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.
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.
All agreements must contain mandatory elements (found in Appendix II of Rule H1):
- the date of the agreement, and the customer's signature (on paper agreements)
- 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)
- 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)
- 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.
- 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 biller
- 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.
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 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), the customer needs to be notified at least 10 days before each payment, unless both parties mutually agreed 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 in the case of an electronic agreement.
What if a business sells or buys 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, the 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). A written notice giving full details of the transfer must also be sent to the 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.