Subordinated Promissory Note Template for Canada

A subordinated promissory note is a legal document that establishes a debt obligation ranking below other specified debts in your creditor hierarchy. Under Canadian law, this instrument must comply with federal legislation including the Interest Act and Bills of Exchange Act, while also meeting provincial requirements for securities and personal property transactions. You'll use this document when you need to formalize a loan agreement that explicitly acknowledges its junior status to existing or future senior debt.

When do you need this document?

You'll typically require a subordinated promissory note in complex business financing scenarios where debt prioritization matters. This includes situations where your company needs additional capital but existing lenders require assurance that their debt remains senior. Corporate restructuring often necessitates subordinated notes to clarify creditor rankings during reorganization. Family business transitions frequently use these instruments when family members provide financing that should rank below institutional lenders. Venture capital and private equity transactions commonly employ subordinated notes to structure investment terms that protect senior creditors while providing necessary funding.

Key legal considerations

Your subordinated promissory note must clearly define the subordination relationship and identify which debts take priority. The subordination clause should specify whether it applies to existing debt only or includes future senior obligations. Interest rate provisions must comply with the Interest Act's disclosure requirements, particularly regarding annual percentage rates and compounding frequency. You'll need to consider whether your note constitutes a security under provincial Securities Acts, which could trigger additional disclosure and registration requirements. The document should address acceleration clauses, default provisions, and how subordination affects your rights during bankruptcy or insolvency proceedings under the Bankruptcy and Insolvency Act.

Legal requirements in Canada

Under Canadian federal law, your subordinated promissory note must comply with Interest Act requirements for interest rate disclosure and calculation methods. The Bills of Exchange Act governs the negotiable instrument aspects, including endorsement and transfer provisions if applicable. Provincial Personal Property Security Acts may require registration if your note includes security interests in personal property. You must ensure the subordination provisions align with provincial bankruptcy and creditor priority legislation. If your note could be considered a security, provincial Securities Acts mandate specific disclosure requirements and may require registration or exemption filings. The document should include proper execution formalities, including witness signatures and corporate seals where required by provincial corporate law.