Interest on Unpaid Debts and Judgments in Ontario

When a debt goes unpaid, the amount actually owed rarely stays frozen at the original invoice or loan figure. Ontario law generally allows a creditor to add interest to a debt for the period it remains outstanding, which means the longer a debt sits unpaid, the more it can grow. Understanding how this works — and which rate applies — matters whether you’re a creditor trying to calculate what’s owed, or a debtor trying to understand why a balance has crept upward.

There are really three different interest regimes that can come into play: the default rates set under Ontario’s Courts of Justice Act, a rate the parties themselves agreed to in a contract, and a federal ceiling under the Criminal Code that limits how high any agreed rate can legally go. Each plays a different role, and knowing which one applies to a given debt is the starting point for any accurate calculation.

This matters at every stage of a money dispute — when drafting a demand letter, when calculating what to claim in a court filing, and when a judgment has already been obtained but remains unpaid. Our guides to recovering unpaid invoices and enforcing a judgment in Ontario both touch on interest, and this guide goes into more depth on how the rates themselves actually work.

Prejudgment interest generally applies to the period between when a debt or loss arose and the date a court issues judgment on the claim. Ontario’s Courts of Justice Act sets a default prejudgment interest rate that applies where the underlying contract doesn’t specify its own rate, and this default rate is recalculated every calendar quarter using a formula tied to government treasury bill rates rather than being fixed permanently at one figure.

Because the rate is set quarterly, the applicable prejudgment rate for a claim can depend on when the cause of action arose — a claim that originated two years ago may carry a different prejudgment rate than one that arose last quarter. Courts generally use the rate that was in effect at the relevant starting point, applied over the applicable period, rather than whatever rate happens to be current at the time of judgment.

Prejudgment interest is intended to compensate a creditor for being deprived of money they were owed during the time it took to resolve the claim through the court system. It’s calculated on the principal amount outstanding, generally as simple interest, over the number of days or months between the triggering event and the judgment date.

Once a court issues judgment, a different rate generally takes over: postjudgment interest, which applies from the date of judgment forward until the debt is paid in full. Like the prejudgment rate, the default postjudgment rate under the Courts of Justice Act is also set and republished quarterly by the province, and it’s commonly a different figure than the prejudgment rate that applied earlier in the same case.

A key practical point is that the postjudgment rate that applies to a given judgment is generally fixed at the rate in effect on the date judgment was issued, and that same rate continues to apply for as long as the judgment remains unpaid — it doesn’t automatically update every quarter along with the current published figure. This is worth keeping in mind when calculating a running balance on an older judgment.

Many commercial contracts, loan agreements, and invoices include their own interest clause — a specific annual percentage that applies to overdue amounts, sometimes framed as a monthly rate for familiarity. Where a contract validly sets its own interest rate, courts will generally apply that negotiated rate instead of the statutory default, because the parties have already agreed on compensation for late payment.

A contractual rate doesn’t need to match the statutory default, and it’s common for commercial agreements to specify a higher rate than the quarterly Courts of Justice Act figure, particularly for business-to-business invoicing. That said, a contractual rate is not unlimited — it remains subject to the federal criminal interest rate cap discussed below, regardless of what the parties agreed to.

It’s worth reviewing exactly how a contractual interest clause is worded, since some specify a flat monthly late fee rather than a true annualized interest rate, and the two can produce quite different totals over time. A clause that isn’t clearly drafted can also become a point of dispute in itself, separate from the underlying debt.

Separate from Ontario’s own court-related interest rules, the federal Criminal Code sets a cap on the “effective annual rate of interest” that can lawfully be charged on an agreement for the advance of credit or a loan. This cap exists to prevent extremely high, predatory interest rates, and it applies across Canada regardless of provincial contract terms.

The criminal interest rate cap is relevant to both informal private lending arrangements and some commercial financing terms, and it can override a contractual interest clause that exceeds the lawful maximum. A rate structured to look modest on its face — for example, a seemingly small periodic fee applied very frequently — can sometimes work out, once properly annualized, to exceed this cap.

Because the cap is calculated based on the effective annual rate once all fees and compounding are accounted for, determining whether a particular arrangement actually exceeds it can require a careful calculation rather than a simple glance at the stated percentage. This is a technical area where getting a professional calculation can matter more than it might first appear.

Whether interest on a debt compounds — meaning interest is calculated on previously accrued interest, not just the original principal — depends on what rate regime applies. The default statutory prejudgment and postjudgment rates under the Courts of Justice Act are generally applied as simple interest on the outstanding principal, which tends to grow a balance more slowly than true compounding would.

A contract, by contrast, can specify compounding interest — for example, interest that is calculated monthly and then added to the principal before the next period’s interest is calculated. Over a long period, even a seemingly moderate compounding rate can meaningfully increase the total balance compared to simple interest at the same nominal rate, which is part of why the criminal interest rate cap pays attention to the “effective annual rate” rather than just the stated percentage.

For a debtor trying to understand why a balance has grown, and for a creditor trying to calculate an accurate figure to claim, it’s worth identifying early on whether simple or compound interest applies, and over what exact period. A clear running ledger — principal, interest calculation method, rate, and dates — avoids disputes later about how a final number was reached.

Given how many variables feed into a final interest calculation — which rate regime applies, whether it’s simple or compound, the exact start and end dates, and any partial payments made along the way — keeping accurate, dated records throughout a dispute makes a significant difference. This matters whether the debt is still informal, has become a demand letter situation, or has already turned into a court judgment.

A clear calculation also supports a stronger negotiating position. A creditor who can show precisely how a total was reached, including the applicable statutory or contractual rate, tends to face less pushback than one presenting a vague, rounded figure. Our guides to debt collection in Ontario and recovering unpaid invoices cover the broader process this kind of calculation typically feeds into.

This is general information about how interest mechanics work in Ontario, not legal advice about any specific debt — the exact rate, period, and method that apply to a particular situation can depend on details that are worth confirming directly. Our tools page and contact page are available if you’re looking for further resources.