Pre-Authorized Debits 101

Pre-authorized debits (“PADs“) are used to make regular payments or transfer funds on an ongoing basis. Recurring charges to a credit card are not PADs. Rule H1 of Payments Canada sets out the requirements for PADs. All mandatory elements of Rule H1 must be included in a PAD agreement (described below). PAD agreements are often used in consumer and commercial transactions.

There are various forms of PADs: Personal PADs, Business PADs, Funds Transfer PADs and Cash Management PADs.

Personal PAD Used by consumers to pay for goods and services, such as mortgage payments, charitable donations, utility bills, membership fees, credit card billings, lines of credit, insurance premiums, property taxes, loans, and payment for other consumer goods or services.
Business PAD Used for payments in relation to commercial activity i.e. payments between businesses such as distributors and suppliers and dealers and manufacturers.
Cash Management PAD  Used to consolidate or reposition funds between accounts held by the same or affiliated entity at different financial institutions e.g. a withdrawal of funds from a subsidiary corporation by its parent corporation.
Funds Transfer PAD Used for the transfer of funds, such as contributions to investment accounts or mutual funds, between accounts held by the same person at different financial institutions (i.e. the Payor and the Payee are the same). These PADs can be initiated only by a member that holds the account to which the funds are to be transferred.

The Payor is the person who owes the funds and whose account is to be debited.

The Payee is the person who is owed the funds and who initiates the PAD.

The Payor and the Payee enter into a PAD agreement where the Payor authorizes the withdrawal of funds from a specified account to be credited to the account of the Payee. The PAD agreement can either be a stand-alone agreement or form part of an underlying agreement. In either case, the PAD must comply with Rule H1 and the other applicable rules, standards and guidelines of Payments Canada.

Amongst other requirements, a PAD agreement must provide written or electronic (e.g. telephone or online) authorization for withdrawals and must specify the account the PAD is to be drawn, as well as the amount of the PAD i.e. fixed amount or variable. The account information (e.g. account number and transit number) may be provided by obtaining a “VOID” cheque from the Payor or by the Payor inserting the account information in the PAD agreement. PADs entered into in electronic form have certain requirements.

There are authorization and pre-notification requirements for PADs, depending on whether the PAD is sporadic (fixed amount or variable) or at set intervals (fixed amount or variable), but these requirements can be waived in certain circumstances.

Subject to the variable amount exception, a dishonoured PAD can only be resubmitted once and within 30 days of the original PAD withdrawal date. The re-presented PAD has to be in the same amount as the original dishonoured PAD and cannot (other than PADs for variable amounts) include service fees (e.g. NSF fees). A variable amount PAD that is dishonoured can include NSF fees when the PAD is resubmitted, provided the pre-notification requirements are satisfied.



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