Canada Late Payment Interest Calculator for Invoices: The Interest Act 5% Trap, the Math, and the Clause That Holds Up

If your invoice says "2% per month on overdue balances" and nothing else, a Canadian court will let you collect 5% per year. Not 24%. Five.

That's the whole reason a Canada late payment interest calculator for invoices needs to ask about your wording, not just your rate. The number you wrote and the number you can enforce are often different, and the gap comes from a federal statute most freelancers have never heard of.

The Interest Act Canada 5 percent rule, in plain English

The federal Interest Act is short and old, and two sections of it decide what you can charge.

Section 3: if interest is payable but no rate is fixed, the rate is 5% per year. So an invoice that says "interest will be charged on late payments" with no number gets you 5%.

Section 4: if a written contract states interest as a rate per day, week, or month (anything shorter than a year), you can't recover more than 5% per year unless the contract also contains an express statement of the equivalent yearly rate.

That second one is the trap. "1.5% per month" is a monthly rate. "2% per month" is a monthly rate. Unless the annual equivalent is written next to it, the Act knocks it down to 5% per year. The court doesn't care that everyone knows 1.5% a month is 18% a year. It has to be on the page.

The rule applies across Canada because it's federal. Ontario, BC, Alberta, Quebec, doesn't matter. Mortgages on real property are carved out, but your invoices are not.

Why the 5% cap matters more than it sounds

Five percent per year on a $5,000 invoice is about 68 cents a day. A client who pays 60 days late owes you $41 in interest. That's less than the hourly rate of most people reading this, which means the "penalty" isn't a penalty at all.

The bigger problem is the signal. A client who gets a late invoice that says "2% per month" and then learns from their accountant that you can only collect 5% is a client who has just learned your terms don't hold. That's worse than having no interest clause at all.

Canada late payment interest calculator for invoices

Simple interest is the standard for commercial invoices, and it's what courts expect unless you've written in compounding. The formula:

Interest = Invoice amount × Annual rate × (Days overdue ÷ 365)

Three steps:

1. Find your enforceable annual rate. No rate stated: 5%. Monthly rate with no annual equivalent in writing: 5%. Monthly rate with the annual equivalent stated: the annual rate you wrote.
2. Count days overdue. From the day after the due date to the day you're calculating. Not from the invoice date.
3. Run the formula.

Here's the same $5,000 invoice, 60 days overdue, under four different wordings:

| What your invoice says | Enforceable rate | Interest after 60 days |

|---|---|---|

| "Interest charged on overdue accounts" (no rate) | 5% / year | $41.10 |

| "2% per month" (nothing else) | 5% / year | $41.10 |

| "1.5% per month (18% per annum)" | 18% / year | $147.95 |

| "2% per month (24% per annum)" | 24% / year | $197.26 |

The second and third rows are the point. Same client, same invoice, same delay. One extra parenthetical is worth $106.

If you want to run your own numbers instead of doing the division by hand, the late fee calculator takes an amount, a rate, and a date range and does the rest.

A worked example with a real timeline

Say you invoice $8,200 on March 1 on Net 30, so it's due March 31. The client pays June 15. That's 76 days overdue.

With "1.5% per month (18% per annum)" on the invoice: $8,200 × 0.18 × 76/365 = $307.33.

With "1.5% per month" alone: $8,200 × 0.05 × 76/365 = $85.37.

Same work, same client, same wait. The wording decided which number you can actually invoice for.

The wording that holds up

Here's the clause. Put it on the invoice itself and in your contract or engagement letter, because section 4 only helps you if the annual rate is in the written terms the client agreed to.

Overdue amounts bear interest at 1.5% per month (18% per annum), calculated from the due date until paid in full.

If you want 2% a month, swap in "2% per month (24% per annum)." The only rule is that the two numbers must actually be equivalent.

Watch the compounding. 1.5% per month compounded monthly is not 18% a year. It's 19.56%. If you want to compound, write "1.5% per month, compounded monthly (19.56% per annum)." If you don't want to deal with that, don't compound. Simple interest at 18% per annum is clean and easy to defend.

Don't go wild on the rate. Canada's criminal interest rate under section 347 of the Criminal Code is now 35% APR. Nobody charging 18% or 24% is near it, but "5% per month (60% per annum)" would be, and the clause becomes unenforceable instead of just reduced.

Tell existing clients before you change terms. Adding an interest clause to invoices for a client who signed a contract without one doesn't retroactively amend the contract. Send the new terms, get acknowledgement, and apply them to work going forward. If you need a template for that email, the late payment policy download has one you can adapt.

How to charge interest on overdue invoices in Canada without a fight

Having the right clause is step one. Actually collecting is where most people quietly give up.

Put the interest on a separate line, not a revised invoice. Reissue the original with the original amount, then add a line or a short statement showing "Interest to [date]: $147.95, per terms." Reissuing with a bigger total invites a dispute over the whole thing.

Calculate to a specific date and say so. "Interest accrues daily, so this amount is valid through October 15" tells the client the number goes up if they wait. That's the actual pressure the clause is supposed to create.

Decide ahead of time when you'll waive it. Most freelancers waive interest for a good client who pays within a week of the first reminder. That's fine. What's not fine is deciding case by case under pressure, because then you'll waive it every time. Write down the rule: "Interest waived if paid within 7 days of first reminder; otherwise applied in full."

GST/HST on interest: late payment interest is generally treated as a financial service and is exempt from GST/HST. Don't add tax to the interest line. If you're unsure for your situation, ask your accountant, because this is one of those things CRA has opinions about.

If it goes to small claims: your clause sets the contractual rate up to judgment. Without an enforceable clause, provincial prejudgment interest rates apply, and in most provinces those are lower than 18%. One more reason to get the wording right now rather than argue later.

The two-minute check for your current invoice

Pull up your most recent invoice and look at the payment terms line.

• No interest mentioned? You're at 5% by default under section 3, and only if you can show interest was "payable by agreement."
• A monthly rate with no annual equivalent? Section 4 caps you at 5%.
• A monthly rate with "(X% per annum)" beside it, and the math checks out? You're fine.

Fix the template once and every invoice from here on carries the rate you meant. Then run the Canada late payment interest calculator for invoices above whenever something goes past due, and put the number on the reminder.

Tools like automated payment reminder software can calculate the accrued interest and include it in each reminder for you.