Financial institution guides

Pre-authorized debits guide

Pre-authorized debits (PADs) are a convenient way to pay bills and make payments automatically. Instead of waiting for its customer to send a payment, a company or financial institution is given permission to debit a customer’s bank account when the payment is due. It’s a great way to pay bills like a mortgage, utilities, and insurance premiums. PADs can also be used by an individual to transfer funds from a bank account to a Registered Retirement Savings Plan (RRSP), for example.

Pre-authorized debits are sometimes called direct debit, pre-authorized chequing (PAC), pre-authorized withdrawals or pre-authorized payments (PAPs). 

There are four different types of PADs:

Personal PADs are automated recurring payments from a customers' bank account for the goods or services they purchased.

Business PADs arrange payments for goods or services related to a business, for example, payments between franchisees and franchisors, distributors and suppliers, or dealers and manufacturers.

Cash Management PADs transfer, consolidate or reposition funds between accounts held by a business or closely affiliated businesses at different financial institutions (FIs). For example, a parent company can use cash management PADs to draw funds from an account of its subsidiary.

Funds Transfer PADs are used by an individual to transfer funds from an account at one financial institution to an account at another financial institution. For example, this could be used to contribute to a registered savings plan.

Payments Canada and its participant financial institutions have established terms and conditions found in Rule H1 for the processing of PADs to ensure proper authorization and protect against improper withdrawals.

Recurring charges to credit cards are not considered PADs and aren’t covered by Rule H1.

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Getting started

To offer pre-authorized debits to their customers, an organization needs to have a contract in place (called a Payee Letter of Undertaking in Rule H1) with your financial institution. In that agreement, your financial institution agrees to issue PADs on behalf of the biller and they, in turn, agree to follow rules that apply to PADs. There are mandatory elements that must be contained in that Payee Letter of Undertaking. Detailed information is available in Rule H1.

Organizations also need to have an agreement, a payor’s PAD agreement, in place with their clients. The agreement can be completed on paper or electronically (online or by telephone for example).

Financial institutions are responsible to review the forms and related processes that their clients wishing to offer PADs as a payment method are intending to use. It’s possible that your financial institution has a template agreement that you want your clients to use.

 

The agreement

All agreements must contain mandatory elements (found in Appendix II of Rule H1):

1. the date of the agreement, and the customer's signature (on paper agreements)
2. the payor's authorization to withdraw funds from a specific account (a "void" cheque can be requested to confirm the account information, but this isn't mandatory)
3. the PAD category
   • personal (e.g. utility, mortgage, etc.)
   • business (e.g. for a business' commercial activities like supplies, lease, etc.)
   • cash Management (e.g. for a parent company to take funds from the subsidiary)
   • funds transfer (e.g. for contributions to a registered savings plan)
4. the amount
   • if the payments are for a fixed amount, that amount must be specified
   • if the payments are for a variable amount (like a utility bill that varies based on usage), the agreement must specify that
     Note: if the amount varies, the biller must give at least 10 days' notice of the amount before the payment, unless the biller and the payor mutually agree to waive or shorten this period, or if the payor asks to change the amount.
5. the timing
   • set intervals (i.e. weekly, monthly, annually, on set dates, etc.)
   • triggered by a specified event (i.e. funds will be withdrawn from the account each time the payor contacts the investment broker to purchase an investment)
   • sporadic (i.e. debits that occur occasionally, irregularly, intermittently, infrequently, etc.)
     Note: The payor's authorization is required before each sporadic PAD. This can be done through a password or secret code, for example.
6. instructions on how to cancel the agreement
7. contact information so that the payor can contact the biller
8. a mandatory recourse/reimbursement statement, which must read: "You [or I/We, depending on the context] have certain recourse rights if any debit does not comply with this agreement. For example, you [I/we] have the right to receive reimbursement for any debit that is not authorized or is not consistent with this PAD Agreement. To obtain more information on your [my/our] recourse rights, [I/we may] contact your [my/our] financial institution or visit payments.ca."

 

Additional requirements for electronic agreements

If an organization’s customers sign up electronically, they’re responsible for verifying that the personal and/or banking information given actually belongs to them. For examples on how this can be done, consult section 5 (e) of Rule H1.

The organization must also send the customer a written confirmation of the terms of the agreement at least 3 days before the first payment (email is acceptable). The confirmation must include all of the mandatory elements found in Appendix IV of Rule H1.

 

Setting up cash management PADs

Since the organization is moving money between accounts held by the same, or closely affiliated businesses, they don’t need to set up a PAD with the other party. However, a Payee Letter of Undertaking should be in place between your financial institution and the organization.

To learn more about pre-authorized debits, check out Chapter 6 from Module 2 (Automated Funds Transfers) of our educational video series – the Learning Exchange.

 

What if something goes wrong

For personal PADs, a client has 90 days from the date of the withdrawal to report an incorrect or unauthorized pre-authorized debit to your financial institution. 

For business PADs, a business has 10 days from the date of the withdrawal to report an incorrect or unauthorized pre-authorized debit to your financial institution.  If there is no agreement in place between the business and the biller, the business has 90 days to report the issue.

If there’s not enough funds in the account to cover a withdrawal, the biller can try the same debit one more time. The biller needs to do so within 30 days from the date of the withdrawal and it must be for the exact same amount. 

How to cancel a pre-authorized debit agreement

The agreement should specify instructions for cancellation. If not, the customer should notify the biller in writing and keep a copy for their records.  They can use the sample cancellation form in Rule H1, but aren't required to do so.

The biller must cancel the agreement within 30 days of the notice.  

Cancelling a pre-authorized debit agreement doesn't cancel your contract for goods or services with the biller, or any amount owed. The cancellation applies to the payment method.