How Direct Deposit Works and How to Set It Up in Canada

Direct deposit is a fast, convenient alternative to waiting for a paper cheque to arrive in the mail, and it requires no work on your end after the initial setup.

When you have a job, the easiest way to get paid is something called direct deposit. It’s a fast, convenient alternative to waiting for a paper cheque to arrive in the mail, and it requires no work on your end after the initial setup. When the money arrives in your bank account, you’ll be able to access it right away without any delays.

In addition to your paycheque, you can receive many types of payments through direct deposit: your tax refund, government benefits and other payments such as employment insurance (EI). While there’s no denying how useful direct deposit is, have you ever wondered how it works? Here’s what you need to know about direct deposit.

How direct deposit works

Direct deposit in Canada uses an electronic payment system to transfer funds between businesses and individuals. This system has detailed rules and procedures to ensure your money ends up in the right place — a lot is going on behind the scenes.

There are two main payment systems in Canada, both overseen owned and operated by Payments Canada: Lynx and Automated Clearing Settlement System (ACSS).

Lynx replaced the Large Value Transfer System, or LVTS, in September 2021. Lynx is the electronic wire system that transfers large amounts of money between financial institutions.
ACSS is used for retail payments, which include pre-authorized debit and point-of-sale transactions.

But all you really need to know is that direct deposit allows you to be paid electronically, which is usually more convenient than getting paid in cash or with a paper cheque.

How to set up direct deposit

In most cases, the easiest way to set up direct deposit is to provide the person paying you with a void cheque that shows all your banking numbers and details. If you don’t have any cheques, you can ask your financial institution for a printout of your direct deposit information.

Some employers require you to fill out a paper or electronic form with your direct deposit information. Here’s what you may need to provide:

Your account info (bank name, transit number, institution number, and account number).
A void cheque or deposit information page.

Once you submit that information to your manager or payroll department, you’re good to go. Your payroll department will ensure that you’re paid the right amount on time. If you decide to switch banks or want your money to be deposited into a new bank account, you’ll need to update your direct deposit information.

Pros and cons of direct deposit

Even though direct deposit is pretty seamless, you still need to be aware of some pros and cons.

Pros of direct deposit

Funds are available immediately with no holds.
Reduced risk of fraud and theft.
Minimal environmental impact.
Option to load funds onto a prepaid credit card.

Cons of direct deposit

Can be a hassle to update if you change bank accounts.
Can be delayed, in rare cases.
To get cash, you’ll need to visit the bank or an automated teller machine (ATM).

The information you provide for direct deposits is protected under the Privacy Act. That means your employer and the government can’t monitor your bank account, nor can they withdraw money from it.

Yes and no. You don’t pay any fees to receive your money, such as your paycheque from your employer. However, your employer will often need to pay a fee to send the money to you.

A common form of direct deposit that’s used between regular people is the Interac e-Transfer. Depending on your financial institution, you may be charged a fee when you send an e-Transfer, or your bank account may include a certain number of free e-Transfers.

Wire transfers are similar to direct deposits, and they often come with fees for both the sender and receiver.