Before you can officially open your doors, you’ll want to make sure employees are paid accurately and timely. Direct deposit is one fast, convenient, and secure way to manage your payroll, and it’s become the standard for most Canadian businesses.
Let’s take a look at what direct deposit payroll is, how it works, and what is required to set it up in Canada.
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What is direct deposit payroll?
Direct deposit payroll is a process where an employer pays employees by sending their wages electronically from the employer's bank account to each employee's bank account. This electronic transfer uses the banking system instead of issuing paper cheques.
In Canada, direct deposit payroll works by integrating with payroll software that collects payroll data, creates payment instructions, and sends the information to the bank. The file format used for this process is called CPA Standard 005, which is required by Canadian financial institutions to ensure the payment instructions are accurate and compatible with their systems.
Key components of direct deposit:
- Electronic funds transfer (EFT): Money moves digitally between bank accounts
- CPA Standard 005 file: The required format for Canadian payroll deposits
- Payroll integration: Direct deposit connects with existing payroll processes
What info is needed for direct deposit from employees?
Setting up direct deposit requires specific banking details from each employee. The required information includes the bank name, transit number, institution number, and account number.
This information is often gathered using a void cheque or a direct deposit authorization form. A void cheque is a cheque with "VOID" written across it, which shows the necessary banking details. If a cheque is unavailable, many banks provide a direct deposit form containing this information.
Required employee information:
- Bank name: The financial institution where the account is held
- Transit number: Five-digit number identifying the specific branch
- Institution number: Three-digit code identifying the financial institution
- Account number: Unique number for the employee's personal bank account
Employers also collect written consent from employees before enrolling them in direct deposit payroll. Canadian regulations require employers to keep these authorization records for six years after the last entry recorded for each employee.
Step-by-step setup process for direct deposit payroll
Gather employee authorization and banking details
The first step involves collecting banking information and signed authorization forms from employees. This information is checked for accuracy to prevent payment errors.
Enter banking info into payroll software
Once collected, the information is entered into the payroll software. Some payroll systems allow employees to enter their own banking details through a secure self-service portal. Many systems allow pay to be split among multiple bank accounts, such as a savings and a chequing account.
Fund the payroll account before cut-off
Before payroll is processed, the employer's payroll account is funded with enough money to cover all employee net pay and source deductions. The timing for account funding depends on the payroll schedule and the bank's processing deadlines.
Approve and submit the EFT file
The payroll software generates an electronic funds transfer file, formatted according to CPA Standard 005. This file is reviewed and approved by authorized persons within the organization. After approval, the file is submitted to the bank or payroll service provider before the cut-off time specified by the financial institution.
Confirm deposits and issue pay statements
After the EFT file is processed, the payroll administrator checks with the bank to confirm that deposits have been made to employee accounts. Employees are informed that their pay has been deposited, and digital pay statements are issued through the payroll system.
How long does direct deposit setup and processing take?
Setting up direct deposit for the first time usually starts with opening a business payroll bank account, which can take a few business days. After the account is ready, configuring payroll software and enrolling employees often takes one to two weeks, depending on how quickly employees provide their banking information.
For each payroll cycle, the payroll file is typically submitted to the bank one to three business days before payday. Banks use this time to validate, process, and transfer funds from the employer's account to each employee's account.
Timeline considerations:
- Initial setup: 1-2 weeks for first-time implementation
- Each payroll run: 1-3 business days processing time
- Holiday adjustments: Earlier submission required for statutory holidays
Where is my direct deposit? Common payment delays explained
Bank processing delays
Delays in direct deposit payments can happen if a bank is performing system maintenance or experiencing a processing backlog. When this occurs, payments may not appear in employee accounts at the expected time, but usually arrive later the same day or the following business day.
Incorrect employee banking information
If direct deposit payments do not arrive, incorrect banking information may be the cause. This can include errors in the account number, transit number, or institution number provided to payroll. In a case where the banks cannot match the payment details to an active account, the funds are sometimes returned to the employer. But if the funds are deposited into the incorrect bank account, the funds cannot be recalled and the process to deposit them into the proper account may take 5-7 business days to be completed.
Holiday or weekend shifts
Direct deposit payments are only processed on business days. Depending on the payroll system, if a payday falls on a statutory holiday or weekend, banks are closed and payments may be delayed until the next business day.
