As Canada’s digital economy evolves, many Canadian businesses are examining their payment processes, considering the transition from paper to electronic payments. The efficiencies, increased availability and added convenience of making or accepting payments via electronic funds transfer, online payments or mobile device are highly attractive, and elec¬tronic payments in Canada are indeed on the rise. However, cheques are still a dominant payment method for small businesses, for both accounts payable and accounts receivable.
While you may think nothing could be easier and more convenient than issuing or accepting a cheque, quite a lot of work is involved behind the scenes by a number of players to carry out these payment instructions. Cheques must be sorted, transported and exchanged between financial institutions as part of this process (which is also referred to as “clearing”).
The Canadian Payments Association (CPA) and its member financial institutions have established specifications for cheques as we know them today to allow for efficient and cost-effective automated processing, and have also introduced options to increase the use of image technology to further improve the existing cheque clearing process. The full texts of CPA Standard 006, which sets out the specifications for cheques, and Rule A10, which governs the use of images in the clearing system are available on the CPA website at www.cdnpay.ca.
Cross-border clearing is managed through correspondent banking relationships that Canadian financial institutions maintain with foreign financial institutions, and is not addressed by CPA Rules. Cheques that are exchanged between two different branches of the same financial institution (referred to in the industry as “on-us” items) also do not enter the clearing system, and CPA Rules do not apply to them.
How Cheques Work
A cheque is a bill of exchange that is drawn on a financial institution. It is an “order” or a “direction” given by the cheque writer (known as the Payor or the Drawer) to its financial institution (the Drawee) to pay a certain party (the Payee) a certain amount. A cheque also serves as the Payor’s continuing promise to pay the holder of the cheque in the event the financial institution does not honour the payment order (e.g., for the reason insufficient funds on account, or the Payor has put a stop payment on the item). Requirements for cheques are set out in CPA Rules and Standards, as well as in the federal Bills of Exchange Act. When a cheque is deposited, the depositor’s financial institution will update the depositor’s account records to show a deposit of the amount indicated on the cheque. Depending on the policies of the depositor’s financial institution, the depositor may able to access the funds at that time, or the funds may not be made available to the depositor (i.e. the funds are placed “on hold”) until their financial institution is assured that payment has been received from the cheque writer’s account.
Payment by Cheque
Cheques are processed in an automated fashion, through the use of magnetic ink in the MICR line (the numbers at the bottom of the cheque that contain financial institution and account information), and image technology.
In most cases, when a cheque is deposited at a financial institution (FI), it is sent that evening to the nearest processing centre serving that FI. There, cheques are sorted according to the financial institution that holds the account of the cheque writer (i.e. the Payor’s account). The cheques are then delivered to the processing centre serving the Payor’s FI. This exchange, or “clearing”, usually occurs the evening of the day the cheque was deposited. However, in some situations, such as deposits made late in the day, on the weekend or through an Automated Banking Machine, clearing may not occur until the evening of the next business day.
After clearing, the cheque must still be delivered to the branch that holds the cheque writer’s account to confirm that the payment can be made. Within Canada, this process generally takes from one to three business days. If the cheque cannot be honoured - for example, due to insufficient funds (NSF), a stop payment order or a forged signature – the cheque will be returned to the branch that accepted it, and the depositor’s financial institution will be provided with a reason why the payment cannot be made. The return voyage will also generally take from one to three days but could take longer in some circumstances.
The CPA and its member financial institutions have introduced new options to increase the use of image technology during the clearing of payment items. In some cases, this may result in earlier notification of a
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dishonoured item, giving the depositor the opportunity to escalate the issue to the payor earlier.
What You Need to
When Ordering or Printing Cheques
Standards for cheque design and layout are available in CPA Standard 006 – Specifications for MICR-Encoded Payment Items. All cheques drawn on accounts held at Canadian financial institutions are required to meet the specifications for paper, design, layout, and MICR-encoding that are set out in this Standard.
If you order cheques from a cheque printer, or use cheque stock, computer software and/or MICR toner to print your own business cheques, you should check with your financial institution to ensure that all of the required specifications have been met. The CPA recommends that samples of such cheques be submitted to a financial institution for quality assurance testing prior to use. With the support of its member financial institutions, the CPA has established a Cheque Printer Self-Accreditation Program (CPSAP) to enhance the efficiency of the cheque testing process for financial institutions, printers and customers. Cheques printed by a self accredited printer bearing their Printer Identification Number on the
Black or blue ball point or roller pens should be used to fill out cheques by hand.
When Accepting a Cheque
When accepting a cheque as payment, be sure that the back of the cheque includes any necessary endorsements. The process of endorsement is outlined in the federal Bills of Exchange Act. To “endorse” a cheque means to negotiate one’s interest in the item (transfer one’s rights to the funds) to another party.
