Lending Money to Family or Friends in Canada: Protect Yourself

Lending money to family or friends feels simple — until it is not. A handshake deal over a few thousand dollars can end a relationship and land you in small claims court, with each side remembering the 'terms' differently. The fix costs nothing and takes minutes: put it in writing.

A written loan agreement should state the names of the lender and borrower, the exact amount, the interest rate (even if it is zero), a clear repayment schedule with dates, and what happens if a payment is missed — late fees, and when the full balance becomes due. Both parties sign. That single document does three things: it prevents misunderstandings, it gives you something enforceable if repayment stops, and it proves the transfer was a loan and not a gift if the tax authorities ever ask.

The tax angle surprises most people. Interest-free or below-market loans between spouses — or to a minor child — can trigger the CRA's attribution rules, meaning the investment income earned on that money may be taxed in your hands instead of the borrower's. Charging at least the CRA's prescribed interest rate, with the interest actually paid each year, generally avoids this problem. The prescribed rate changes quarterly, and this is one area where a quick conversation with an accountant pays for itself.

Set expectations the way a bank would: how much, when, what interest, what happens on default. Keep records of every payment made.

Two more practical points. First, decide whether the loan is secured or unsecured. For larger amounts — say, helping with a down payment — you can secure the loan against an asset, which gives you real recourse if repayment fails. Second, decide what happens on default before it happens: a demand clause lets you call the full balance due if payments stop, and a clear late-fee policy removes the awkwardness of chasing a relative. Write down how payments are made too — e-transfers leave a clean trail that cash does not. And if circumstances change, amend the agreement in writing rather than relying on a new verbal understanding; the whole point is that the paper, not memory, governs.

Be honest with yourself before you lend — only lend money you could afford to lose, because no contract can make an unwilling borrower pay quickly, and the relationship is worth more than the loan.

Our free loan agreement generator creates a proper written agreement — amount, interest, repayment schedule, and default terms — in minutes. It protects the money and the relationship at the same time.