How Much Interest is Illegal?
An Interest Clause Must Be Established When a Contract is Formed. Without Advance Agreement, Adding Interest Afterward is Improper. Additionally, Interest Must Be Shown as an Annual Rate and Be Less than Sixty (60%) Percent.
Understanding When An Interest Charge Is Legal and Enforceable
Sometimes a business will add an interest charge onto an invoice without previously discussing the potential interest charge with the customer. This unilateral, meaning single-sided, decision to charge interest without a prior understanding and mutual agreement is improper and unenforceable. Simply said, a business is unable to charge interest unless the right to charge interest was agreed to when the deal was made and attempts to add an interest charge after the deal was made, such as providing first notice of an applicable interest onto an invoice, is without binding effect. This was stated in the case of King Road Paving and Landscaping Inc. v. Plati, 2017 ONSC 557:
 The contract did not include any payment terms or any interest rate for late payments. The first invoice in relation to the original contract does not include any claim for interest. The second invoice in relation to the extras claims payment within 30 days and late payment charges of 3% per month thereafter.
 The plaintiffs acknowledge that the written contract did not provide payment terms or interest for late payment, but claim that 3% per month is “reasonable in the circumstances as it is comparable to the rates charged by suppliers, which was 2% per month on average.” Alaimo testified that he told Nesci that he was going to charge him 3% interest around November 2012 and that Nesci “was fine with that”. No such oral agreement was alleged in the Amended Amended Statement of Claim.
 The defendant argues that at no time was an interest rate of 3% per month agreed to. In fact, no payment terms or interest rate were ever agreed to by the parties and the court should not be filling in blanks where the parties have not included any such terms in their agreement.
 Interest rates cannot be imposed unilaterally by including a claim for interest in an invoice; see Gilbert Steel, supra, where the Court of Appeal states: “I attach no significance to the notation ‘1% per month interest on overdue accounts’ on the invoices received by the defendant at the increased prices on the basis that interest cannot be imposed unilaterally in this manner.”
Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.
[W]henever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.
 The contract includes no reference to an interest rate. Even if the second invoice reflected the terms of a contract it purports to impose interest at the rate of 3% per month but does not indicate an annual rate as required by s. 4 of the Interest Act.
 I reject the contention that Nesci agreed orally to pay interest at the rate of 3% per month. In the first place, I find Alaimo’s statements in this regard to be not credible, especially when no such agreement was pleaded in any of the iterations of the Statement of Claim. Second, there is no evidence that any such agreement, if there actually was one, fully disclosed the annual cost of borrowing as required by the Interest Act. Alaimo’s evidence in this regard struck me as a belated effort to fill a gap in his claim.
 Finally, it makes no sense that Alaimo and Nesci discussed and agreed to 3% interest per month in November 2012, but Alaimo did not send out any invoices until May 28, 2013. If there was such an agreement Alaimo (who claims that he was desperate for payment) would have sent out his invoices (which he claims he prepared as each extra was completed) immediately.
What Happens If An Interest Rate Is Shown Only As a Monthly Rate Rather Than Annualized Rate?
If An Interest Rate Is Shown Without An Annualized Rate, Then the Interest Charge Becomes Void.
For most contracts involving the sale of goods and services (i.e. other than mortgages) where an interest rate is stated as applying to late payment or overdue accounts will require that the annual interest rate be shown. The mandate to show an annual interest rate is found in section 4 of the federal Interest Act, R.S.C. 1985, c. I-15. In circumstances where an interest rate that is less than annual is shown, such as a two (2%) percent monthly interest charge, without also stating the annual interest rate, such an agreement is void and unenforceable.
The Interest Act also governs the interest rate that applies if an agreement for interest is made but the rate of interest undeclared. In such a situation, the Interest Act statutorily establishes a five (5%) annual rate. Counter-intuitively, many perceive that where a lesser rate is stated without the annualized rate such as the example of two (2%) percent mentioned above, this unenforceable rate should be substituted with the statutory five (5%) percent rate; however, the law will not operate in such a manner as to amend or adjust the defective rate of interest stated in the contract. The law within the Interest Act only establishes the rate at five (5%) percent when interest was agreed to but the rate unstated. Accordingly, in a situation where a rate is stated without the annualized interest rate, any interest becomes disallowed.
How Much Interest Can Be Charged?
An Interest Charge of Sixty (60%) Percent or Greater Is Unlawful.
Even if stated properly shown as an annual interest rate, when an interest charged calculates to sixty (60%) percent or beyond is contrary to section 347 of the Criminal Code of Canada, R.S.C. 1985, c. C-46 and is illegal. As an illegal interest charge, and where such is contrary to the Criminal Code, persons charging such exorbitant may be punished with up to five (5) years in jail when a charge is prosecuted as an indictable offence or two (2) years less a day imprisonment and/or twenty five thousand ($25,000) dollar fine when prosecuted as a summary conviction offence.
Furthermore, fees and other sums charged by pay day loan businesses are also regulated whereas such fees are often interest charges in disguise and such interest charges in disguise may amount to criminal activity if calculations show a rate beyond beyond the maximum allowed. These payday or short-term loan businesses are regulated per the Payday Loans Act, 2008, S.O. 2008, Chapter 9. The decision in the case of The Director v. The Cash Store, 2014 ONSC 980 has helped define some of the restrictions.
Attempts to add an interest charge onto an invoice without first having first arranged an agreement to charge interest is improper and unenforceable. Furthermore, an interest clause must show the agreed upon interest rate as an annual rate, or include an annualized rate if a monthly rate is shown, and the annualized rate must be less than sixty (60%) percent.