What Is Direct Deposit?

What Is Direct Deposit?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated March 30, 2022

These days, just about everyone gets paid from their employers via an automatic bank deposit. But what exactly is involved in direct deposit? How does it work, and what are the perks and potential drawbacks to this form of payment?

Let’s get to know a little more about direct deposit. 

What Is Direct Deposit? 

Direct deposit is an automated way to transfer funds from one party to another. With this type of transaction, the payor sends the payee an electronic payment that is automatically deposited into the payee’s bank account. 

Direct deposits are convenient for both parties: the employer doesn’t have to spend any time or money sending out physical paycheques, and the employee can expect their pay on time with every pay period. 

How Does Direct Deposit Work? 

In order to facilitate a direct deposit, the employer must first collect the bank account information from employees. The employer will then send payment instructions to their financial institution regarding how much to deposit and the exact days of deposit. The employee’s bank will then process the payment, and the account will reflect the added funds. 

In Canada, direct deposits are managed by Payments Canada, which is a non-profit organization. Members include the Bank of Canada, all major Canadian banks, and other institutions like insurance companies and loan companies who wish to be members.

How Long Does Direct Deposit Take?

Typically, a direct deposit transaction can take two days to complete. While that may seem like a long time, especially when you can go to the bank and deposit a cheque in less time. Direct deposits don’t come with 5 day holds like cheques, and usually, employers started the deposit process two days early, so you get your money on the right day.

How To Set Up Direct Deposit 

To set up direct deposit with your employer or another payor, follow these steps:

Complete The Direct Deposit Form

You’ll need to fill out a direct deposit form with information including the following:

  • Full name
  • Address
  • Social Insurance Number (SIN)
  • Bank account information and bank routing number
  • Deposit amount
  • Signature for authorization 

Submit A Void Cheque

A cheque will have the bank account and routing number on it. Even though this information is already on your direct deposit form, you may need to attach a void cheque along with the form for accuracy.

Submit The Form

The completed form will be forwarded to your company’s payroll department for processing. 

Setting With Direct Deposit With The Canadian Government

Most government agencies, for example, the CRA and Service Canada, no longer issue cheques. This means that you likely have already set up direct deposit to receive tax refunds or any government assistance. If you have not already done so, you will need to set up a My CRA Account or a My Service Canada Account.

Setting With Direct Deposit With Your Bank

Canada’s major banks all offer direct deposit so that their clients can easily send and receive money. It’s very easy to set up direct deposit with your bank, typically you will need to sign in to our online banking portal and navigate to the section called “direct deposit info” or “void cheque info”. 

Advantages Of Direct Deposit

Having your paycheque automatically deposited into your bank account comes with a few perks, including the following:

  • No delays. Automated deposits into your bank account mean there are no delays to deal with that may be more common with traditional paper paycheque payments, such as holds or processing delays.
  • No need to visit the bank. You won’t have to make a trip to your bank to manually deposit your paycheque into your account. 
  • No holds. When you deposit a cheque in your bank account, the bank typically holds some or all of the money until it is cleared. With direct deposit, this doesn’t happen.
  • It’s safe. There’s no risk of paper cheques being lost when your funds are deposited electronically. 

Disadvantages Of Direct Deposit

Along with the perks of direct deposit come a few drawbacks to consider:

  • The underbanked. For those Canadians who are underbanked and do not have access to a bank account, direct deposit is not a viable option to receive a paycheque from an employer or money from the government. 

Can You Set Up Direct Deposit For Government Payments? 

In addition to receiving your pay from your employer through direct deposit, you can also use this automated payment system with government payments. In fact, government assistance or benefit payments are commonly made through direct deposit. 

The process to sign up for direct deposit to receive your government payments automatically is the same as the steps outlined above.

Can A Direct Deposit Be Reversed?

If a direct deposit was made in error, it can be reversed within 3 days after the funds show up in an account. That said, if the payee believes a reversal is unfounded, they may refuse the correction within 90 days. It’s best to communicate with the payor or bank in a situation like this. 

It’s also important to understand that keeping funds that have been mistakenly deposited into your account leaves you vulnerable to potential litigation.

Direct Deposit FAQs

Can the payor take money from my bank account since they have access through direct deposit?

No. Signing up for direct deposit does not authorize the payor to take money out of your bank account. Instead, the form only authorizes the payor to deposit money into your account.

Why was I asked for a void cheque for a direct deposit request? 

Even though you provide your bank account and routing information on the direct deposit form, you may still be asked for a void cheque so the payor can verify the accuracy of the information on the form. It’s important that the cheque is not signed and that you write “VOID” across it.

What are the advantages of direct deposit?

Getting paid via direct deposit means you’ll always be paid on time, and you won’t have to physically visit your bank to deposit the cheque into your account. Plus, you won’t have to worry about losing your cheque. 

Finals Thoughts

There’s no denying the convenience of having funds deposited directly and automatically into your bank account. It’s fast, secure, and helps ensure that you always get paid on time.  

Rating of 5/5 based on 1 vote.

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Save With Loans Canada

Special Offers

Cashback & Bonus Offer

Cashback & Bonus Offer
Ends March 1st, 2023

New Offer! Get up to $2,000 cashback + a $50 bonus on signing up. Conditions apply.

View Offer
Earn 5% Cash Back With Neo

Earn 5% Cash Back With Neo
No annual fee!

Earn an average 5%¹ cash back at thousands of partners and at least 0.5%² cashback guaranteed.

View Offer
Build Credit For $10/Month

Build Credit For $10/Month

With KOHO’s prepaid card you can build a better credit score for just $10/month.

View Offer
Best Personal Loan Provider by Greedy Rates

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.