Pre-Authorized Debit

Pre-Authorized debits (PADs) are a powerful tool for businesses. They are sometimes called direct debit, pre-authorized chequing (PAC), pre-authorized withdrawals or pre-authorized payments (PAPs). 

PADs are typically used for recurring payments, like mortgages and utilities, membership dues, charitable donations, RSP investments, and insurance premiums. 

Personal PADs are automated recurring payments from your customers' bank accounts for the goods or services you provide. 

Business PADs arrange payments for goods or services related to your 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 your business or closely affiliated businesses at different financial institutions. For example, a parent company can use cash management PADs to draw funds from an account of its subsidiary. 

Payments Canada and its participant financial institutions have established terms and conditions 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.

Getting started

First, check if your financial institution offers a PAD service for business clients. If it does, you'll enter into a contract (called a "Payee Letter of Undertaking" in Rule H1). Your financial institution will agree to issue PADs on your behalf, and you'll agree to follow Payments Canada Rules that apply to PADs.

You also need to have an agreement (called a Payor's PAD Agreement in Rule H1) in place with your customers. This agreement can be completed on paper or electronically (online or by telephone for example).

Your financial institution is responsible to review the forms and related processes that you intend to use. Your financial institution may also have a template agreement that you can use. You can also include the mandatory elements of the PAD agreement within another agreement or contract.

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

  1. the date of the agreement, and your client's signature (on paper agreements)
  2. the payor's authorization to withdraw funds from a specific account (you can ask your customer for a "void" cheque to confirm their account information, but this isn't mandatory)
  3. the PAD category
    1. personal (e.g. utility, mortgage, etc.)
    2. business (e.g. for a business' commercial activities like supplies, lease, etc.)
    3. cash management (e.g. for a parent company to take funds from the subsidiary)
  4. the amount
    1. if the payments are for a fixed amount, that amount must be specified
    2. if the payments are for a variable amount (like a utility bill that varies based on usage), the agreement must specify that

Note: In the case of variable amounts, you must give at least 10 days' notice of the amount before the payment, unless you and the payor mutually agree to waive or shorten this period, or if the payor asks you to change the amount.

  1. the timing
    1. set intervals (i.e. weekly, monthly, annually, on set dates, etc.)
    2. 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)
    3. 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.

  1. instructions on how to cancel the agreement
  2. contact information so that the payor can contact the you, the payee
  3. 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.cdnpay.ca."

Additional requirements for electronic agreements

If your customers sign up electronically, it's your responsibility to verify that the personal and/or banking information given actually belongs to them. For examples on how to do this, consult section 5 (e) of Rule H1 or ask your financial institution.

You 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.

To set up cash management PADs

Since you're moving money between accounts held by the same, or closely affiliated businesses, you don't need to set up a PAD agreement with the other party. You do, however, need to have an agreement in place (a Payee Letter of Undertaking) with the financial institution that will process these payments for you.