Charging Interest and Late Fees on Overdue Invoices in Canada: What B2B Creditors Can Actually Recover
Most Canadian businesses assume that if a customer pays late, they can simply add interest, tack on a late fee, and recover their collection costs on top. The invoice says "1.5% per month on overdue accounts," so surely that is enforceable.
Often it is not. The gap between what a business charges on paper and what it can actually recover in front of a judge is one of the most expensive misunderstandings in B2B credit. A poorly worded interest clause can cap your recoverable interest at a fraction of what you intended. A late fee with no contractual basis can be struck entirely. And collection costs you assumed the customer would cover may land squarely back on you.
This article explains what interest, fees, and recovery costs a Canadian business can realistically claim on an overdue commercial account, where the common traps are, and how to set up your terms so the numbers on your invoice survive contact with reality.
You can only charge interest if you agreed to it first
The starting point surprises a lot of business owners. You cannot charge a customer interest on an overdue account simply because the account is overdue. Interest is a contractual entitlement. It has to be agreed to before the debt arises, not invented after the customer fails to pay.
This means the right to charge interest needs to live somewhere the customer agreed to in advance:
A signed credit application or credit agreement.
Accepted terms of sale or terms and conditions referenced on a purchase order or order confirmation.
A contract that the customer signed or accepted before the goods or services were delivered.
A line printed on an invoice issued after the work is done is weaker ground. If the customer never agreed to that term before incurring the debt, a court may treat it as something you imposed unilaterally rather than something the customer accepted. The cleaner the paper trail showing the customer agreed to interest before the transaction, the stronger your claim.
If there is no agreement to interest at all and you end up suing, you are not left with nothing. You can usually claim pre-judgment interest at the statutory rate set by your province. The problem is that statutory pre-judgment interest rates are frequently very low, sometimes only a few percent or less. That is exactly why a properly drafted contractual interest clause matters: it lets you claim a meaningful rate instead of the statutory floor.
The interest clause trap that quietly caps you at five percent
Here is the single most common mistake in Canadian commercial invoicing, and it costs businesses real money every year.
Under federal law, if a written contract makes interest payable at a rate for any period shorter than a year, such as "per month" or "per week," and the contract does not also state the equivalent yearly rate, then the maximum interest you can recover drops to five percent per year. It does not matter how clearly the monthly figure is printed. If the annual equivalent is missing, the recoverable rate collapses.
The practical effect is brutal. A clause reading "1.5% per month on all overdue accounts" looks like 18% per year. But because it expresses only a monthly rate without stating the annual equivalent, a court can limit recovery to five percent per year. Canadian courts, including in Alberta, have applied exactly this result to supplier invoices, reducing the creditor's interest claim from what they expected down to the five percent statutory cap.
The fix takes ten seconds and costs nothing. State both rates. Instead of:
"Interest of 1.5% per month on all overdue accounts."
Write:
"Interest of 1.5% per month (18% per annum) on all overdue accounts."
That single parenthetical is the difference between recovering 18% and recovering 5%. Every set of credit terms, sales terms, and invoice templates a business uses should be checked for this. If your interest is expressed only as a monthly or daily figure, you are very likely leaving money on the table.
Is there a maximum interest rate?
Yes, there is a federal ceiling, but for ordinary B2B trade credit it is rarely the binding constraint. Canada sets a criminal rate of interest above which charging interest is an offence. As of January 1, 2025, that ceiling was lowered to an annual percentage rate of 35%, down from the previous effective annual rate of 60%.
Two points matter for businesses. First, ordinary commercial interest on overdue accounts, typically in the range of 18% to 24% per year, sits comfortably below this ceiling, so it is almost never an issue for normal trade credit. Second, the rules around the criminal rate are primarily aimed at lending, and there are exemptions for commercial borrowing by businesses. The realistic takeaway is not "watch out for the criminal rate" but rather "keep your rates commercially reasonable and clearly documented," because the enforceability problems described above will bite long before the criminal ceiling ever does.
Late fees and administrative charges
Businesses often want to add a flat late fee, an administration charge, or a rebilling fee on top of interest. These can be enforceable, but they live or die by the same principle as interest: the customer has to have agreed to them in advance, and they have to be reasonable.
