Is seller financing legal in Canada, and what rules apply?

BDC, the federal Crown corporation that lends to entrepreneurs, describes vendor financing (also known as vendor take-back or VTB) as a form of business acquisition debt that lets the buyer hold back a portion of the purchase price as a debt to the vendor. This page does not give a legal opinion on any deal. It names the statutes that shape the note and the security behind it. For how the structure works, see seller financing explained.

The note itself

For a written promise to count as a promissory note under the federal Bills of Exchange Act, it must meet section 176(1): an unconditional promise in writing, signed by the maker, to pay a sum certain in money on demand or at a fixed or determinable future time to a specified person, to that person’s order or to bearer. The Act sits beside the commercial terms the parties agree.

Interest limits

The federal Interest Act, in section 3, fixes the rate when interest is payable by agreement or by law and no rate is fixed by either. Section 4, except as to mortgages on real property or hypothecs on immovables, restricts interest made payable at a rate for a period shorter than a year unless the contract expressly states the equivalent yearly rate. Section 347(1) of the Criminal Code applies despite any other Act of Parliament: a person who enters or offers to enter into an agreement or arrangement to receive interest at a criminal rate, advertises such an offer, or receives a payment or partial payment of interest at a criminal rate commits an offence, prosecuted either by indictment under paragraph (a) or on summary conviction under paragraph (b). Section 347(8) excludes transactions to which the Tax Rebate Discounting Act applies. Section 347(2) defines the criminal rate and what counts as interest, so check any rate and default charge against it.

Security for the note

Ontario’s Personal Property Security Act, subject to section 4(1), applies under section 2(a) to, among other things, every transaction that in substance creates a security interest, without regard to its form or to who has title to the collateral. This page reads only Ontario’s Act. If the business is elsewhere, check the personal property security rules where it is.

The lawyer acting for each side should confirm which statutes apply to the specific note and security, and whether a bank loan changes the ranking of the take-back.