What is an Overdraft Fee in Canada?

Imagine you go to the grocery store to buy a couple of essentials, but you forgot to transfer money over from your savings account to cover the debit charge. Rather than having your bank decline the transaction, they may approve it, allowing the account to go into a negative balance. Of course this is convenient, but it isn’t free. As a result, your bank will bill you for this in what’s called an overdraft charge. In this article, we’ll break down what overdraft fees are, how they differ from other types of charges, and the types of protection available to Canadians.

What is an overdraft fee?

An overdraft fee is a charge that applies when you spend more money than you have available in your chequing account. Instead of declining the transaction altogether, your bank will cover the difference. However, this convenience isn’t free. In Canada, banks charge an overdraft fee on a per occurrence basis or as part of a monthly plan. They will also charge you interest, making it more expensive the longer your balance stays negative.

There is also a difference in having your overdraft permitted versus having overdraft protection. Under a protection program, you have formal coverage that ensures your payments go through using a set fee structure. But, if your overdraft is merely permitted while you are not part of an overdraft program, it is usually on a discretionary basis and may still result in high fees. 

The difference between overdraft and NSF fees in Canada

They may seem similar, but there is a distinct difference between overdraft fees and NSF (non-sufficient funds) fees. The former appears when the bank allows the transaction to go through but there is not enough money in your account to cover it. Your account has a negative balance at that point. An NSF fee, on the other hand, is when your bank declines the transaction because your account does not have the money to cover it completely. It is what happens when you don’t have overdraft protection on your account.

NSF fees in Canada are typically higher than overdraft fees. It’s the reason why many Canadians opt into their bank’s overdraft program. According to the Government of Canada, an NSF fee is approximately $50, while overdraft costs depend on the institution and your chosen fee structure.

Types of overdraft protection in Canada

Overdraft fees in Canada vary depending on the institution, with most Canadian banks offering several versions.

Standard (pay-per-use) overdraft protection

With this type of overdraft coverage, you only pay when your account goes below $0. With pay-per-use, you would see a charge each time that happens. This means your costs can add up quickly even though the government caps the fee at $5 per use.

You will also need to pay interest on the negative amount as you are borrowing money from the bank to cover the balance. These charges will accrue until you bring the account back into a positive balance.

Best for: Those who rarely use overdraft but want the option of coverage when needed. 

Monthly-fee overdraft protection plans

Some banks in Canada also offer a monthly plan to cover you regardless of how often your account slips into overdraft. With a monthly plan, you will pay the charge even if you do not use the coverage. In Canada, the flat monthly fee is around $5.

Best for: Those who go into overdraft several times per year.

Overdraft line of credit

An overdraft line of credit functions like a small credit line with a link to your chequing account. When your balance goes negative, funds will automatically draw from the LoC. Here, there is no additional fee, though you will pay interest on the amount that you borrow.

Best for: Those who go into overdraft frequently but have a high enough credit score to qualify for the LoC. Typically, this is the cheapest long-term option.

Courtesy overdraft

Even if you don’t have overdraft coverage, your bank may still approve the transaction at its discretion. While it prevents you from receiving a declined payment, it can also trigger high fees and steep interest charges.

Best for: Those who do not qualify for an overdraft protection program. This is the least desirable option as it is unpredictable and potentially expensive. Consider it a “last-resort” option.

How much do overdraft fees cost in Canada?

As mentioned above, the cost of overdraft in Canada depends on the type of coverage plan you have. Most Canadians can expect to pay either per-use fees or a monthly charge, as well as interest costs on the negative balance. The pay-per-use fee is a maximum of $5 per use, while a monthly plan is often around the same amount.

Most banks also charge between 21% and 22% in interest annually on overdrawn amounts. The exact cost, though, will vary depending on the bank or credit union. For example as of December 2025, TD has a 21% interest rate on these negative balances while RBC charges 22%.

Pros and cons of overdraft protection

Advantages of overdraft protection:

• Prevents declined payments and transactions
• Cheaper than NSF fees
• Provides short-term cash flexibility
• Predictable coverage
• Avoids disruptions to automatic payments like rent, utility payments, and subscriptions
• Offers access to funds in case of an emergency

Disadvantages of overdraft protection:

• Interest charges can add up quickly
• Per-use fees can become expensive if you use overdraft coverage frequently
• Makes it easy to spend beyond your means, masking budgeting issues
• Courtesy overdraft is unpredictable

How to avoid overdraft fees

Overdraft protection can help in a pinch, but the best strategy is to avoid going below a zero balance in the first place. When possible, consider the following to help you avoid overdraft fees:

• Set up low-balance alerts to help you remember to transfer money before a transaction pushes you into overdraft
• Keep a balance in your chequing account to act as a buffer. Often, a small amount is enough to prevent you from accidentally moving below a $0 balance
• Create automatic transfers from your savings account to help you cover your upcoming bills
• Review your pre-authorized debits so you can prepare for upcoming payments
• Link your chequing account to a lower-interest-rate line of credit instead of relying on overdraft
• Some banks let you opt out of courtesy overdrafts entirely. By doing so, you can save yourself the high fees associated with unplanned negative balances
• Use your bank’s budgeting tools to track your spending in real time and ensure you avoid surprise overdrafts

Takeaway

Overdraft protection provides breathing room for when your bank account falls short. But that protection isn’t free. Whether you pay per use, sign up for a monthly plan or rely on a line of credit, the cost can add up quickly. Overall, overdraft protection is a valuable safety net, but understanding how it works can help you choose the right protection and ultimately save you money.