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 customer's 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 a signature field for written payor’s PAD agreements
2. the payor's authorization to withdraw funds from a specific account
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  or criteria (i.e. funds will be withdrawn from the account each time the payor contacts the investment broker to purchase an investment) If each PAD is to be triggered by a specified act, event or other criteria, then an unambiguous description of that act, event or other criteria is required.
6. instructions on how the payor or payee can 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 www.payments.ca.”

In addition to the mandatory elements required in every PAD agreement, there are mandatory elements based on circumstance. These elements must be included if the specified circumstances apply (e.g. sporadic PADs).

1. Fund Transfer PADs coded “650” or “83” must advise that the payor will not have recourse within the CPA Rules.
2. One-time PADs must be stated in the agreement, and the payor’s PAD agreement will no longer be valid once the payment has been fulfilled. Any subsequent PAD(s) require a newly authorized payor’s PAD agreement. 
3. If a payment service provider is collecting payments on behalf of a company or organization, that is providing a payor with goods and services. In that case, the payor’s PAD agreement must include a statement that describes the arrangement between the payee and the company or organization. 
4.  A payor’s PAD agreement that provides for personal PADs or business PADs to be issued at set intervals may state that the payor is entitled to receive pre-notification in the manner and at the time(s) set out in Rule H1. 
5. Sporadic PADs must specify that the payee must obtain authorization from the payor per Rule H1 for each sporadic PAD that the payee issues against the payor. 
6. Payor and payee may mutually waive pre-notification / confirmation or modify the pre-notification / confirmation requirements of Rule H1 provided the payor specifically indicates its acceptance in accordance with Rule H1. Any reduction or waiver of pre-notification / confirmation requirements must be prominently displayed (e.g. bold, highlighted or underlined).

Confirmation Requirements

A confirmation to the payor is required for personal and business PADs.  A confirmation provides the payor with a summary of the PAD details, such as bank account details, PAD amount, PAD type, and payment frequency, to name a few (the complete list of confirmation mandatory elements can be found in Appendix IV of Rule H1). 

A confirmation must be provided at least ten calendar days before the first due date of the first PAD.  The payee can provide or make available the confirmation in multiple formats or methods, including providing a copy of the PAD to the payor, an email to the payor with the confirmation mandatory elements, or making the confirmation mandatory elements available to the payor through the payor’s website (i.e. payor’s account settings). The format can be flexible, but what’s important is that the payor has the PAD details available to them. 

A payor may waive the requirement to receive a confirmation before the due date of the first PAD to allow for a faster first payment; however, the payee must provide confirmation within five calendar days following the date of the first PAD.

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

A PAD may be cancelled by the payor or the payee, and 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.