Ontario Promissory Notes: Requirements, Holder in Due Course, and Limitation Periods

1. Statutory Framework: Bills of Exchange Act

Promissory notes in Canada are governed by the federal Bills of Exchange Act, R.S.C. 1985, c. B-4 ("BEA"). The BEA is federal legislation — it applies uniformly across Canada, including in Ontario. Provincial legislation (including Ontario common law) applies to aspects of promissory note transactions not covered by the BEA.

2. Requirements for a Valid Promissory Note

Under BEA s.176(1), a promissory note is an unconditional promise in writing made by one person (the maker) to another person (the payee), or to bearer, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer.

Requirement	Details	Failure Consequences
Unconditional promise in writing	No contingencies; "I promise to pay" language required	Not a negotiable instrument; enforceable as contract only
Signed by maker	Signature of promisor (maker) required	No binding obligation; unsigned note is unenforceable as a note
Sum certain in money	Fixed amount in Canadian or specified foreign currency	Note void if amount uncertain or non-monetary
Payable on demand or fixed/determinable date	Demand note or note with specified maturity date	If no date stated, treated as demand note
Payee identified	Named payee or "bearer" note	Defective but may be enforceable by the holder as a bearer note

3. Demand Notes vs Fixed Term Notes

3.1 Demand Promissory Notes

A demand note is payable immediately on demand — the maker promises to pay when the payee demands repayment. The payee can make demand at any time after the note is executed. Key characteristics:

No maturity date; payable immediately upon demand;
The cause of action does not accrue until demand is made — the limitation period begins to run on the date of demand;
Common in shareholder loan arrangements, director loan documentation, and informal lending.

3.2 Fixed Term Promissory Notes

A fixed term note specifies the maturity date on which the principal (and any accrued interest) is due and payable. Key characteristics:

Principal and interest are due on the specified maturity date;
The limitation period begins on the maturity date if not paid;
May include acceleration clauses (the full amount becomes due on default of any instalment payment);
Common in vendor take-back mortgages, business acquisition financing, and real estate transactions.

4. Interest Provisions

Promissory notes may specify an interest rate. Provisions typically include:

Fixed interest rate: A stated percentage per annum on the principal balance, accruing from the date of the note or from the date of advance;
Prime rate or floating rate: A rate tied to the Bank of Canada overnight rate or a chartered bank's prime lending rate, which fluctuates over the term;
Default interest: A higher rate applicable after default — enforceable if not unconscionable;
Criminal rate of interest (ITA s.347): Interest exceeding 60% per annum (effective annual rate) is a criminal offence under theCriminal Code s.347 and renders the interest provision void.

5. Holder in Due Course

The holder in due course ("HDC") doctrine is one of the most important features of negotiable instruments. An HDC is a holder who takes a note:

That is complete and regular on its face;
Before it is overdue (i.e., before maturity);
Without notice that it has been previously dishonoured;
In good faith and for value; and
Without notice of any defect in the title of the person negotiating it.

An HDC takes the note free of personal defences that the maker could raise against the original payee. This means the maker cannot refuse to pay the HDC even if the maker has a valid defence against the original payee.

Defence Type	Examples	Available Against HDC?
Personal (defects in transaction)	Failure of consideration, set-off, breach of contract, payment	No — HDC takes free of personal defences
Real (absolute) defences	Forgery, fraud in the factum, incapacity (minors), illegality, material alteration	Yes — real defences are available against all holders including HDC

6. Negotiation and Endorsement

A promissory note is transferred (negotiated) by:

Endorsement and delivery: For a note payable to order (e.g., "pay to the order of John Smith"), the payee must endorse the note (sign the back) and deliver it to the transferee. The transferee then becomes the holder.
Delivery only: For a bearer note, delivery alone is sufficient to negotiate the note.

Endorsement types include:

Blank endorsement: Endorser signs without specifying a transferee — converts the note to bearer form;
Special endorsement: Specifies the person to whom the note is negotiated;
Restrictive endorsement: Limits negotiability (e.g., "for deposit only") — the note can no longer be further negotiated.

7. Consumer Protection and Promissory Notes

Where a promissory note is taken in connection with a consumer transaction governed by the Consumer Protection Act, 2002 (Ontario), restrictions apply:

BEA s.189.2 restricts the holder in due course rules for consumer bills and consumer notes — a holder of a consumer note takes it subject to any defence or right of set-off that the maker has against the original supplier;
Consumer transactions are defined under the CPA and include purchases of goods and services by individuals for personal, family, or household purposes.

8. Limitation Periods for Promissory Notes in Ontario

The Limitations Act, 2002 governs limitation periods for claims on promissory notes in Ontario:

Demand notes: The cause of action accrues on the date demand is made. The two-year limitation period runs from the date of demand. If no demand is ever made, the claim does not accrue (though the ultimate 15-year limitation period from the date the note was executed may eventually apply).
Fixed term notes: The cause of action accrues on the maturity date (or upon acceleration after default, if an acceleration clause applies). The two-year period runs from that date.
Acknowledgment and partial payment: A written acknowledgment of the debt (signed by the debtor) or a partial payment resets the limitation period under the Limitations Act, 2002 ss.13-14. This is particularly important for demand notes where the creditor has not called the loan.

9. Default and Enforcement

On default (failure to pay at maturity or on demand), the holder may:

Commence a civil action on the note in the Ontario Superior Court of Justice or Small Claims Court (for amounts up to $35,000). The note itself is typically sufficient evidence of the debt;
Seek summary judgment — a claim on a promissory note is a typical candidate for summary judgment under Rule 20 of the Ontario Rules of Civil Procedure, as the defendant's available defences are limited;
Enforce any security pledged in connection with the note (e.g., a charge on real property, PPSA security interest);
Sue endorsers and guarantors jointly and severally in the same action.

10. Shareholder Loans and Promissory Notes

Ontario corporations commonly use promissory notes to document shareholder loans — amounts loaned by a shareholder to the corporation or by the corporation to a shareholder. Key considerations:

Corporation borrowing from shareholder: A demand promissory note documents the shareholder loan. The limitation period begins when demand is made. Shareholder loan notes are often interest-free and repayable on demand — counsel should advise on the income tax implications under ITA s.80.4;
Corporation lending to shareholder: A shareholder who borrows from the corporation and takes more than one year to repay may have the loan included in income under ITA s.15(2). Demand notes are commonly used to document these loans.

Frequently Asked Questions

What are the requirements for a valid promissory note in Ontario?

Under the Bills of Exchange Act, a valid promissory note must be: (1) an unconditional promise in writing; (2) signed by the maker; (3) to pay a sum certain in money; (4) to a named payee or bearer; (5) on demand or at a fixed or determinable future time. A document failing any of these requirements is not a negotiable instrument.

What is the limitation period for a promissory note in Ontario?

The two-year limitation period under the Limitations Act, 2002 applies. For demand notes, the period runs from the date demand is made. For fixed term notes, it runs from the maturity date. A written acknowledgment or partial payment resets the limitation period.

What is a holder in due course for a promissory note?

An HDC is a holder who takes the note before maturity, for value, in good faith, without notice of defects or dishonour. An HDC takes the note free of personal defences (failure of consideration, set-off) but not real defences (forgery, fraud in the factum, incapacity, illegality).

Is a promissory note enforceable without consideration in Ontario?

Against the original payee, a note without consideration may fail. However, a holder in due course takes the note free of the defence of failure or absence of consideration — the HDC can enforce the note regardless. This is a key advantage of transferring notes to HDC status.