Promissory notes: the short document that decides whether you get paid

Current to September 11, 2026.

It is usually the shortest document in the transaction, and the one most often written without advice.

A promissory note is an unconditional written promise by one party to pay a fixed sum to another, either on demand or at a stated future time. It is evidence of the debt and the basis for suing on it, and it is much simpler to enforce than a claim that has to be built out of emails and bank records.

A note is not security. It is a promise to pay, not a claim on anything in particular. Unless it is paired with a guarantee, a charge on property, or a general security agreement registered under the personal property security regime, the holder ranks with the unsecured creditors if the borrower fails. That gap between having a signed note and being protected is the thing most often misunderstood.

Demand, or a date

This choice has the longest tail. A note payable on a fixed date defaults on that date, and the clock on enforcing it starts then. A demand note behaves differently: under Ontario’s Limitations Act, 2002, the basic two-year period for a demand obligation runs from the first failure to pay after a demand has actually been made. So a note sitting undemanded in a drawer does not quietly expire.

That has been the rule for notes created since the beginning of 2004; before then the clock ran from the date of the note itself. The trap now sits on the other side of it. Once demand is made the clock is running, and a demand followed by an informal agreement to allow more time is one of the commoner ways a good claim is lost. Extend time in writing, and deal with the limitation period expressly when you do.

The interest clause is where notes are quietly rewritten

The federal Interest Act imposes a rule that catches home-made notes constantly. Where a note states interest at a rate for a period shorter than a year, a monthly or weekly rate say, and does not also state the equivalent yearly rate, no more than five per cent a year is chargeable. Mortgages on real property sit outside that rule; ordinary notes do not.

A note written at “one and a half per cent per month” and nothing else is not an eighteen per cent note. It is a five per cent note, and courts have said so.

Two related points. Where interest is payable but the note fixes no rate at all, the same Act supplies five per cent a year. And at the other end there is a statutory ceiling on interest, lowered in 2025, with carve-outs for some commercial lending. Neither end of that range is intuitive, and both are set by statute rather than by what the parties wrote.

When the lender is you and the borrower is your company

Notes between an owner and their corporation are not a private arrangement between friendly parties. Money advanced out of the corporation to a shareholder can be brought into the shareholder’s income unless it is repaid within the period the tax rules allow. A loan carrying no interest or a low rate can also produce a taxable benefit while it is outstanding. Writing the advance up as a note settles none of that. How and when it is repaid does.

Forgiving the note later is an event in itself rather than a tidy way to close the file: debt settled for less than what is owing engages the debt forgiveness rules. And where the lender is outside Canada, interest on the note may carry a withholding obligation, depending on the relationship between the parties and any applicable treaty. See how money reaches an owner-manager.

What a note should actually say

Who the parties are, and who is signing for a corporate borrower. The principal. An interest rate stated as a yearly rate, whatever else it also says. Whether payment is on demand or on a schedule, and what happens to the balance on default. Whether co-signers are liable jointly and severally or only for their share. And, where the amount matters, a separate security document rather than a hope that the note is doing that work.

Where the borrower is a corporation with more than one owner, the terms on which insiders lend to the company usually belong in the shareholder agreement as well, so that one owner funding a shortfall does not become a dispute about what was agreed. See business and tax.