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Published January 6, 2022

What Is a Bank Draft?

Bank drafts are a way to make payments, especially large ones, in a format that’s more secure than cash or cheque. Most banks and credit unions can provide bank drafts.

So, you need to send a large amount of money to someone, but you’re not interested in withdrawing a huge pile of cash from the ATM, and your daily e-transfer limit is lower than you need. A bank draft might be your answer.

What is a bank draft?

Bank drafts are a secure way to make a large payment to a third party — and they’re guaranteed by the financial institution that issues them.

How do bank drafts work?

When you take out a bank draft — a physical instrument that looks similar to a cheque — your bank or credit union will withdraw the funds from your bank account and place them in its reserve account, guaranteeing the amount for the person receiving the draft.

The name of the person or entity receiving the money will appear on the bank draft. You then give or send the draft to the recipient, who can deposit or cash it as they would a cheque.

As the name suggests, you can typically pick up a bank draft at your local bank or credit union branch. Some financial institutions also allow clients to request bank drafts online.

» DISCOVER: How do online-only banks work in Canada?

When to use a bank draft

A bank draft might be appropriate (or even requested) when you need to give someone a large payment, such as when purchasing a used vehicle, paying tuition, or putting a down payment on a house. Bank drafts can also be used to send money internationally for large purchases.

Pros of a bank draft

  • Not subject to limits. Unlike other forms of money transfer, bank drafts don’t have a maximum amount, so they can be used to easily send a large sum of money to a recipient.
  • Currency options. Many financial institutions offer bank drafts in a number of currencies.
  • CDIC coverage. As with savings and chequing accounts and Guaranteed Investment Certificates (GICs), bank drafts issued by member financial institutions are covered by the Canada Deposit Insurance Corporation (CDIC) in case of bank failure.

Cons of a bank draft

  • Bank drafts are physical and considered to be cash-like. This makes them susceptible to loss, damage, theft and fraud. After obtaining your bank draft, it becomes your responsibility to ensure it ends up in the recipient’s possession.
  • They can’t be cancelled. Once issued, financial institutions are not able to stop or cancel bank drafts. If your bank draft is lost or stolen, you may need a Bond of Indemnity to get a replacement or a refund.
  • Fees. Banks generally charge a small fee for bank drafts, although some include a limited number of free bank drafts with monthly banking packages.

» MORE: What to know about free and no-fee bank accounts

Alternatives to bank drafts

If a bank draft is not suitable for your circumstance, consider these other ways to transfer money in Canada.

Certified cheque

A certified cheque is also issued by a financial institution and works the same way as a bank draft, except the funds are put on hold rather than withdrawn immediately. Some banks no longer issue certified cheques drawn on personal accounts.

Money order

A money order is a certified, cashable document, available up to CAD$999.99. Money orders are guaranteed and sold through Canada Post and financial institutions and are generally used to pay bills or send money within Canada.

E-transfer

An e-transfer allows you to instantly send an amount to a Canadian recipient’s mobile number or email address, but this is usually subject to a daily debit limit.

Wire transfer

A wire transfer is a quick way to send money between two bank accounts within Canada or internationally. To send a wire transfer, you need the recipient’s bank account information, including their international bank account number (IBAN), transit number, SWIFT code, the bank’s full address and the recipient’s address. Wire transfers between different financial institutions are usually subject to a fee.

» MORE: What are bank account and routing numbers?

Money transfer apps

Apps such as PayPal allow you to quickly send money to someone else, make an online payment or receive funds. The maximum amount you can send depends on whether you have a PayPal account and if your account is verified or unverified.

About the Author

Helen Burnett-Nichols
Helen Burnett-Nichols

Helen Burnett-Nichols is a freelance writer specializing in news and feature articles on a variety of business, legal and investment topics. Her work has appeared in publications such as The Globe and Mail, National Post Legal Post, Canadian Lawyer magazine, Benefits Canada and Golden Girl Finance. Follow her on Twitter @helenbnichols or visit her website, burnettnichols.com.

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