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.
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):
- the date of the agreement, and your client's signature (on paper agreements)
- 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)
- 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)
- 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: 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.
- 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.
- instructions on how to cancel the agreement
- contact information so that the payor can contact the you, the payee
- 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."
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.
Can the amount of a PAD vary depending on how much the customer owes?
Yes, but you must state this clearly in the payor's PAD agreement.
For variable amounts PADs at set intervals (e.g. monthly), you need to notify the customer at least 10 days before each payment, unless you and your customer mutually agree to reduce or waive this "pre-notification" period in the payor's PAD agreement. The waiver has to be prominently displayed in a paper agreement (e.g. in bold print, highlighted or underlined), or expressly communicated to your customer in the case of an electronic agreement.
Do PADs have to occur at set intervals (e.g. monthly)?
No. PADs can also be triggered by a specified act, event or other criteria - for example, every time a customer uses a particular service. This act, event or other criteria must be clearly described in the payor's PAD agreement. PADs can also be sporadic, meaning that they occur occasionally, irregularly, intermittently, infrequently or periodically.
Is a one-time payment allowed? Do I need to have an agreement in place?
Yes, one-time pre-authorized debits are allowed and you do need to have an agreement in place. Rule H1 applies to both recurring and one-time PADs.
Can I mask my customer's bank account information in my correspondence with them?
Yes. The ideal balance is to give enough information for your customer to understand the details of the agreement, while ensuring that enough of their bank account number is masked to help protect their privacy and security.
What if the customer's account information changes?
If you customer tells you about the change, you can update the existing agreement or you can set up a new one. Remember to keep a record of their instruction to change the information along with the original agreement.
If your financial institution tells you via a Notice of Change (NOC), you should update the customer's information as soon as possible. You don't need your customer's authorization to make the change.
What happens if my business makes a mistake when taking money from an account?
If you make a mistake, you can ask your financial institution to recall it (if it hasn't been processed yet), or issue an error correction (if it's already been processed). You must do so within the timeframes specified in your agreement with your financial institution.
If a PAD is rejected because of incorrect routing information or missing transaction information, it will be returned to your financial institution, sometimes as early as the same day. Your financial institution will then notify you. If the customer's financial institution can't withdraw funds from your customer's account (for example, if there's not enough money), it will return the PAD to your financial institution by the next business day.
If a customer doesn't have enough funds (NSF) in their account to cover a payment and it bounces, can I try again?
If a PAD bounces, you can try the same PAD one more time. This must be done within 30 days of the original transaction date, and the payment must be for the exact same amount. It cannot include extra fees charged by your business.
If a payment is returned because the customer doesn't have enough funds (NSF), does this cancel the agreement? Can I withdraw funds from the account at the next scheduled time?
From a Payments Canada rules perspective, having an NSF payment doesn't cancel the agreement.
Can my customer cancel a payor's PAD agreement?
Yes, by following the cancellation process in your payor's PAD agreement or letting you know that they no longer wish to pay by PAD. We recommend that the customer does so in writing and keeps a copy of the cancellation request.
Cancelling a PAD agreement doesn't cancel the contract for goods or services between you and your customer, or cancel any amount they owe you. By cancelling the PAD agreement the customer is simply indicating that they no longer want to pay by PAD. They'll need to make other arrangements with you to pay any amounts owing.
Can I cancel an agreement for my customer?
Yes, you can.
Can my customer reverse a payment?
Yes, if the PAD isn't in accordance with the terms of the payor's PAD agreement such as wrong date or amount) or if no agreement exists.
If your customer can't resolve the issue with you or if they wish to contact their financial institution first, they can make a claim for reimbursement. They can do this up to 90 days after the payment. Once the customer gives the reason for their claim, their financial institution will reverse the PAD and restore the funds to their account, resulting in the funds being taken from your account.
Can the amount of a PAD agreement be changed? Can we add extra charges? If a customer signs up for additional goods/services, can these fees be added to an existing agreement?
Yes, you can change the amount of a PAD agreement, if you inform your customer ahead of time within a specified time period in accordance with Rule H1.
If the payments are at set intervals, you must notify your customer at least 10 calendar days before the change in amount, unless the agreement specifically allows for a change in amount (if requested by the customer) or if you and your customer agree to reduce or waive the notification period.
Keep a copy of the changes with the original agreement for a minimum of one year following the last debit to the account.
Detailed information is available in sections 14 and 15 of Rule H1.
Can I charge my customers a fee for paying by PAD?
Payments Canada rules and standards do not specify whether businesses can charge fees when their clients pay using a certain method.
What can I do if a payment is returned for the reason "No agreement exists" when there is an agreement in place?
This must be addressed outside of our rules, as per section 24 of Rule H1.
What if I sell or buy a company? Can the new owner continue the PADs?
Yes, but the new owner will need:
- a Letter of Undertaking - The new owner might already have one in place with their financial institution. If not, your Letter of Undertaking could be transferred, or "assigned" to the new owner, if the financial institutions involved agree to this arrangement.
- payor's PAD agreements – many payor's PAD agreements (or written confirmations) include an assignment clause. This is a prominent statement (e.g. bold, underlined or highlighted) that allows for transfer or "assignment" of the agreement in the future.
If the agreements with the business’ current customers contain an assignment clause, the new owner can continue the PADs, if the business’ financial institution “signs off” on the existing agreements (as well as any new ones). You must also send a written notice giving full details of the transfer to your customers (including the name and contact information of the new owner).
If the existing agreements don’t contain an assignment clause, the new owner will need to give a written notice of the full details of the assignment (including the name and contact information for the new owner) at least 10 days before withdrawing funds from their accounts. The new payee can also set up a new agreement with each customer.
More details are available in section 25 of Rule H1.
Do businesses outside of Canada need to follow Rule H1?
Yes, if they're withdrawing funds from bank accounts held at participant financial institutions in Canada. Their agreements and related processes must comply with the mandatory requirements of Rule H1.