How to legally charge interest on a family loan in Canada

You're happy to lend, but you'd like a little interest — to keep pace with inflation, or just to make it feel like a real loan rather than a giveaway. That's completely allowed in Canada. But two federal rules quietly decide whether the interest you write down is interest you can actually collect, and a third question — how it's taxed — catches people off guard. Here's how to charge interest correctly.

Rule one: state the rate as an annual rate

The federal Interest Act contains a quietly powerful rule. If a contract specifies interest but doesn't express the rate as a rate per year, the lender can recover no more than 5% per year — no matter what the parties intended. So an agreement that says "1.5% per month" or "a fee of $50 a week," with no annual equivalent spelled out, can collapse to 5% annually if it's ever challenged. The fix is trivial: write the rate as a percentage per year (for example, "6% per annum, not compounded"). It costs nothing and removes the single most common drafting trap in homemade loan documents.

Rule two: stay under 35% APR

Since January 1, 2025, the criminal rate of interest in section 347 of the Criminal Code is an annual percentage rate above 35% — down from the old 60% effective annual rate. For a loan to an individual of $10,000 or less, that 35% APR ceiling is the hard line. Charge above it and the interest term isn't just unenforceable; offering or receiving it is a criminal offence. No realistic family loan approaches this — but it's why you should never copy a rate from an old or foreign template without checking it.

How interest is taxed — the part people forget

Interest you charge a relative is taxable income to you. When the borrower pays you $300 in interest over a year, that $300 goes on your return as interest income, exactly as if a bank had paid it to you. The borrower, for an ordinary personal loan, generally gets no deduction — deductibility only arises when the borrowed money is used to earn income from a business or property. This asymmetry is one reason many families keep loans interest-free: it sidesteps the reporting entirely and keeps the arrangement simple.

Should you even charge interest?

Legally permitted isn't the same as wise. For most family loans the honest answer is a modest rate or none at all. A small amount of interest can signal that this is a real loan, not a gift — useful evidence if the relationship later frays — without turning a kind gesture into a profit centre. If your goal is genuinely to earn a return, a written, interest-bearing agreement is the right vehicle; if your goal is simply to help while keeping a clear record, an interest-free loan with a firm repayment schedule does the job and spares you the tax reporting.

Whatever you choose, put the interest decision in writing. "Interest-free" stated plainly is clearer than interest left unmentioned, and a stated annual rate is the only form the Interest Act fully protects.

Common questions

Can I legally charge interest on a loan to a family member in Canada?

Yes. Family loans can carry interest like any other private loan. Two rules govern it: if the rate is not expressed as an annual rate, the Interest Act can cap what you recover at 5% a year, and it must stay under 35% APR, above which it becomes a criminal rate under section 347 of the Criminal Code. Most family loans charge little or nothing, but charging interest is entirely legal within those limits.

Do I have to report interest I earn from a family loan?

Yes. Interest you receive is taxable income and must be reported on your tax return, even when the borrower is a relative. This is one reason to write the rate clearly into the agreement — you'll need to know exactly what you collected.

What happens if I write the rate per month instead of per year?

Under the Interest Act, if a contract states a rate of interest without expressing it as an annual rate, no more than 5% per year is recoverable. So '2% per month' with no annual equivalent can quietly limit you to 5% a year. Always state the rate as a percentage per year.

Is there a minimum interest rate I have to charge family?

Not for an ordinary loan — interest-free is fine and common. The only place a minimum matters is income-splitting: if you lend to a spouse or child to invest, you must charge at least the CRA prescribed rate (3% in mid-2026) for the strategy to work.

General information for Canada, not legal advice; LendRight is not a law firm. Interest limits and tax treatment can change — the criminal rate (35% APR) is set under s. 347 of the Criminal Code, and the CRA prescribed rate changes quarterly. Confirm current figures before relying on them.