July 30, 2008

Canadian Business people have a problem complying with Canadian law when charging interest on Accounts Receivable. Most of the computer programs and spreadsheets that we use may (do) not comply with Canadian Law. Canadian law requires interest to be ALWAYS stated as a yearly effective rate for comparison purposes. See the Canadian Interest Act, Section 4. Every invoice, bill or statement must contain an express statement of the effective annual rate being charged. Canadian Banks, Visa, MasterCard and others advancing credit seem to be using the method used in the USA, which, as you will see, is not correct in law or in fact. Most businesses charge interest each month on accounts receivable, and the computer program may ask for the monthly interest rate or the annual interest rate. If the program asks for a monthly interest rate then, in percent: 
			
	Monthly			Annual Effective Rate
	1.0			12.682503013		NOT 12%
	1.5			19.561817146
	2.0			26.824179456
	2.5			34.488882425
	3.0			42.576088685
	3.5			51.106865735
	4.0			60.103221857


The Canadian Interest Act requires the Annual Effective Rate to be shown on your Invoices and Statements. Just the Monthly rate is not enough. If you want to use a different monthly rate from those above you can Calculate annual effective rates by clicking here. If the program asks for an annual interest rate then, in percent: 
Annual Effective Rate	Monthly Equivalent Rate
	 6.0			0.0048676
	 9.0			0.0072073
	12.0			0.9488793	NOT 1%
	17.5			1.3529722
	18.0			1.3888430
	24.0			1.9097582
	30.0			2.2104451


If you want to use a different yearly rate you can Calculate monthly rates by clicking here .

If you are in Business and are charging interest on your Accounts Receivable, in addition to the Canadian Interest Act you should be aware that the Canadian Criminal Code creates a "criminal rate of interest" of sixty percent. Look at excerpts from the Criminal Code. You can see from the table above that 4% per month hits that limit. But see the definition of interest in the Criminal Code.

There are two other pitfalls in charging interest on your accounts receivable. The first is the charging of a late payment charge such as one or two dollars if the payment is received later than some date, and the second is the method of charging daily interest. Both of these pitfalls are in some computer programs.