Pre-authorized debits (PADs) are a convenient, flexible and easy way to set up bill payments and automatic transactions, and hundreds of millions of PADs are processed each year in Canada. This article will answer some of the frequently asked questions (FAQs) about how to set up a PAD and the rights and responsibilities of consumers and billers, including the protections that consumers have when trying to cancel a PAD.

What is a PAD?

Pre-authorized debits (PADs) allow you to pay regular bills and make other payments automatically so you don’t have to worry about not making payments on time. Many people use PADs on an ongoing basis to pay their mortgage, insurance premiums, utility bills and membership dues to clubs and organizations.

A PAD is an agreement between a customer and a biller. When you enter into a PAD agreement with a biller, you give that organization permission to withdraw money from your bank account on a regular basis.

How do I set up a PAD?

You can ask the biller if they will accept PADs as a form of payment. If so, the biller is required to provide you with a pre-authorized debit agreement, outlining the account your money will be taken from and the amount and frequency of the withdrawals.

It is important that you keep a copy of the agreement in case there are any disputes or if you wish to cancel the PAD.

What information should be included in a pre-authorized debit agreement?

A pre-authorized debit agreement should generally include the following information:

• Amount – PADs can be for a fixed amount or a variable amount. If the PAD is for a fixed amount, such as a monthly $50 donation to a charity, the PAD should specify the amount. If the amount is variable, for example a hydro bill where the amount varies, then the PAD must state that the amount is variable. The biller must give you at least 10 days notice of the amount that will be withdrawn from your account before doing so.
• Frequency – The PAD must specify how often the withdrawal will be made. This could be every 15 days or on the first day of each month, for example. If the withdrawal will not occur on a specific date, then there must be a trigger for the withdrawal, such as you contacting your investment adviser and requesting an investment be made.
• How to Cancel – For PADs written after February 28, 2010, the agreement must also specify how you can cancel the PAD and provide contact information for the biller.

What else should I know before I sign a pre-authorized debit agreement?

Here are a few other things to keep in mind:

• Don’t be pressured into signing an agreement you’re not comfortable with. You’re not obliged to pay through pre-authorized debit and if you feel uncomfortable at all about the arrangement, don’t sign the agreement and arrange for an alternate method of payment, if available, or take your business elsewhere.
• Make sure there are sufficient funds in your account when the pre-authorized debit is scheduled to be processed. If not, the biller may withdraw the funds at any point during the next 30 days.
• Check your account statements regularly to ensure that the PAD is working properly.
• Always ensure that you have a copy of the agreement.

What do I do if I have a problem with a pre-authorized debit?

Payments Canada operates and maintains the clearing and settlement system for payments in Canada, and they have rules in place to protect consumers. The Rule H1 from Payments Canada clearly sets out the rights and responsibilities of consumers and billers, including the protections that consumers have when they have a problem with a PAD. You can also read Payments Canada's consumer guide about PADs on their website.

If you notice a withdrawal for an amount that you didn’t authorize or an automatic payment that you have cancelled, you should first contact the biller to resolve the issue. It could just be an administrative error that can be easily corrected. Hundreds of millions of PADs are processed each year in Canada and the vast majority go through without any problems. Keep in mind that your bank or financial institution does not have the details of the agreement between you and the biller (unless the biller is also your bank).

If you have tried to resolve the issue with your biller without success, you have 90 days from the time the transaction was posted to your account to ask your bank or financial institution to provide a reimbursement.

You will then be asked to sign a declaration that you are disputing the transaction and you should be provided with a reimbursement. Your bank or financial institution will then seek reimbursement from the biller’s financial institution.

How do I cancel a PAD?

The procedure to cancel a PAD should be outlined in your PAD agreement. If there are no specific instructions on how to cancel a PAD in the agreement, you should notify the biller in writing and keep a record of your letter. You may use the Sample Cancellation Form created by Payments Canada on page 32 of this document (Rule H1).

It is important to remember that cancelling your PAD agreement does not cancel a contract for goods or services you may have with a biller. It also doesn’t cancel the amount you owe them. By cancelling your PAD agreement you are simply indicating that you no longer wish to pay by pre-authorized debit. You will need to make alternate arrangements with the biller to pay any amounts owing or to terminate your contract. For example, if you have signed a contract for a two-year membership at a fitness club and arranged to pay by pre-authorized debit, if you cancel the PAD after one year, you will still be responsible for paying for your membership for one more year.

What if the agreement was a pre-authorized charge on my credit card? Do the same rules and procedures apply?

If you have automatic payments set up on your credit card and have problems or would like to cancel the payment, you should contact the biller. If you are still having a problem with the biller, then contact the financial institution that issued your credit card and they will provide you with information about disputing the charge. Keep in mind that some billers may require advanced notice to cancel an automatic credit card bill payment. The biller can give you more information about that.