Bank draft explained: how a bank draft works in Canada

What a bank draft is

A bank draft, also called a demand draft or banker's draft, is a payment instrument that a financial institution issues on its own funds and makes payable to a named person or business. Because the bank, not the purchaser, is the payer, the recipient is not relying on the account balance of the person buying it.

In Canada, banks and some credit unions issue drafts, most often for larger amounts. The purchaser pays the face amount plus a service fee when the draft is created. The institution debits or holds that money immediately, then prints the draft with the exact payee name and signs it as the drawer.

• The issuing institution, not the customer, is the payer
• The draft names one specific payee
• The amount is funded at the time of purchase
• It is usually a paper item, though some institutions offer electronic versions

How a bank draft works, step by step

The purchaser requests a draft at a branch, or through online banking where the institution offers it, and supplies the exact payee name. The institution confirms the funds are available, collects the amount plus its fee, and issues the draft.

The buyer then delivers the draft to the payee. The payee deposits it or presents it for payment, and the funds move once the item clears through the banking system. A domestic draft typically clears within a few business days.

An institution may hold the proceeds of a deposited draft before making them available, especially for a new customer or an unusually large amount. That hold is a fraud-control measure and does not mean the draft itself is invalid.

Bank draft, certified cheque, money order and wire transfer

These instruments look similar but work differently. The key question is who is legally the payer, because that decides whose account the money comes from and how much protection the recipient has.

A certified cheque is the account holder's own cheque with the institution confirming that funds have been set aside. A money order is a prepaid item usually bought for smaller amounts. A wire transfer moves funds electronically between accounts and leaves no paper item to deposit.

Where remittance fits: remittance, payment and transfer

Remittance has two everyday meanings in Canada. In payroll and accounting it means a payment sent to an authority or a supplier. An employer remits payroll source deductions to the Canada Revenue Agency on the schedule the agency assigns to that employer.

In personal finance, remittance usually means money sent to a family member or a business, often across a border. Payment is the broader act of settling what you owe. Transfer describes moving funds between accounts, whether or not a debt exists.

A bank draft is a payment instrument, not a type of transfer. If you send a draft to another country, the whole transaction is often described as an international remittance. Businesses commonly attach a remittance advice to a payment so the supplier knows which invoices it covers.

Bank drafts in everyday Canadian situations

Buyers are often asked to provide a bank draft for a real estate deposit or for the balance of closing funds. Lawyers, notaries and real estate offices usually specify the exact payee name and whether the payment must be a draft, a certified cheque or an electronic transfer.

Vehicle dealers, contractors and landlords may request a draft for a large one-time payment. Some institutions can issue a draft in a foreign currency. The exchange rate applied when the draft is issued will differ from the rate applied when it is deposited abroad, so the two amounts are not the same.

If someone sends you a draft drawn on a foreign institution, expect a longer clearing time than for a domestic item. Check with your own institution about holds before you spend or release anything.

Costs, limits and timing

Fees for bank drafts vary by institution and by account package. Some accounts include a set number of drafts at no extra charge, while others charge a flat fee per item. Expect an additional charge for a draft in a foreign currency, a replacement draft, or an attempt to stop a lost draft.

Institutions also set their own maximum amounts for drafts, so a large transaction may need to be split or handled another way. A domestic draft is usually issued the same day if the funds are available. A draft drawn on an institution outside Canada can take considerably longer to clear.

Because costs and processing times differ, it is worth comparing the total cost of a draft against other options before committing to a large payment.

Risks: loss, theft and counterfeit drafts

A bank draft is a valuable paper item. If it is lost or stolen before it reaches the payee, stopping payment is not as simple as stopping a personal cheque, because the institution issued the item. Institutions generally require a written declaration and an indemnity before they will act.

Counterfeit drafts exist, and the Canadian Anti-Fraud Centre warns about overpayment schemes. In these, a buyer sends a draft for more than the agreed price and asks the seller to refund the difference. The draft is later returned unpaid, and the refunded money is gone.

Practical steps help. Verify the item with your own institution before releasing goods, wait until the funds are genuinely available, keep the purchase receipt and the draft number, and treat any request to refund an overpayment as a warning sign.