Direct deposit in Canada: An employer guide for payroll

Direct deposit is an electronic payment method that lets employers send wages directly to an employee’s bank account. For Canadian small businesses, it can be a faster, safer, and more efficient way to pay employees than paper cheques or manual transfers.

Instead of printing cheques or sending individual payments, employers can use direct deposit through their bank, payroll provider, or payroll software to pay employees on a regular schedule.

This guide explains how direct deposit works in Canada, what employers need to set it up, how long it usually takes, and how payroll software can make the process easier.

Direct deposit quick facts for employers

How direct deposit works in Canada

In Canada, many direct deposit payments are processed through the Automated Clearing Settlement System (ACSS), which clears electronic payments between financial institutions.

For payroll, the process usually looks like this:

1. The employer collects the employee’s direct deposit information.
2. The employer submits payroll through their bank, payroll provider, or payroll software.
3. The payment is processed through the banking system.
4. The employee receives their net pay directly in their bank account on payday.

The exact timing can depend on your bank, payroll provider, payroll cutoff time, and holidays.

What do employers need for direct deposit in Canada?

To pay your employees using direct deposit transactions, there are a few details you’ll need. Here’s a look at what info to gather for your business and some key banking information from your employees in order to set everything up.

What employers need for their business

1. A business bank account.
2. A method of processing payroll: You may either work with the bank that handles your business bank account, find a payroll service provider that has the capability to handle direct deposit or choose a payroll software.
3. Employee information (we’ll get to that in a moment).
4. To upload this employee data or provide it to your service: Depending on the service you are using, your employees may be able to input this data themselves, otherwise you’ll need to make sure your employees’ information is uploaded.
5. Send your direct deposits: The payment can take 1-3 business days to process, so you might want to send it ahead of payday to make sure your employees are paid on time.

What employers need from their employees

You will need the following banking information from your employees:

1. Bank name 
2. Transit number
3. Bank institution number
4. Account number 
5. Bank address

A void cheque or direct deposit form from your employee’s financial institution can provide the necessary information for the chequing account or savings account where the funds will be deposited. If the employee is registered for online banking, they can simply log in to their online banking account and download a digital void cheque from there. Otherwise, they can get the completed form by visiting their branch.

Many banks also have direct deposit authorization forms available online that your employee can provide to you.

How long does direct deposit take?

Direct deposit payments often take 1-3 business days to process, depending on your bank, payroll provider, payroll cutoff time, and whether there are weekends or holidays in the way.

For payroll, employers usually submit direct deposit ahead of payday so employees receive their pay on time. If you’re using payroll software, check your payroll processing deadline so you know when funds need to be available and when payroll needs to be approved.

Advantages of direct deposit

1. Convenient: After the initial set up, no other work is needed on your end unless there’s a change. Like bank account information, for instance.
2. Cost effective: Cheaper than paying the fees associated with e-transfers or writing, printing and mailing pay cheques.
3. Better for the environment: Reduces your carbon footprint by cutting out paper waste. 
4. Safe and secure: Prevents fraud as there is a reduced chance of a cheque being lost, stolen or signatures being forged. 
5. Employee satisfaction: Your employees are likely to be more satisfied when their income is being deposited directly into their account and wages are immediately accessible on pay day. Less work for them and for you! 
6. Timeliness: Ensures employees are paid on time as delays are more likely with mailing cheques during holidays, staff vacations and bad weather.
7. Certainty: No more guessing when money will be withdrawn from your account, making it easier to plan for other business expenses.                     

Disadvantages of direct deposit

1. Cannot stop payment: Unlike paper cheques, once a direct deposit is sent, it cannot be stopped. If the payment is still pending you may be able to modify it. (You’ll have to check with your direct deposit provider.)
2. Information needs to be updated: If an employee changes their bank, you will need to update their direct deposit information.
3. Setup fees: The initial set up of direct deposit and using a software will involve paying some fees.
4. Other fees: While often cheaper than the fees associated with pay cheques, banks will sometimes charge businesses processing or transaction fees for sending money through direct deposit. 
5. Employee preference: Some employees may still prefer receiving paper cheques. 

How to set up direct deposit for payroll

Employers generally have three options for setting up payroll direct deposit:

1. Set up direct deposit through a business bank account.
2. Use a payroll provider that processes direct deposit payments.
3. Use payroll software with direct deposit built in.

Direct deposit through your bank

Banks often have an online, self-serve option for you to set up direct deposit and pay your employees. Each bank will have their own process, features and pricing for you to review.

