. The Borrower may prepay all or any part of the principal at any time without notice, bonus or penalty.”
Fifty-three payments of $750 clears $39,750, so the final instalment in our example is $250 — which is exactly why the “entire remaining balance” backstop is there. Never leave a schedule that does not visibly land on zero.
Now the part that surprises people. In the common-law provinces the basic limitation period to sue on a debt is two years from discovery — Ontario s. 4, British Columbia s. 6, Alberta s. 3(1)(a) of their respective limitations statutes. With a fixed schedule like ours, each missed instalment starts its own two-year clock. Miss the September 2026 payment and do nothing until 2029, and that instalment is gone, even though later ones survive.
A demand loan — one with no fixed repayment date, repayable when the lender asks — behaves completely differently. Ontario provides that the clock on a demand obligation starts on the first day there is a failure to perform after a demand has been made, and its long-stop period is measured the same way; the combination means an Ontario family demand loan is close to open-ended until you actually ask for the money back. That rule applies to demand obligations created on or after 1 January 2004.
So the choice is real. A fixed schedule gives you certainty, visible discipline and a paper trail of missed payments — and starts clocks running. A demand structure keeps the claim alive almost indefinitely in Ontario, at the cost of vagueness that makes a “that was a gift” argument easier to run. Our example uses a schedule, which is right for a renovation loan between people on good terms. For an open-ended advance to an adult child with no repayment expectation yet, a demand structure with a written acknowledgement every few years is usually the better instrument.
Default, acknowledgement, and the clock you can restart by accident
“If any instalment remains unpaid for thirty (30) days after its due date, the Lender may, by written notice to the Borrower, declare the entire remaining balance immediately due and payable. Failure to enforce this clause on any occasion does not waive the Lender’s right to enforce it later.”
Two deliberate omissions. There is no late fee and no default interest rate — because of s. 347 above, and because in a family loan a penalty clause buys you an argument rather than money. And the acceleration is optional (“may”), not automatic, so a parent who lets three months slide during a rough patch has not accidentally triggered anything.
The non-waiver sentence is not boilerplate padding. Family lenders forgive missed payments constantly. Without it, a borrower can argue the pattern of tolerance varied the contract.
Now the mirror image of the limitation rules, and the thing lenders most often stumble into by luck rather than design: a partial payment restarts the clock, and it does not need to be in writing. That is true in Ontario, British Columbia and Alberta alike. A borrower who sends $200 out of guilt has just handed the lender a fresh limitation period. A written, signed acknowledgement of the debt does the same thing — but it must be made to the creditor, and it must be made before the period expires. Once a limitation period has run out, nothing revives it. Which is why the cheapest piece of loan admin in Canada is an annual email: “confirming the balance outstanding on your loan is $X” — and a reply saying yes.
Security: when to register a charge — and the trap it creates
Our $40,000 renovation loan is unsecured, and for most family loans that is the right call. Registering a second mortgage against your child’s home costs money, needs the first lender’s cooperation, and turns a family arrangement into a visible encumbrance that will surface on every future refinance.
But security does three things at once that nothing else does. It gives you priority against your child’s other creditors. It makes the loan unarguably real if the child’s marriage later ends — a registered charge is the single most persuasive piece of evidence that family money was a debt and not a disguised gift. And it survives changes of memory, because it is on a public register.
Signing it: e-signatures, witnesses, and the promissory-note trap
A loan agreement between family members can be signed electronically across Canada. The governing law is provincial — Ontario’s Electronic Commerce Act, 2000, British Columbia’s Electronic Transactions Act, Alberta’s Act of the same name and their equivalents elsewhere. A widely repeated claim that PIPEDA governs this is simply wrong: Part 2 of PIPEDA is an opt-in whitelist for federal statutory paper requirements listed in its schedules, and it reaches no contract between private parties.
In each province the default is permissive. A legal requirement that a document be signed is satisfied by an electronic signature, consent to deal electronically can be inferred from conduct, and the demanding conditions about reliability and identification apply only to documents specifically prescribed by regulation — which a family loan agreement is not. No witness is required for a simple contract, and a witness adds evidentiary weight rather than validity.
