Business Guide to

the Power of
Pre-Authorized
Debit
Pre-Authorized debits (PADs) are a powerful tool for
businesses that want to initiate and receive recurring
electronic payments.
Personal PADs
With your customers permission, you can use PADs to set
up recurring debits to your customers bank account to
collect payment for the goods or services you provide.
Business PADs
You can also leverage the power of PADs to arrange
payment for goods or services related to your business
or commercial activities, for example, payments between
franchisees and franchisors, distributors and suppliers, or
dealers and manufacturers.
Funds Transfer PADs
PADs are also a great tool to 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 a cash management
PAD to draw funds from an account of its subsidiary.

The Canadian Payments Association (CPA) and its member

financial institutions have established certain terms and
conditions for the processing of PADs to ensure that these
transactions are properly authorized and to protect against
improper withdrawals from accounts.
The full text of the CPAs Rule H1 which governs PADs is
available on the CPA web site at www.cdnpay.ca.
Recurring charges to credit cards are not considered PADs
and are thus not covered by Rule H1.

How to Get Started

Regardless of the type of PAD, your first point of contact is
your financial institution.

To offer Personal PADs as a payment

option for your customers
First youll need to determine whether your financial
institution offers a PAD service to billers. If they do, your
next step will be to sign a contractual agreement (referred
to as a Payee Letter of Undertaking in Rule H1) with them.
In the contract, they agree to issue PADs on your behalf (to
be your sponsoring financial institution), and you agree
to follow the terms of Rule H1 and other CPA Rules as they
apply to pre-authorized debits.
Before issuing any PADs to a customers account, you
must obtain the authorization of the account holder (the
Payor), either electronically, or on paper, and this must be

www.cdnpay.ca

done using a form or process that has been approved by

your sponsoring financial institution. This authorization
is referred to in Rule H1 as a Payors PAD Agreement. To
provide clarity and transparency to your customers, the
Payors PAD Agreement must contain certain mandatory
elements, which are outlined in Rule H1. You need to keep
a copy of this agreement, and any associated information,
for a minimum of one year following the last debit to the
customers account. You may request a void cheque from
your customer to confirm their account information, but
this is not mandatory.

Signing up your customers for PADs

electronically
If the customer provides their authorization electronically,
it is your responsibility to verify that the personal and/or
banking information set out in that Payors PAD Agreement
actually belongs to that Payor using a commercially
reasonable method of verification approved by your
sponsoring financial institution. You are also required to
send the customer a written confirmation of the terms
of the electronic Payors PAD Agreement before the first
PAD is submitted. The Confirmation must include all of the
mandatory information elements set out in Appendix IV of
Rule H1.

If you want to set up Business PADs

The set-up procedure for Business PADs is essentially the
same as for Personal PADs. You enter into a contractual
CONTINUED ON PAGE 2

Your Rights and

Responsibilities
CONTINUED FROM PAGE 1

agreement (a Payee Letter of Undertaking) with a financial

institution that will process the PADs on your behalf, and
obtain the agreement of the other party in a Payors PAD
agreement that contains the mandatory elements outlined
in Rule H1.

To arrange Funds Transfer PADs

When you set up funds transfer PADs, youre moving money
between accounts held by the same, or closely affiliated,
businesses, so no Payee Letter of Undertaking is required.
Your sponsoring financial institution will obtain your
authorization for the PADs via a Payors PAD Agreement.

Frequently Asked Questions for

businesses who use PADs to collect
payments from their customers
What should the Payors PAD agreement say?
According to Rule H1, there are mandatory elements that
every Payors PAD Agreement must contain.
You should consult with your financial institution to see
if they have a template agreement that they require their
Payees to use. If not, you can design your own Payors PAD
Agreement, or include the mandatory elements within
another agreement, such as a broader contract for goods or
services.

These mandatory elements are in addition to, and do not

replace, the provisions of any other contract between your
business and the Payee:

the execution Date of the Agreement, and a Signature

field (for paper agreements)

the Payors Authority to Debit a specific Account

the PAD Category (Personal, Business, or Funds

Transfer)

the Amount and Timing of the debits, or the Specified

Event/Action that will trigger a PAD

instructions for the Payor on how to Cancel the

Agreement

Contact Information so that the Payor can contact 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.cdnpay.ca.

How do I provide payment instructions to my

financial institution? Is there a standard format?

www.cdnpay.ca

Instructions can be provided to your sponsoring financial

institution in many ways, depending on their processes
and preference. The standard file format for PADs (AFT
transactions) in Canada is CPA Standard 005. Your
instructions might already be in the form of AFT files,
or the financial institution might ask you to provide
the instructions in a different format (like an Excel
spreadsheet, for example, or even over the phone for small
businesses who need to make very few of these types
of payments at a time) and do the work of creating the
AFT files for you. Some businesses might also choose
to contract out the work of creating the AFT files to a
service provider (if the service providers name is shown
on account statements as the originator of the PAD,
your business would need to disclose this third-party
arrangement to the Payor in the Payors PAD Agreement).

