When do you owe GST/HST on a deposit or a progress draw?

Summary

GST/HST is the federal Goods and Services Tax, plus a provincial share in the provinces that folded their own sales tax into the federal one. Those provinces charge a single combined rate called HST, and everywhere else it’s 5% GST plus whatever the province charges separately (which is which, province by province).¹ You collect it for the Canada Revenue Agency (the CRA) and hand it over, or remit it, on a GST/HST return covering a set period (i.e. monthly, quarterly or annually).

If your corporation builds, renovates or repairs on land somebody else owns, tax on a stage payment, or draw, becomes payable on the earlier of the day the customer pays you and the day the money legally becomes due.² Your return reports every dollar that became payable in the period it covers, whether or not your customers paid you. As such you can owe the government tax on an invoice nobody has paid.³

Four rules do most of the work from there:

1. Money held as security for the customer going through with the job, rather than as advance payment, is a deposit. It isn’t taxed until you apply it against a bill.
2. Money “becomes due” on the earliest of four days: the day you send an invoice, the date printed on that invoice, the day you’d have sent it had you followed your normal billing practice, and the day a written contract requires payment.
3. Each draw is tested on its own day and taxed on its own amount, so a long contract doesn’t tax the whole price at the first draw.
4. Where the customer keeps back part of the price (a holdback) under provincial construction legislation or a written construction contract, tax on that part waits until it’s paid or becomes payable.

We’d recommend taking signing money as a genuine deposit rather than as the customer’s first payment toward the price, and putting the payment dates in a written contract. Subtract any holdback from the price before working out the tax. And move the GST/HST share of each payment into a separate bank account the day it clears.

When the tax becomes payable

Section 168(1) of the Excise Tax Act, the federal law that creates GST/HST, fixes the day, which can come before the cash arrives.² “Becomes due” isn’t ordinary English either, and all of the timing lives inside it. Money becomes due on the earliest of four days: the day you send an invoice, the date printed on that invoice, the day you would have sent it had you followed your normal billing practice, and the day a written contract requires payment.⁴

Dating an invoice March 28 and emailing it April 3 therefore pulls the tax back to March 28. Putting a future date on an invoice won’t push the tax past the day you actually sent it. Sitting on the paperwork defers nothing either, because the day you’d normally have invoiced catches anything held back through what the Act calls undue delay. In our view waiting on a subtrade’s final numbers is a reason for that, and wanting the tax in a later return isn’t. And if a signed contract sets payment dates, those dates make the money due on their own, even where you never send a document.

Deposits and down payments

Two kinds of money arrive at signing and the law treats them very differently. A deposit, in the sense the Excise Tax Act uses the word, is money the customer gives you as security that they’ll go through with the job. It isn’t payment for the work until you apply it against a bill, so nothing is due when it lands.⁵ Money credited against the price straight away, which is what plenty of contracts loosely call a deposit (i.e. a down payment), is payment, and tax on it is due the day it’s paid.

What the contract calls it doesn’t decide the answer, because the test is how the money behaves. Is it sitting untouched, recorded in your books as something you owe back, and deducted only when you apply it to a specific invoice? Then it’s a deposit. Did it reduce the customer’s balance the moment it arrived? Then it’s a payment, and the tax on it was due that day. Refundability isn’t the legal test, since the Act covers a deposit “whether refundable or not”. A written right to the money back is still your best evidence that one was intended.

Progress draws

Where money is paid or becomes due on more than one day, each part is tested on its own day and taxed only on that part.⁶ A $500,000 renovation billed in ten draws therefore doesn’t trigger tax on $500,000 at the first draw. On the usual pattern of fixed amounts on fixed dates, tax on each draw falls due on the earlier of two days: the day the customer actually pays, and the payment date the contract sets. So a slow payer leaves you out of pocket twice. You’re waiting for their money, and you’ve already sent the tax on it to the CRA.

