Businesses:
Payment by Cheque
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.
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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Your Rights and
Responsibilities
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dishonoured item, giving the depositor the opportunity to
escalate the issue to the payor earlier.
What You Need to
Know
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
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 SelfAccredited Printers and their Identification Numbers, is
available on the CPA website.
Black or blue ball point or roller pens should be used to fill
out cheques by hand.
When Issuing a Cheque
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.
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 imagefriendly 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.
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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.
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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Frequently Asked
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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 “postdated”.
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 staledated 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
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.
signature would need to have sufficient contrast to ensure
that a clear image could be captured from the original item.
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.
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.
Frequently Asked Questions for
businesses who issue cheques and/
or accept cheques as payment from
their customers
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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How long can a financial institution place a hold
on funds when I deposit a cheque?
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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Frequently Asked
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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
cheque’s return?
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.
“stop payment”, they do not address the procedures or
requirements for issuing a “stop payment” on an item.
Can a certified cheque ever be returned through
the clearings?
Are financial institutions required to follow
conditional statements, such as “Void after 30
days” on cheques?
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
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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
account?
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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Frequently Asked
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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
financial institution.
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 wellestablished 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
info@cdnpay.ca
facebook.com/cdnpay
@cdnpay
© Canadian Payments Association 2012
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