Negotiable instruments are excluded from the electronic-commerce statutes in Ontario, British Columbia and Alberta alike. If your family arrangement is documented as a bare promissory note — an unconditional written promise to pay a fixed sum — rather than as a loan agreement, and it meets the Bills of Exchange Act definition, the provincial e-signature statute does not apply to it at all. A great many free family loan templates are, in substance, promissory notes. A two-party loan agreement sidesteps the question entirely, which is one more reason to prefer it. If you want the comparison, see promissory note vs loan agreement.
Two more provincial quirks worth knowing. Alberta’s Guarantees Acknowledgment Act requires a guarantor to appear before a lawyer and obtain a certificate — guarantees are carved out of Alberta’s e-transactions statute, so a co-signing Alberta relative cannot be handled electronically. And while Ontario repealed its exclusion for land documents in 2015, British Columbia and Alberta still exclude them: the unsecured agreement can be e-signed anywhere, but the mortgage securing it generally cannot.
Whatever you use, keep the audit trail — timestamps, IP addresses, email verification, a tamper-evident hash of the final document. That evidence is what answers “I never signed that” three years later.
Quebec is a different contract
If either party is in Quebec, most of the assumptions above invert. Four articles of the Civil Code of Québec matter.
A money loan is presumed to bear interest. Article 2315 provides that a simple loan is presumed gratuitous unless it is a loan of money, in which case it is presumed to be by onerous title — and article 2330 adds that a loan of money bears interest from the date the money is handed over. This is the exact opposite of the folk rule that family loans are interest-free by default. A Quebec parent who intends an interest-free loan must say so in writing, or risk a presumption running against them from day one. (Where interest is presumed but no rate stated, the federal Interest Act supplies 5% per annum.)
An oral loan over $1,500 is close to unprovable. Article 2862 bars proof of a juridical act between the parties by testimony where the value in dispute exceeds $1,500, unless there is no writing available and a “commencement of proof” exists — a document, an admission, or testimony making the fact likely. Bank records plus text messages will usually get you there, but relying on that is a poor plan. In Quebec, writing it down is not prudence; it is close to evidentiary necessity.
Prescription is three years, not two (article 2925), and it is interrupted by acknowledgement of the right (article 2898) with no writing or signature requirement — so a verbal admission or a casual email restarts a fresh three years. Quebec is simultaneously the easiest province in which to accidentally restart a debt clock and the hardest in which to prove the debt existed.
Lesion applies between adults. Uniquely for money loans, article 2332 lets a court annul the contract, reduce the obligations or revise the terms where a party has suffered lesion — a remedy with no common-law equivalent, available far below the criminal-rate threshold. An oppressive family loan in Quebec can simply be rewritten by a judge. Small claims in Quebec runs to $15,000, and lawyers cannot represent parties there.
Four things about family loans that no template tells you
Readers almost universally assume a bad family loan is at least a capital loss. It is not. A loss on the disposition of a debt is deemed nil unless the debt was acquired for the purpose of gaining or producing income from a business or property. An interest-free loan, by definition, was not. Charging even a modest rate of interest is what preserves the possibility of a capital loss if the money is never seen again. That is a genuine argument for putting 2% on a large family loan rather than nothing.
There is no Canadian equivalent of the US below-market-loan rules: an interest-free loan between individuals creates no phantom interest income for the lender and no deemed gift. The provisions people confuse this with do something different. Where a loan to a non-arm’s-length adult was made with tax reduction as one of its main purposes, the income earned on the money can be taxed back to the lender — unless interest was charged at the lesser of the prescribed rate when the loan was made and an arm’s-length rate, and paid within 30 days of each year end. The CRA prescribed rate has been 3% since 1 July 2025 and remains 3% for the third quarter of 2026. The rate is locked for the life of the loan — and missing the 30 January deadline once destroys the exception permanently, for every year afterwards. See the prescribed-rate guide if income splitting is the point of your loan.