Holdbacks and how the invoice is laid out

A holdback is a slice of each payment the customer keeps back for a period after the work. It protects the customer against defects, and against unpaid subcontractors claiming against the property. Most provinces have construction or builders’ lien legislation providing for one. It’s that statute rather than your contract that sets how much is held and when it’s released.⁷ We aren’t stating a percentage or a release date for any province, because we couldn’t verify them against the statutes themselves. Check yours, or ask us, before a number goes into a contract.

Holdbacks carry the one rule that delays tax on work you’ve already done, and it’s narrow. Tax on the retained part waits for the earlier of the day it’s paid and the day it becomes payable. The deferral applies only where the customer holds the money back under a federal or provincial statute, or under a written agreement to construct, renovate, alter or repair land and buildings.⁸ Either route is enough on its own, so an unwritten job still qualifies where the province’s legislation is what makes the customer hold the money. A job with neither gets nothing, and nor does a software project, because the rule reaches only land and buildings. Nor does a holdback your contract permits but the customer never actually takes.

With a qualifying holdback, the invoice layout decides what you hand over now. Say a draw is $100,000 before tax on an Ontario job, the contract requires the customer to hold back a tenth, and the customer does (a tenth just keeps the arithmetic simple, and isn’t necessarily your province’s figure). Charge 13% HST on the full $100,000, then subtract the holdback at the bottom of the invoice, after tax has been worked out on the whole amount. The CRA has published in two directions on that layout: one document treats the whole $13,000 as remittable now, and another says the holdback deferral applies anyway.⁹ Subtract the holdback from the price first and charge 13% on the $90,000 actually payable, and you remit $11,700 now, with $1,300 waiting for the release. The customer pays $101,700 either way.

We’d recommend the second layout for most owner-managed contractors, because funding tax on money you won’t see for months is expensive. The cost falls on your customer, who normally claims back the GST/HST they pay suppliers on their own return. This layout delays part of that claim for as long as the holdback runs, and a large customer may push back on it. Where your bookkeeping can’t track a held-back tax figure across a two-year job, use the first layout and accept paying the tax before you’re paid.

Substantial completion

One rule overrides everything above, including your own payment schedule, and it catches jobs that run past their planned dates. Take a written agreement to construct, renovate, alter or repair land and buildings, of any expected length. Anything not paid and not yet due then becomes taxable on the last day of the calendar month after the month the work is substantially completed. The CRA reads “substantially completed” as 90% or more of the work being done.¹⁰ Its own worked example is a deck repair finished on October 20 with the tax due by November 30, so this isn’t a rule that only reaches large projects. Holdbacks sit outside the override, which is why their deferral survives it.

How often this changes

Check your billing setup again whenever any of the following happens:

• Your province changes its construction legislation, because tax on a holdback keys off the day the holdback is paid or becomes payable.
• You take work in a province you don’t usually work in, because for work on a building the rate follows the building rather than your office (e.g. an Alberta company renovating in Ontario charges Ontario’s rate).
• You move between working on somebody else’s land and selling finished property you own, because tax on a sale waits for the day ownership or possession transfers.¹¹

Closing thoughts

In our view the risk here isn’t misreading the rules. It’s that a GST/HST balance feels like working capital until the day it becomes a debt. The tax you collect was never your money: the Act deems you to hold it in trust for the government. Outside insolvency, that trust ranks ahead of your bank’s security over the same assets.¹² Directors carry personal exposure for what the corporation collects and fails to remit, subject to preconditions the CRA has to meet first and to a due-diligence defence.¹³ Nothing actually makes you open a second bank account for the money, and opening one anyway is still the highest-return habit available here.

How we handle it

We set the billing pattern before the first draw goes out, in the contract rather than in your invoice template. Holdbacks are laid out so you’re not remitting tax on money you haven’t been paid. Bookkeeping is kept on what became payable rather than on what cleared the bank, and we calendar the substantial-completion date on every construction job. GST/HST returns are included from our Year-Round Tax Partner package up, on our pricing page.