Late Payment Fees for Canadian Contractors: What’s Legal, What’s Enforceable (2026)

There are two completely different questions hiding inside the phrase “late payment penalty” for Canadian contractors. One is about money you can charge a customer who pays you late. The other is about money the CRA charges you when you file or pay late. Both matter. Both have real numbers attached.

This guide covers both. By the end you’ll know what’s legal to put in your contract, why the Criminal Code sets the ceiling (and what that ceiling now actually is), how Ontario’s Construction Act gives you statutory interest whether or not it’s in your contract, and exactly what the CRA will charge you if you miss a GST/HST filing, a T5018 deadline, or a payroll remittance.

There are no vague disclaimers here. Only the actual numbers.

Charging clients: contractual late fees

You can charge a client interest on a late invoice. The catch is that you must have agreed on it in writing before the invoice was issued. Slapping a “2% per month” line on the bottom of an invoice the client never signed is not enforceable. The rate and timing must appear in your contract, quote, or a payment terms sheet the client agreed to.

The industry standard in Canada is 1.5% to 2% per month on the outstanding balance, calculated from the due date. At 2% per month that works out to 24% per year, well within the legal limit (more on that below). Some contractors use a flat late fee instead, such as $50 per invoice, but a percentage that grows with the overdue balance tends to create a stronger incentive to pay.

Three things to put in writing before you do any work:

1. The due date (e.g., net 28 from invoice date).
2. The late interest rate (e.g., 1.5% per month on the overdue balance).
3. When interest starts accruing (e.g., the day after the due date).

If these three items are in your signed quote or contract, you can charge them. If they’re not, a court may reduce or void the charge entirely.

The Criminal Code cap (and what it actually is now)

Most contractors have heard the phrase “60% criminal rate of interest” and assume that’s the ceiling they need to stay under. That number is out of date.

Effective January 1, 2025, the federal government amended section 347 of the Criminal Code to lower Canada’s criminal rate of interest from an effective annual rate of 60% to a 35% annual percentage rate (APR). Charging interest above that threshold is a federal criminal offence, regardless of what the contract says.

In practice, this cap is not a concern for contractors charging typical commercial late fees. A rate of 1.5% per month equals roughly 18% APR. Even 2% per month comes to about 24% APR. Both sit well below 35%.

There is one exemption worth knowing: for credit advances between $10,000 and $500,000, the Criminal Code allows up to 48% APR if calculated under accepted actuarial methods. For advances over $500,000, no cap applies. These thresholds are relevant to lenders, not to contractors charging invoice interest, but it is useful context if you ever negotiate a large retainer or staged advance arrangement.

The short version: stay at or below 2% per month (24% APR) and you are nowhere near the criminal rate. Anything above 3% per month starts to attract risk and should be reviewed by a lawyer before it goes into a contract.

Ontario Construction Act: statutory interest, automatic

If you work on a construction project in Ontario, you may have a right to late-payment interest even if your contract says nothing about it. Under the Ontario Construction Act, if a payer misses the 28-day payment deadline that applies to a proper invoice, interest starts accruing automatically on the overdue amount.

The statutory rate is the greater of two amounts: the prejudgment interest rate set under section 127(2) of the Courts of Justice Act (currently 2% per year), or the rate specified in your contract. In almost every case, whatever rate is in your contract will be higher, so the statutory rate acts as a floor rather than a ceiling.

Two things to understand about this statutory interest:

• It cannot be waived by contract. An owner cannot write a clause into your agreement saying interest does not apply. The Act overrides that.
• It only applies if you sent a proper invoice. If your invoice does not meet the six required fields under the Act, the 28-day clock never started and the interest provision does not kick in. Most trade invoices from standard accounting software are missing the “period of work” and “contract reference” fields. Check yours.

For a full breakdown of what qualifies as a proper invoice, the seven required fields, and what to do when a customer does not pay by day 28, see the Ontario Construction Act prompt payment guide or the proper invoice glossary entry.

When the CRA charges you

This is the half of the late-payment question most contractors ignore until they get a letter. The CRA’s penalties are not negotiable, do not care about cash flow problems, and compound daily. Here is what each one actually costs.

Late HST filing penalty

If you file your GST/HST return late and have a balance owing, the CRA applies a penalty using this formula:

At the worst case (12 months late) that is a 4% penalty on top of the balance. On top of that, the CRA charges 7% daily compound interest (the rate for Q1 and Q2 2026; adjusted quarterly) from the day the payment was due.

An example: you owe $8,000 in HST and file 3 months late. The penalty is $80 (1%) plus $60 (0.25% x 3) = $140 in penalties, plus daily interest on the $8,000 from the original due date. That interest starts compounding immediately, not when you get the CRA’s letter.

One important note: if you file on time but pay late, you avoid the filing penalty but still owe daily interest. Filing on time even when you cannot pay in full is almost always the right move.

T5018 late filing

The T5018 is the information return contractors must file when they pay subcontractors more than $500 in a calendar year for construction services. It is due within 6 months of your fiscal year end.

Miss that deadline and the CRA charges $25 per day, with a minimum of $100 and a maximum of $2,500 per return. Miss two years in a row and you may face additional third-party penalties on top of the per-day charge.

Most contractors who are hit with T5018 penalties did not know the obligation existed. The CRA does not proactively notify you. You owe a T5018 if you paid a subcontractor more than $500 for construction work and your primary business activity is construction. That applies to most Canadian trades contractors: electricians, plumbers, and HVAC techs who ever hired a helper. For the full rules, see our T5018 filing guide.

Late payroll remittances

If you have employees, payroll source deductions (income tax, CPP, EI) must be remitted to the CRA on a fixed schedule. The penalty for a late remittance escalates based on how late you are:

The 7% daily compound interest applies on top of these penalties from the day the remittance was due. There is no grace period. The penalty is automatic the moment the deadline passes.

Late payment escalation sequence

When a client misses your payment deadline, here is the sequence that works in practice. The goal is to get paid without destroying the relationship and without waiting long enough to lose your lien rights.

Sample late-payment notice email

Copy and adapt this for your day-32 notice. Plain language works better than legal threats at this stage.

Three things this template does right: it states the amount and due date clearly, references the contractual interest clause, and names the escalation path without being threatening. Clients who receive vague “please pay” emails are slower to act than clients who see a concrete deadline and a specific next step.

Pre-job checklist to enforce on-time payment

The best time to set up your late-payment protections is before the job starts, not after payment is already late.

• Payment terms in every signed quote or contract. Due date, late interest rate, and start date for interest. No verbal agreements.
• Invoice format that qualifies as a proper invoice under the Construction Act: contractor name and address, invoice date, contract reference (job address + contract date), period of work, amount and basis, HST number and amount separately stated.
• Confirmed delivery method. Email with a read receipt or a timestamped portal link creates a record of when the invoice was received. That record starts the 28-day clock.
• Lien deadline logged on day one. In Ontario, 60 days from your last day of supply. Set a calendar alert for day 50 so you have 10 days to act if needed.
• A written record of any payment extension agreed to. A text message is better than a verbal promise. An email is better than a text.
• Your own CRA deadlines tracked separately. Your HST filing dates and T5018 deadline are fixed. Missing them because you were busy chasing a client adds a CRA penalty to a cash flow problem, making a bad situation worse.

This article is for general information only and does not constitute legal or tax advice. CRA penalty rates and interest rates are reviewed quarterly and may change. For advice specific to your situation, consult a construction lawyer or CPA licensed in your province.