Promissory Note

A promissory note is a written, legally binding promise by a borrower to repay a specified amount to a lender at an agreed interest rate and repayment schedule. In business sale transactions, promissory notes are used to document seller financing arrangements — the buyer signs a note in favour of the seller for the portion of the purchase price that is not paid in cash at closing.

In the context of family business transfers, a promissory note bearing at least the CRA's prescribed interest rate (3% as of Q3 2026) is required to avoid attribution rules under the Income Tax Act when transferring shares to an adult child using a sale-with-note structure. The child pays interest on the note annually, and the parent recognizes interest income each year.

In arm's-length business sales, seller financing via promissory note is common when the buyer has insufficient capital or bank financing for the full purchase price. The seller defers receiving part of their proceeds in exchange for interest income over the repayment term, typically 2–5 years.

See also: Seller Financing, Vendor Take-Back, Prescribed Interest Rate, Attribution Rules.