In the situation where two companies (A and B) are the payees, for example, Company A can deposit the cheque into its account if an authorized signing officer from Company B has endorsed the item. The negotiating
institution may require proof that the person who signed on behalf of Company B has valid signing authority.
It is ultimately up to each negotiating financial institution to decide which items they are willing to accept, and up to the Drawee financial institution to decide which items they will honour. Ensuring that the cheques you accept include any necessary endorsements prior to deposit increases the likelihood that the cheque will be accepted by both financial institutions.
When Depositing a Cheque
When preparing to deposit a cheque, carefully check the date indicated on the item. Post-dated items (those dated for a future date) or stale-dated items (those dated more
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reverse are not subject to routine Standard 006 testing requirements by financial institutions or their designates. Self accredited printers are provided with a Printer Identification Number by the CPA, which they may print on the back of any cheques they produce. This Printer Identification Number allows CPA members to monitor the effectiveness of the program and ensure the accountability of printers for the quality of cheques they produce. Full information on the program, as well as a list of Self-Accredited Printers and their Identification Numbers, is available on the CPA website.
When Issuing a Cheque
When issuing a cheque as payment, complete the date, the name of the payee, the amount in words as well as the amount in figures, and ensure that the signature field is completed. Although the amount in words is not legally required on a cheque, the CPA strongly recommends including this information, as the amount in words serves as a backup if the amount in figures is called into question. If the cheque is for a large amount, and you are completing the information via software, it is acceptable to “wrap” the amount in words onto two or more lines.
If you are using a computer to complete the Payor-filled fields, be sure to use a minimum 10 point font, and image-friendly inks: black, blue or dark purple to ensure sufficient contrast against the background. You must also ensure that the placement of the information on the cheque meets the requirements for clear space set out in Standard 006, to ensure that the information is legible both on the original cheque, and on an image captured from the original item.
Your Rights and
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than six months in the past) may be rejected by your financial institution, or by the Drawee financial institution. Under CPA Rules, a post-dated cheque is not eligible for clearing and therefore should not be deposited before the due date. However, given the large volume of cheques and the degree of automated processing, some post-dated items may inadvertently slip through. A cheque can be returned through the clearing by a CPA member financial institution for the reason “post-dated” up to and including the day prior to the due date, resulting in a debit to the depositor’s account. Once the due date is reached, the payment item cannot be returned for the reason “post-dated”.
Similarly, stale-dated cheques can be refused, either by your own financial institution, or by the Drawee financial institution. A cheque is considered stale-dated after six months, unless it has been certified. Although a stale-dated item may be refused and returned through the clearing for the reason “stale-dated”, there is no obligation to do so, and the Payor’s financial institution may still accept it as a valid payment item. An institution accepting a cheque bearing a date more than six months earlier may choose to contact the Payor’s FI to confirm whether the cheque will still be accepted prior to accepting the item on deposit.
When an item is returned for the reason “stale-dated”, the return must be initiated within the “next business day” timeframe, as discussed in CPA Rule A4. It is important to note that the item may not be returned for this reason if the
signature would need to have sufficient contrast to ensure that a clear image could be captured from the original item.
How long can a financial institution place a hold
on funds when I deposit a cheque?
When a financial institution places a hold on funds, the depositor’s account records are updated to show a deposit of the amount indicated on the cheque, but the funds are not made available to the depositor (i.e. the funds are “on hold”) until the depositor’s financial institution is assured that they will receive payment from the cheque writer’s account . A financial institution’s decision to place a hold on funds is a proprietary matter and is outside the scope of the CPA’s clearing rules. However, if your financial institution decides to place a hold on funds, one important factor it will consider is the number of days likely to be required for the cheque to reach the branch that holds the account on which it was written and, in the event that the cheque is dishonoured, its subsequent return to the branch that accepted it.
How do I know when the payment is final, if a
cheque can be returned? How long does it take
for a cheque to be returned if it’s dishonoured?The risk of return (for reasons such as “NSF” or “stop payment”) is a risk inherent in accepting cheques.
If a cheque is dishonoured, the Drawee financial institution has until the next business day to initiate its return through the clearings. However, the return journey to the branch
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item is a Bank Draft, Money Order, or Certified Item. Once the next business day time frame has passed, the item could no longer be returned through the clearing for the reason stale-dated, and any further action would need to take place outside of the clearing.
Federal government cheques, bank drafts, money orders and certified items do not stale-date. Cheques issued by provincial governments may be considered stale after six months.