Let’s use RBC’s direct deposit system as an example. Direct deposit enrolment looks like this: you will first set up your profile by providing the required information, such as your company’s name, contact name, billing account number, phone number and email address. From there, you’ll input your employee’s banking information (same information we went over earlier!). Once you’ve saved your employees’ information, you can just select the employees you wish to pay each time, input the amount and date, and submit the payments for processing.

Through a payroll provider

Some employers work with a payroll provider, accountant, or bookkeeper to manage payroll and direct deposit. This can reduce manual work, but it may come with additional costs or less hands-on control depending on the service model.

Some examples of payroll providers include: 

Full service payroll software

Payroll software handles the end-to-end payroll process for you each pay period. Afterward, they’ll provide you with the data for your bookkeeping. They may also include useful HR features like onboarding, time off requests for employees, managing group benefits and more.

Accountant

An accountant will gather and record all data needed to process payroll and make sure all standard processes and procedures are being followed, including maintaining a payroll schedule. They’ll also provide financial advice, prepare and file tax returns, calculate wages and deductions for taxes and benefits. 

Bookkeeper

Some bookkeepers handle payroll processing among the day-to-day record keeping and data management of your finances, as well as preparing financial statements and handling accounts receivable and payable. 

Direct deposit and payroll software

Payroll software can make direct deposit easier by keeping payroll calculations, employee banking details, payment timing, and payroll records in one place.

With payroll software, employers can process employee payments, calculate payroll taxes, manage deductions, and keep pay statements organized without handling each payment manually.

Wagepoint helps Canadian small businesses run payroll with direct deposit, automated payroll tax calculations, CRA remittances, employee pay statements, and year-end forms.

Other things payroll software helps with

Apart from direct deposit, payroll features can also help you with things like:

• Payroll tax remittances and year-end filing.
• Canada Pension Plan (CPP) and Employment Insurance (EI) calculations.
• Employee setup with self-serve options to fill in their own details (think social insurance number (SIN) or date of birth for instance).
• Handling of payroll forms, such as Records of Employment (ROEs)s that get filed with Service Canada.
• Remaining compliant with the Government of Canada and other provincial and territorial agencies.

In short, whether you’re a newbie or a payroll expert, taking advantage of payroll software adds convenience and brings relief to your work life. Especially since you still get the peace of mind from knowing that you’re avoiding common payroll mistakes.

Make payroll direct deposit easier

Direct deposit can help you pay employees on time, reduce manual payroll work, and move away from paper cheques or one-off payments.

With Wagepoint, Canadian small businesses can run payroll, pay employees by direct deposit, calculate payroll taxes, and manage payroll records in one place.

Learn more about payroll software.                 

Direct deposit FAQs

Is direct deposit safe?

Direct deposit is more secure and safe than paper cheques. Paper cheques can be lost or stolen, but direct deposit transfers the funds directly into your employee’s bank account. 

Do my employees have to pay to receive their direct deposit?

Your employees will not have to pay anything!

My employee is worried I can access their bank account. Is that possible?

No. The banking information an employee gives you for direct deposit lets you deposit money into their account, not withdraw money from it.

Employers should also treat employee banking information as confidential and keep it secure, just like other sensitive payroll and employee records.

How long will it take for my employee to receive their money?

Your employee will receive their money on payday as long as everything is set up correctly. A direct deposit payment can take 1-3 business days to process, but employers usually process in advance so the recipients get their money on time. 

Is setting up direct deposit expensive?

The fees associated with direct deposit are often cheaper than the fees associated with paying your employees in other ways, like through mailing physical cheques.

Does my employee need to have access to a computer or the Internet for direct deposit?

Nope! They can visit their financial institution to gather all the information needed to set up direct deposit and still receive an electronic payment instantly without internet access. 

Is EFT different from direct deposit?

Direct deposit is a form of electronic funds transfer (EFT).

What are the payment systems in Canada?

Lynx and the Automated Clearing Settlement System are Canada’s two main payment systems. Both of these systems are owned and operated by Payments Canada. ACSS is similar to the Automated Clearing House (ACH) in the United States and clears cheques and electronic items. This includes direct deposits, pre-authorized debits and Interac debit payments. Lynx is Canada’s High Value Payment System. It launched in 2021 to replace The Large Value Transfer System (LVTS) that launched in 1999.

What is CRA direct deposit?

CRA direct deposit is a way for businesses or individuals to receive payments from the Canada Revenue Agency directly into a bank account. For businesses, this may include corporate income tax refunds, goods and services tax/harmonized sales tax (GST/HST) refunds, or refunds on payroll tax overpayments.

This is different from payroll direct deposit, which employers use to pay employees or contractors.