The effects of interfacial modification in tri-layered Cu/Al/Cu composites by heat treatment on interface stability and crack propagation were investigated. In order to investigate the crack path during the peel test, the intermetallic compound layer with the propagating crack was examined using electron backscatter diffraction (EBSD) analyses. The increase of peel strength from 7.8 to 9.1 N/mm in the tri-layered Cu/Al/Cu composite in the presence of thin discontinuous intermetallic compounds with heat treatment at 200–300 °C was accompanied by the increase of electrical conductivity from 65.3% IACS (International Annealed Copper Standard) to 66.8% IACS. Continuous intermetallic layers consisting of Al2Cu, AlCu, and Al4Cu9 were found in Cu/Al/Cu heat-treated at temperatures above 350 °C and its thickness increased rapidly and reached up to 35.2 μm at 500 °C. The peel strength drastically decreased to 5.75 N/mm after heat treatment at 400 °C, and it gradually increased as the heat treatment temperature was increased to 450 °C (5.91 N/mm) and 500 °C (6.16 N/mm). The increased peel strengths after heat treatment at 450 and 500 °C were accompanied by pronounced serrations of the peel strength–displacement curves. The amplitude of serration increased substantially with increasing annealing temperature from 400 to 500 °C. The major crack along the interface propagated, mostly along the Al2Cu/AlCu boundary with some inclined cracks, propagated through the AlCu and Al4Cu9 intermetallic compound layers. The repetition of crack propagation along the interface and crack deflection through the intermetallic layer as an inclined crack induced the serrated surface on the peeled-off Cu plate, enhancing the interface toughening.