Can the amount of a PAD vary from month to

month according to the amount the customer
owes? If so, do I have to let the customer know
the amount for each PAD in advance?
Yes, the Payors PAD Agreement can fulfill the mandatory
requirement for Amount by stating that the amount will
vary from month to month.
For variable amount PADs occurring on a set schedule, you
need to let your customer know what the amount will be
at least 10 days in advance of each PAD, unless you and
your customer mutually agree to reduce or waive this prenotification period in the Payors PAD Agreement.
CONTINUED ON PAGE 3

Frequently Asked
Questions
CONTINUED FROM PAGE 2

The waiver has to be prominently displayed in a paper

agreement (e.g. in bold print, highlighted or underlined),
or expressly communicated to the Payor if the Payors PAD
Agreement is set up electronically.

Can I mask my customers bank account

information when sending a written confirmation
for an electronic agreement?
Yes, you can partially mask or truncate customer account
numbers in your correspondence. The ideal balance would
be to provide enough information to enable the Payor to
understand the details of the PAD, while ensuring that
enough of the bank account number is masked to mitigate
security and privacy concerns.

What if the customers account information

changes?
The account number on which a PAD is drawn is a
mandatory element of the Payors PAD Agreement. If the
account number changes, the Payee must have the Payors
authorization for this amendment to the agreement,
either by establishing a new agreement with the Payor, or
by obtaining an instruction from the Payor to change the
account. As this instruction would be an amendment to the
original Payors PAD Agreement, you need to retain it, along
with the original agreement, for a minimum of one year
after the last debit to the account.
If you receive an update to your customers financial
institution information from your sponsoring financial

institution in the form of a Notice of Change (NOC), you

should update the customers records accordingly. Payees
are required to act upon NOCs; no separate authorization
from the Payor is required.

What happens if my business makes a mistake

when issuing a PAD?
In the vast majority of PADs, everything goes according
to plan, and both the Payor and the Payee are satisfied.
If an error does occur (for example, incorrect account
information provided by the customer, or an incorrect
amount entered by the business), the errors can be
corrected.
If an AFT transaction is rejected for incorrect routing
information, or if required information is missing in the
transaction itself, it will be returned to your sponsoring
financial institution, sometimes as early as the same day,
and they will notify you of the issue.
If the customers financial institution cant post the
transaction to the customers account (because there isnt
enough money in the account, for example) the customers
financial institution will return that transaction to your
sponsoring financial institution by the next business day.
If a return is initiated at the request of the Payor or Payee,
however, the timeframe is different.
If your business discovers an error, you can ask your
financial institution to recall the transaction (if it hasnt
been posted to the customers account yet), or issue an

www.cdnpay.ca

error correction, provided that you contact them within the

timeframe outlined in your agreements.

What can a biller do if a PAD to a customers

account is returned NSF? Can I debit the account
again? Can I apply NSF charges to the next debit?
If a PAD is returned due to insufficient funds, the biller may
re-present the payment item, but only once, and this must
be done within 30 days of the original transaction date. If
the biller chooses to re-present the PAD that was returned
NSF, the PAD must be for exactly the same amount as the
original transaction (i.e. it cannot include service fees
charged by the biller).
However, if the Payors PAD Agreement provides for variable
amount PADs, the Payee may add NSF charges to the
outstanding balance the next time a PAD is withdrawn
from the Payors account, provided the pre-notification
provisions are satisfied. Take for example a Payors
PAD Agreement that provides for variable amount PADs
reoccurring on the 15th of every month; if on January 15th
a PAD of $100.00 was returned NSF, the Payee would have
the right to debit the account on February 15th for $200.00
plus NSF charges (i.e. for the outstanding balance plus
NSF fees). On the other hand, if the Payors PAD Agreement
provides for a Fixed Amount PAD reoccurring on a fixed
date (the 15th of every month), the Payees only recourse
within the clearing system would be to re-present the PAD
(without NSF charges) one time only (i.e. for $100.00 in the
example above) within thirty days.
CONTINUED ON PAGE 4

