How to Calculate Late Payment Interest in Canada

Why Charge Late Payment Interest?

Late payment interest serves two purposes: it compensates you for the time value of money you're owed, and it incentivizes your clients to pay on time. In Canada, charging interest on overdue invoices is perfectly legal — as long as the terms were communicated before the transaction.

Most businesses include late payment terms in their contracts, invoices, or terms of service. Common rates range from 1% to 2% per month (12% to 24% per year), though some industries have specific norms.

The Basic Formula: Simple Daily Interest

The most common approach for overdue invoices is simple interest calculated daily:

Daily interest = Principal × (Annual rate ÷ 365)

Total interest = Daily interest × Days overdue

Example

Let's say a client owes you $5,000 and is 45 days late. Your agreed rate is 18% per year.

Daily rate: 18% ÷ 365 = 0.04932% per day
Daily interest: $5,000 × 0.0004932 = $2.47 per day
Total interest after 45 days: $2.47 × 45 = $111.12
Total amount owed: $5,000 + $111.12 = $5,111.12

Simple vs Compound Interest

Simple interest is calculated only on the original principal amount. This is the standard for most B2B invoices and is easier to defend legally.

Compound interest (interest on interest) accumulates faster but is less common for invoice collection. If you choose compound interest, make sure it's clearly stated in your contract.

For most small businesses, simple interest is recommended — it's straightforward, defensible, and widely accepted by Canadian courts.

Legal Considerations in Canada

Canadian law allows you to charge interest on overdue invoices, subject to a few rules:

The Interest Act (federal) requires that the annual interest rate be clearly stated. If you express a rate per month or per day without also stating the annual equivalent, a court may limit you to 5% per year.
Criminal rate: Section 347 of the Criminal Code caps interest at 60% per year (effective criminal rate). Exceeding this is a criminal offence.
Prior agreement: Interest terms should be communicated and agreed to before the invoice is issued — ideally in your contract or terms of service.
Provincial variations: Quebec's Civil Code has specific provisions about interest (art. 1617). Ontario and other provinces follow common law principles.

Common Interest Rates by Industry

Industry	Typical monthly rate	Annual equivalent
Professional services	1.5%	18%
Construction	2%	24%
Wholesale / distribution	1%	12%
Technology / SaaS	1.5%	18%
Healthcare	1%	12%

Best Practices

Always state the annual rate on your invoices and contracts — this is required by the federal Interest Act.
Start counting from the due date, not the invoice date. Grace periods are optional but build goodwill.
Be consistent — apply the same rate to all clients to avoid discrimination claims.
Document everything — keep proof that the client agreed to your payment terms.
Automate the calculation — manual tracking leads to errors and inconsistencies.

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AIDebtCollection.Net calculates late interest automatically every day based on the annual rate you set. Each reminder sent to your debtor shows the up-to-date total, including accumulated interest. No spreadsheets, no manual calculations.

Combined with automated email, SMS, and AI voice call reminders, you can recover overdue invoices without spending a minute on manual follow-ups.