With Rise, our software prepones the pay date, making sure that your employees get paid before a holiday or weekend — ensuring a better payroll experience.
Common direct deposit errors and solutions
Invalid account numbers
Invalid account numbers happen when the banking information entered for an employee is incorrect or incomplete. If a payment fails because of an invalid account, the funds do not go into the employee's account and are returned to the employer.
To fix this, the correct banking details are collected from the employee, and the information is updated in the payroll system. If the error is not caught in time for payday, the employer may issue a paper cheque while correcting the direct deposit details.
Insufficient funds at funding time
Insufficient funds occur when the employer's payroll bank account does not have enough money to cover the total payroll amount. If this happens, direct deposit payments may be rejected by the bank, and employees may not receive their pay on time.
Recalling or reversing a deposit
Direct deposit payments can be reversed in Canada only in certain situations and within a limited period, usually requiring bank approval and consent from both parties.
One example of a reversal is if the wrong amount was sent or the payment went to the wrong account. Banks allow reversal requests within a short timeframe, often up to three business days after the deposit has been processed.
It’s important to note that a reversal isn’t a simple "undo." It's a formal request to the financial institutions, not a command. The employee's bank account is their personal property, and the bank is not obligated to comply, especially if the employee disputes the reversal.
As a best practice, reversals are a last resort. For minor errors, it is far better to correct the amount on the next paycheque or issue a separate payment to the employee. This approach is cleaner, faster, and avoids the risks associated with a failed reversal.
What is needed for direct deposit compliance in Canada?
CRA payroll program registration
Employers are required to register for a payroll program account with the Canada Revenue Agency (CRA) before processing payroll. This registration is how the CRA tracks employer payroll activity for tax purposes.
Data security requirements
Payroll systems in Canada are required to protect employee banking information both when it is stored and when it is sent electronically. Encryption is used to make data unreadable to anyone who does not have permission to access it.
Record retention obligations
Canadian regulations require employers to keep direct deposit authorization records for six years after the last entry. However, it's crucial to specify the starting point for this retention period. The Canada Revenue Agency (CRA) requires payroll records, including direct deposit authorizations, to be kept for six years from the end of the last tax year to which they relate.
For example, records for a pay period in June 2025 must be kept until December 31, 2031. This is a common point of confusion and a key compliance requirement.
Choosing the right payroll provider for Canadian direct deposit
Bank-based payroll portals
Major Canadian banks offer payroll services that include direct deposit. These portals allow employers to upload payment files and send funds directly to employee accounts. Integration with business bank accounts is standard, but connections to HR or benefits systems are limited.
All-in-one HR and payroll platforms
There are people management software options that combine payroll processing with other HR functions. Rise is one example of an all-in-one platform that connects payroll with benefits, time management, and much more to streamline your employees’ experience.
Outsourced payroll services
Outsourced payroll services handle payroll processing, direct deposit, tax remittances, and reporting on behalf of the employer. Employers using outsourced services have fewer tasks to manage directly, but may have less flexibility over payroll changes and timing.
Next payday made easy with Rise People
We know how busy you are as a business owner.
So why not let Rise simplify your payroll?
Our all-in-one platform streamlines direct deposit payroll by connecting payroll processing, benefits enrollment, time tracking, and employee self-service.
From day one of onboarding, employees can easily enter their banking details and update them at any time. And on the management side, you and your HR team can process payroll quickly and securely. Plus, all payroll, benefits, and time tracking records are stored digitally for easy access and compliance.
Ready to see how Rise integrates direct deposit with HR management? Book a demo with our team today.
FAQs about direct deposit payroll in Canada
What does a deposit mean in payroll?
A deposit in payroll is the electronic transfer of wages from an employer's bank account to an employee's bank account, replacing paper cheques with secure digital payment.
Can direct deposit payments be reversed in Canada?
Direct deposit payments can be reversed in Canada only in certain situations and within a limited period, usually requiring bank approval and consent from both parties.
How can employees split their pay into multiple bank accounts?
Most payroll systems allow employees to divide their pay into multiple accounts by percentage or fixed amount, with one account designated for any remaining pay.
What happens when payday falls on a Canadian statutory holiday?
When payday falls on a statutory holiday, banks may process direct deposits on the next business day, requiring employers to submit payroll files earlier to maintain payment schedules.
With software like Rise, the pay date is preponed, which makes sure that your employees get paid before a holiday or weekend.