Frequently Asked
Questions
CONTINUED FROM PAGE 3

Can my customer cancel a Payors PAD

Agreement?
Yes. All PAD cancellation requests must be sent directly
to you by your customers, not to the CPA. The CPA cannot
cancel a PAD agreement, as it is a contract between you
and the Payor.
The procedure to cancel a PAD should be outlined in
the Payors PAD Agreement. If no clear preference for
cancellation procedure is expressed in the agreement, the
customer may notify the biller in writing and keep a record
of the cancellation. They may use the Sample Cancellation
Form provided in the CPAs Rule H1 for this purpose, but
they are not required to do so.
If your PAD Agreement does not outline the cancellation
procedure, and the customer is unable to contact you, they
may seek the advice of their financial institution as to how
to cancel the PAD. That said; this should be a last resort.
The customers financial institution may not be able to
assist them in cancelling the PAD Agreement as the Payors
PAD Agreement is a contract between the customer and the
biller.
Once the PAD has been cancelled with the biller, the
customer can check their account records to confirm that
the withdrawals have stopped. If the PADs continue to
be taken from their account, they are advised to contact
the biller and ask why. If they are not satisfied with the
response that they obtain from the biller, customers may
seek recourse through their financial institution.

Remember, cancelling the PAD Agreement does not cancel

a contract for goods or services between you and your
customer, or cancel the amount they owe you. By cancelling
the PAD Agreement the customer is simply indicating that
they no longer wish to pay by pre-authorized debit. The
customer will need to make alternate arrangements with
you to pay any amounts owing.

Can my customer reverse a PAD?

Yes, if the PAD is unauthorized, or not in accordance with
the Payors PAD Agreement.
A customer should inform their biller immediately if any
withdrawal from their account is not in accordance with the
terms of their agreement (e.g. different amount or date), or
processed after the customer has cancelled a Payors PAD
Agreement.
If a customer is not successful in resolving the issue with
their biller, or if the PAD was originated by a biller with
whom no agreement exists, the customer may request
that their financial institution reverse the transaction and
return the funds to their account, (resulting in a debit to
the billers account) subject to the time frames below. (This
provision may not apply to certain funds transfer PADs).
For a customer-initiated return of a PAD, the timeframe is
90 days for personal PADs, and 10 days for business PADs,
unless the business PAD is not authorized for the reason
that no agreement exists, in which case its 90 days. Once
a reason for the claim has been provided to the Payors
financial institution, the debit will be reversed, and the
funds will be restored to their account.

www.cdnpay.ca

If I have a client with an existing PAD and they

sign up for an additional service, can the charges
be added to the existing PAD agreement, or do
they need to sign a new one?
Adjustments to the amount of an existing PAD Agreement
are permitted, provided that you meet your requirements
to provide pre-notification of change in amount to your
customer as outlined in you Payors PAD Agreement, and
retain a record of the Payors instruction to make the
change for a minimum of one year following the last debit
to the account.

What if I sell my company? Can the new owner

continue the PADs?
A Payee may transfer its contractual arrangements
relating to PADs to another organization (for example,
through a sale of the company or a business unit, or to a
collection agency in provinces where this is permitted)
provided that certain conditions are met. In the case of
the Letter of Undertaking or equivalent contract with its
financial institution, the Payee must obtain its financial
institutions prior consent to transfer or assign the contract
with the FI to another party and in the case of Payors
PAD Agreements, the Payee must provide full details of
the transfer to the Payor, including the name and contact
information of the proposed new Payee, at least 10 days in
advance of the first PAD being issued in the proposed new
Payees name.
CONTINUED ON PAGE 5

Frequently Asked
Questions
CONTINUED FROM PAGE 4

If the original Payors PAD Agreement, or the written

Confirmation in the case of an electronic Payors PAD
Agreement, includes a prominent statement (e.g. bold,
underlined or highlighted) that provides for the potential
transfer or assignment of the PAD Agreement in future,
the period of advance notice can be less than 10 days.
However, the notice providing the name and contact
information for the new Payee must still be sent. More
details are available in Rule H1.

Do businesses outside of Canada need to follow

Rule H1?
Yes, PADs that are drawn on bank accounts held at CPA
member financial institutions in Canada are subject to
the requirements of Rule H1, regardless of where they
originate. In particular, this means that Payees outside
of Canada who have Canadian customers must ensure
their Payors PAD Agreements comply with the mandatory
requirements.

For additional information, please contact your financial

institution or:

CPA Public Affairs

1200 - 180 Elgin
Ottawa ON K2P 2K3
Tel: (613) 238-4173
[email protected]
facebook.com/cdnpay
@cdnpay
Canadian Payments Association 2012

In addition, if foreign Payees intend to obtain Payors

authorization for PADs through an electronic process,
they must ensure that this process is consistent with the
requirements of Rule H1, and they must send a written
confirmation to each Payor in advance in accordance with
the requirements set out in Section 16 of Rule H1. A model
form setting out the mandatory requirements of the written
Confirmation is provided in Appendix IV of Rule H1.

www.cdnpay.ca