What is a pre-authorized debit?

At a glance

How it works

Payments Canada names three parties. The payee is the business that issues the debit. The payor is the customer whose account is debited. The third is the payee's bank. The payee needs two agreements before the first debit.

1. The business signs a Payee Letter of Undertaking with its financial institution.
2. The customer signs a PAD agreement. It names the account, the amount or how it is set, the timing and how to cancel. It also has a recourse statement.
3. The business gives the customer a confirmation at least 10 calendar days before the first debit. The customer can waive this or shorten it.
4. For amounts that change, the business gives notice of each amount at least 10 calendar days before the debit. The customer can agree to a shorter period or waive it.
5. If a debit bounces, the bank must return it by the next business day.

A Canadian example

A gym in Laval debits a member $45 on the first of each month, under a signed PAD agreement. If the gym wants to raise it to $50, it must give notice at least 10 calendar days before the change. If a debit bounces for lack of funds, the gym can try the same $45 once more within 30 days. If the member cancels, the gym must stop new debits within 30 calendar days. This is an example only, not a quote. No rate is used, because Payments Canada does not publish PAD fees.

What is different in Canada and Québec

• PAD is a bank-to-bank system, and Rule H1 is national. The pages we read show no separate Québec version. Québec's rules on consumer contracts sit outside Rule H1. Check them for your business.
• The Code of Conduct is about the payment card industry. A PAD is not a card payment, so card acceptance rules do not apply to it.
• A customer can claim a refund through their bank if a debit breaks the agreement, or if none exists. Rule H1 allows 90 calendar days for a personal PAD. It allows 10 business days for a business PAD.
• Since 3 October 2022, paper and electronic PAD agreements follow the same rules. A one-time PAD ends by itself after the payment. Paper PADs stop being accepted for clearing on 1 December 2028, says Rule H1.

What it costs and where it shows on your statement

Payments Canada's PAD pages list no fee for a business, so we give no figure. Your bank or PAD provider sets its own price. It can differ between them. A PAD does not appear on a card statement. Look on your business bank statement or your PAD provider's invoice.

Where CleverPays fits in this step

Payments Canada writes Rule H1. Your bank and your customer's bank clear the debit between them. CleverPays does not run PADs, clear bank debits or set Payments Canada rules. CleverPays is operated by Groupe Heo Inc., an Agent of Fiserv Canada Ltd. We work on card payments.

We can explain how a card payment differs from a PAD, so you can compare the costs on your statement. If you want to take cards for repeat bills, we can recommend and set up a gateway or terminal. We can answer in English and French.

Common mistakes

• Debiting without a signed agreement. The customer can claim the money back through their bank.
• Changing the amount without notice. Rule H1 asks for at least 10 calendar days, unless the customer agreed otherwise.
• Ignoring a cancellation. You must stop new debits within 30 calendar days of the customer's notice.

Related terms

• Electronic funds transfer: the wider family of bank-to-bank transfers.
• Recurring billing: charging a customer again on a schedule, by card or by PAD.
• Payments Canada Rule H1: the rule that governs PADs.
• ACSS: the Payments Canada batch system that clears PADs.
• Interac e-Transfer: a payment the customer sends, not one you pull.
• Chargeback: the card dispute that has no direct match in a PAD.

Common questions