A flat fee that functions as a genuine pre-estimate of the administrative cost of dealing with a late account is more defensible. A fee that looks like a penalty designed to punish the customer rather than compensate the creditor is more vulnerable to challenge. Canadian courts have a long-standing discomfort with clauses that operate as penalties rather than reasonable compensation.
If you intend to charge administrative fees on late accounts, the safest approach is to set them at a level that reasonably reflects your actual cost, state them clearly in the terms the customer agreed to, and avoid stacking multiple overlapping charges that together look punitive.
Can you make the customer pay your collection and legal costs?
This is where many businesses are caught off guard. By default, when you place an account for collection or hire a lawyer, those costs are yours. The customer is not automatically responsible for them simply because they failed to pay.
You can shift those costs, but only if your agreement says so. A well-drafted credit agreement should include a clause stating that the customer is responsible for all reasonable costs of collection, including agency fees and legal fees, incurred as a result of the customer's default. With that clause in place, you have a contractual basis to claim those costs.
Even then, two limits apply. First, the costs have to be reasonable. A court is unlikely to enforce recovery of costs that are disproportionate to the debt. Second, if the matter goes to court, the amount of legal costs the court will actually award is often governed by court rules and the judge's discretion, which may not match the full amount you paid your lawyer, even with a costs clause in your contract.
The lesson is the same as everywhere else in this article: the entitlement to recover costs has to be built into the agreement before the default, not asserted afterward.
How to set up terms that actually hold
If you want the numbers on your invoices to be recoverable, build the following into the terms your customers agree to before you extend credit:
An interest clause that states both the periodic rate and the equivalent annual rate. This is the single highest-value fix.
Clear payment terms that define when an account becomes overdue and when interest begins to run.
A reasonable, clearly stated late or administrative fee, if you choose to use one, set at a level that reflects genuine cost rather than punishment.
A collection and legal cost recovery clause making the customer responsible for reasonable costs incurred due to their default.
A signature or documented acceptance showing the customer agreed to these terms before the transaction, not after.
A business that gets these five things right is in a dramatically stronger position than one relying on a single line at the bottom of an invoice.
Frequently asked questions
Can I charge interest on an overdue invoice if my contract doesn't mention interest? Generally no. Interest on an overdue account is a contractual entitlement that must be agreed to before the debt arises. Without an agreement, your main option is to claim statutory pre-judgment interest if you sue, which is often a low rate.
Why might my "2% per month" clause only let me recover 5% per year? Because federal law caps recoverable interest at five percent per year when a contract states interest for a period shorter than a year without also stating the equivalent annual rate. A clause expressed only as a monthly rate triggers this cap. Stating the annual equivalent, such as "2% per month (24% per annum)," avoids it.
What is the maximum interest I can charge a business customer in Canada? There is a federal criminal interest ceiling, lowered to 35% annual percentage rate as of January 1, 2025, with exemptions for commercial borrowing. Ordinary trade-credit interest of 18% to 24% per year sits well below this and is rarely an issue. The practical limits on what you recover come from how your interest clause is drafted, not the criminal ceiling.
Can I make a customer pay my collection agency or legal fees? Only if your agreement with the customer says so. A clause making the customer responsible for reasonable collection and legal costs incurred due to their default gives you a basis to claim them. The costs must still be reasonable, and a court may limit the legal costs it awards.
If I sue and win but never agreed on an interest rate, what do I get? You can typically claim statutory pre-judgment interest at the rate set by your province, which is often modest. This is usually far less than a properly drafted contractual interest rate would have allowed, which is why agreeing on interest in advance matters.
The bottom line
Interest, late fees, and recovery costs are not automatic rights that come with being owed money. They are contractual tools, and they only work when they have been set up correctly before the customer ever falls behind. The businesses that recover the most are not the ones with the most aggressive interest clauses. They are the ones whose clauses are clearly worded, properly agreed to, and built to survive a challenge.
If your invoices have been quietly capping you at five percent, or your collection costs keep landing back on your own books, the problem is almost always upstream in the terms, not in the customer. Fixing the paperwork before the next account goes overdue is one of the cheapest and highest-return things a credit-conscious business can do.