Frequently Asked Questions for
businesses who issue cheques and/
or accept cheques as payment from
Can I issue cheques that have been “signed”
using an electronic signature, or stamp?CPA Rules do not provide guidelines for the use of an electronic signature. You should discuss the issue with your financial institution directly. The business account agreement you have in place with your financial institution addresses issues such as “unauthorized signatures” and “safeguarding” of cheque stock and signature stamps etc. In terms of the specifications for cheques: the placement of the printed or the stamped signature would need to be positioned so that it does not interfere with any other areas of interest or their associated clear areas, and the printed
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that initially accepted it may take a number of days (for reasons such as holidays, geographical distance, courier schedules, etc.), so CPA rules don’t address the timeframe within which the returned item must be received by the depositor’s financial institution.
There are some exceptions to the next business day rule. For example, in case of a forged endorsement on the back of the cheque, the Payor’s financial institution has 6 years from the date of receipt to initiate the item’s return through the clearing. The Payor’s financial institution may not have a direct relationship with the person who endorsed the cheque, so it is difficult to verify that the endorsing signature is valid. Consequently, considerable time may be required to uncover a forgery. In the case of material alteration, financial institutions have 90 days to initiate the return of the item.
The full text of CPA Rule A4, which governs returned and re-directed items, is available on the CPA website, at www. cdnpay.ca.
Is there a time limit for a financial institution
to withdraw funds from my account due to a
Once a returned cheque has been received, the depositor’s financial institution will generally debit the depositor’s account for the amount of the cheque as soon as possible. The recovery of funds from a customer is generally
governed by the account agreement between the financial
institution and the customer, and is not addressed by CPA Rules.
Can a certified cheque ever be returned through
A certified cheque will have the words “accepted” or “certified” or other words to that effect written or stamped on it by the cheque writer’s financial institution, which has set aside the funds to cover the cheque in its own internal account. Under the clearing rules, a certified cheque may be returned for only three reasons:
• the cheque bears a forged endorsement on the back of the cheque;
• the intended payee was not paid; or
• the cheque has been altered in a material way
subsequent to its certification, such as a change to the name of the payee or the amount.
What happens if a cheque that I deposited is
returned because the customer placed a “stop
payment” order on it?
You have the option of asking your financial institution to send the item to the Drawee financial institution “on collection” (i.e. outside of the clearing system), if they offer this service. If not, you might need to contact your customer to obtain payment in another way. “Stop payment” is a service offered by financial institutions to their clients. Although the CPA Rules allow a cheque to be returned through the clearing for the reason
“stop payment”, they do not address the procedures or requirements for issuing a “stop payment” on an item.
Are financial institutions required to follow
conditional statements, such as “Void after 30
days” on cheques?
CPA Rules and Standards do not create any obligation on financial institutions to verify that conditions printed on cheques have been met. If the Drawee financial institution chooses to offer such a service to clients, this would be addressed in the client’s account agreement or another service agreement. Alternatively, clients who make use of positive pay services or reconcile accounts daily may identify such items themselves and notify their financial institution in time to meet the “next business day” return timeframe. Depositors’ financial institutions do not face any additional liability when accepting an item bearing a conditional statement; in other words, they are still faced with the same “24 hour” risk that the item may be returned for any reason.
What do I do if a fraudulent item clears my
You should report any suspicious account activity to your financial institution as soon as possible. CPA Rule A4 provides the opportunity for your financial institution to return a cheque drawn on your account if it is suspected of being fraudulent, provided that the financial institution initiates the return within the timeframes specified. After
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those timeframes have elapsed, the financial institution can no longer return the item through the clearing. It is our understanding that in that situation, any type of recourse that the client of the financial institution might have for these items would be covered in the account agreements that the client has in place with their financial institution.
Can I deposit a third-party cheque?
It is ultimately up to each negotiating financial institution to decide which items they are willing to accept on deposit, and you should discuss this issue directly with your
CPA Rules don’t set out a specific process that has to be followed to negotiate an item to another party, but they do mandate that where a cheque is deposited to a third party (someone other than the named and intended payee on the item) the “named and intended payee’s” endorsement is necessary, and if missing, can be requested by the financial institution on which the cheque is drawn (the Drawee). If the depositor’s financial institution fails to provide a missing and necessary endorsement, it is required to reimburse the Drawee, which might result in a debit to the depositor’s account.
Can cheque images be used as proof of payment?Yes, cheque images can be used as proof of payment. Images, photocopies and microfilm copies of cheques are already used as proof of payment in many circumstances. For example, financial institutions have been providing
microfilm copies of cheques to clients who request them for many years, and some have begun to provide images for this purpose.
The Canada Revenue Agency has confirmed that images of the front and back of cheques or print-outs from them are acceptable when they may ask clients for copies of cheques.
Both the federal Evidence Act and the parallel legislation in most provinces and territories have already been amended to permit the admissibility of electronic records in court proceedings. Further, most jurisdictions have well-established business record and banking record provisions that could be used for admitting an image in evidence as proof of a cheque.
For additional information, please contact your financial institution or:
CPA Public Affairs 1200 - 180 Elgin Ottawa ON K2P 2K3 Tel: (613) 238-4173
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