Holdbacks Under Ontario's Construction Act: What Every Contractor Needs to Know

Ontario's Construction Act holdback bookkeeping rules affect every contractor working on a construction project in the province — from a $15,000 bathroom renovation to a multi-million dollar commercial build. The 10% statutory holdback is not optional, it's not a negotiating point, and it cannot be waived by contract. If you're a GC, subcontractor, or sub-subcontractor in Ontario and you're not tracking holdbacks properly, you're likely misstating your receivables and your income every single month.

What Is a Holdback and Why Does It Exist?

A holdback is a percentage of each progress payment that is withheld — "held back" — until the holdback period expires and any lien claims have been resolved. Under Ontario's Construction Act, every owner who hires a contractor must hold back 10% of the value of each progress payment. That withheld money sits in trust (or at minimum is treated as trust funds) to protect the rights of subcontractors, workers, and suppliers who have supplied labour or materials to the project.

The holdback system exists because of how payment flows in construction. An owner pays a GC, the GC pays subs, and subs pay their suppliers and sub-subs. If a GC receives full payment from the owner and then goes bankrupt or simply doesn't pay down the chain, the trades at the bottom are left with nothing — and they've already done the work. The holdback is a buffer of last resort: if the GC doesn't pay, subcontractors can make a lien claim against the project, and the holdback funds are there to satisfy legitimate claims.

The 10% Rule: Who Holds Back From Whom

The holdback obligation flows through every tier of the construction pyramid:

• The owner holds back 10% from every payment to the general contractor
• The general contractor holds back 10% from every payment to each subcontractor
• Each subcontractor holds back 10% from every payment to their sub-subcontractors and suppliers

This means if you're a Barrie electrician working as a sub on a residential build, and you invoice the GC $20,000 for your rough-in, the GC is legally required to pay you $18,000 and hold $2,000 in trust. When you in turn pay your apprentice sub or a supplier, you hold back 10% from them. The entire chain is subject to the same rule.

When Is the Holdback Released?

Under the Construction Act, the basic holdback must be retained for at least 45 days after the contract is substantially performed or the subcontract is completed. The clock typically starts from the date of publication of a Certificate of Substantial Performance (CSP) in the Ontario construction publication directory. Substantial performance is a defined legal term — it's when the project is ready for use or is being used for its intended purpose and the cost to complete or correct remaining work is less than a specified threshold.

For subcontracts, the holdback becomes payable 45 days after the earlier of: the date a copy of the subcontract completion is published, or the date the contractor's contract is completed. In practice, you need to track when your subcontract portion is done and communicate that to the GC clearly, because the 45-day clock won't start if the completion event isn't properly established.

If there are no lien claims registered against the property within the holdback period, the payer is obligated to release the holdback. If a lien has been registered, the holdback (or the relevant portion) stays frozen until the lien is vacated, discharged, or settled.

Lien Rights: The Connection to Holdbacks

Ontario contractors and suppliers have a right to place a lien on the property where their work was performed if they aren't paid. The lien must be registered within a specific time period — generally 60 days after the last day the person supplied services or materials. The holdback exists precisely so there are funds available if a lien is successfully claimed.

Understanding lien rights isn't just for lawyers. As a contractor or sub in Ontario's construction industry, knowing when your lien preservation period expires — and not letting it lapse before you've been paid — is critical. Once the lien period expires, so does your security interest in the property.

How to Account for Holdbacks Correctly in QuickBooks or Xero

This is where many Ontario contractors make a genuine bookkeeping error that distorts their financial picture. When you invoice a GC for $20,000, you've earned $20,000. The holdback is not a discount or a write-down of the invoice — it's a timing difference in when you'll receive the money. Here's the correct approach:

• Record the full invoice as a receivable: $20,000 goes into accounts receivable when you invoice it
• Record the payment correctly: When the GC pays you $18,000 and holds $2,000, record the $18,000 as a payment against the invoice
• Set up a "Holdback Receivable" account: The remaining $2,000 moves from accounts receivable to a separate holdback receivable account — it's still money owed to you, just not yet collectible
• Release the holdback receivable when collected: When the holdback is released and paid, clear the holdback receivable account and record the cash receipt

The common mistake is treating the $18,000 payment as full settlement of the invoice and never tracking the $2,000 holdback. Over a full year of construction work, this can add up to significant untracked receivables — and you won't know how much money is actually owed to you.

HST and Holdbacks: When Is HST Due?

Under CRA's rules, HST on holdback amounts is generally due when the holdback is paid or when the holdback period expires — whichever comes first. This is different from your regular invoiced amounts, where HST is typically due when the invoice is issued (if you're on the accrual method). Make sure your accounting setup reflects this timing difference, or you'll be remitting HST on holdbacks before you've actually received the cash.

For cash-basis HST reporting (which some smaller Ontario contractors use), holdback HST is due when the holdback is actually received. Confirm with your bookkeeper which method applies to your business.