Repaid principal is not income — it is your own money coming back. Interest is investment income and belongs on your return whether or not anyone issued a slip; private lenders don’t issue T5s, and the obligation to report is unaffected. Related point, because “there is no gift tax in Canada” gets over-applied: gifting cash has no tax consequence, but gifting appreciated property — shares, a cottage, a rental — is a deemed disposition at fair market value and can trigger a real capital gain for the giver, who received nothing.
Gifted down payments need a letter confirming the funds are not repayable and there is no recourse. Borrowed down payments are permitted on insured mortgages — typically at 90.01% to 95% loan-to-value with a higher premium — but the repayments must be included in the borrower’s debt-service ratios, against maximums of 39% GDS and 44% TDS, with qualification at the greater of the contract rate plus 2% or 5.25%. In plain terms: a $750 monthly family loan payment consumes roughly the same TDS room as a car loan and can measurably reduce the mortgage your child qualifies for. A genuine gift does not. Signing a gift letter over what is really a loan is mortgage fraud and exposes both of you — see the down-payment guide before choosing.
The finished agreement
Put together, the $40,000 renovation loan is a one-page document containing: the parties in full; the principal in words and figures; the date and method of advance; an express no-interest clause; a repayment schedule with a hard end date and a free-prepayment right; an optional acceleration clause with a non-waiver sentence; a governing-law clause naming the province; and two signatures with dates.
That is the whole thing. No witness, no notary, no registration, no lawyer — unless you are securing it against property, adding a guarantor in Alberta, or the sum is large enough that an hour of advice is cheap insurance. Our do-I-need-a-lawyer check covers where that line sits.
If it goes wrong, the enforcement route is small claims court, and the ceilings are higher than most people think: $50,000 in Ontario since October 2025, $100,000 in Alberta, $50,000 in Saskatchewan, $35,000 in the BC Provincial Court (with claims to $5,000 going to the Civil Resolution Tribunal), $25,000 in Nova Scotia, $20,000 in Manitoba and New Brunswick, and $15,000 in Quebec. Most family loans fit comfortably inside those limits — which means the agreement in front of you, not a lawyer, is what decides the outcome. Our guide on what to do when family won’t pay back a loan walks the steps before it ever gets that far.
The version that beats a template is the one where the wording has already been checked against the rules above and both signatures are captured properly. You can build this exact agreement in about four minutes: answer the questions, both of you e-sign from your phones, and you each keep an identical sealed copy that anyone can verify as genuine years later.
Build this agreement in about four minutes
Province-appropriate wording, the interest and repayment clauses already checked against the rules above, both signatures captured properly. Free to draft.
Create my loan agreement →- Interest Act (Canada), RSC 1985, c I-15, ss. 2–8
- Criminal Code, RSC 1985, c C-46, s. 347 (criminal rate 35% APR, in force 1 January 2025)
- Limitations Act, 2002 (Ontario), ss. 4, 5, 13, 15; Limitation Act, SBC 2012, c 13, ss. 6, 14, 21, 24; Limitations Act, RSA 2000, c L-12, ss. 3, 8, 9
- Civil Code of Québec, arts. 2314, 2315, 2330, 2862, 2898, 2925, 2332; Code of Civil Procedure, arts. 536, 542
- Electronic Commerce Act, 2000 (Ontario); Electronic Transactions Act (BC and Alberta); Bills of Exchange Act; Guarantees Acknowledgment Act (Alberta)
- Income Tax Act, ss. 40(2)(g)(ii), 56(4.1)–(4.2), 69(1)(b), 74.5(2), 80.4, 160
- CRA prescribed interest rates, 2026 Q3; OSFI Guideline B-20; CMHC, Sagen and Canada Guaranty underwriting guidelines, 2026
This article is general information about Canadian law, not legal advice, and LendRight is not a law firm. Contract, limitation and family law are provincial and change over time, and Quebec is a separate civil-law system. For a large sum, a secured loan, or a dispute already underway, consult a lawyer or notary in your province.
We write plain-language guides on lending between family and friends in Canada, reviewed against current provincial and CRA rules. LendRight is not a law firm — this is general information, not legal advice.