Construction holdbacks at year-end: when they become taxable, and when their GST/HST is due

Summary

If you build on somebody else’s land, your province’s construction lien law requires the customer paying you to keep back part of every payment. That law is what lets an unpaid trade register a lien, which is a claim filed against the property itself that blocks a sale or refinancing until the debt is settled. The slice kept back is a holdback, and your customer sits on it for a set period after the work finishes. A holdback is a fund your subcontractors and their suppliers can claim against if they go unpaid. Holding that fund caps what your customer can be forced to pay out, and a claimant still has to register a lien to reach it.

A holdback raises three separate tax questions, and your year-end is where you answer them. Your year-end is the date your company’s financial year stops, which you pick rather than being given one, and which sets every filing deadline after it.

1. Income tax on holdbacks owed to you. A progress billing is an invoice issued partway through a job for the work done so far. That billing, less the holdback, becomes taxable income when your customer approves it, or when you send it if your contract requires no approval. The holdback itself waits until the year the second of two things happens: the completion certificate is signed, and your province’s waiting period runs out.
2. Holdbacks you keep back from subcontractors. While a certificate your subcontract requires is still outstanding, you can’t subtract the held-back amount from your profit. So you get no tax relief on it until that certificate arrives. Otherwise it comes off when it’s paid or payable under your province’s statute or under the subcontract.
3. GST/HST. The sales tax on a holdback becomes yours to hand over on whichever comes first: the day your customer releases it, or the day the waiting period ends. You owe it on that day even if the money hasn’t reached you.

We recommend claiming the deferral on the holdbacks you’re owed, and tracking the holdbacks you owe subcontractors in an account of their own. We would also keep the sales tax on the holdback portion off the progress invoice. What flips that is your paperwork, because a CRA review three or four years later needs the signed contract and the certificate for every job. Without those, report everything you bill as you bill it and accept the tax before the cash. Size the reserve on the profit you’ll report rather than on the money sitting in the account, which our set-aside calculator does for your province.

What a holdback is, and what your province does with it

Each province has its own lien statute, and the two this page covers set the holdback on different bases. British Columbia’s Builders Lien Act requires 10% of the greater of two amounts. Those two are the value of the work and materials actually provided, and any payment made on account of the contract price.¹ Alberta’s Prompt Payment and Construction Lien Act requires 10% of the value of the work actually done and the materials actually furnished.² Where you bill ahead of the work, those two bases give you different numbers.

How long your customer then sits on the money differs too, as does what starts the clock. British Columbia runs 55 days from the issue of a certificate of completion, or from completion or abandonment of the head contract where none is issued.¹ Alberta runs 60 days from a certificate of substantial performance, or from completion of the contract where none is issued.² Both documents do the same job, so this page calls either one the completion certificate, and the waiting period after it the holdback period.

Only British Columbia and Alberta figures appear here, so ask us for your own province’s before applying any timing below (e.g. Ontario, which rewrote its Construction Act with effect in 2026 and whose figures this page doesn’t carry).

Income tax on the holdbacks you’re owed

Canadian income tax law taxes a business on amounts receivable, meaning money you have a clear legal right to be paid. You are taxed on it even where payment isn’t due until a later year. A construction contract usually mixes services with materials, and for the services in it paragraph 12(1)(b) of the Income Tax Act fixes the day as the earlier of two.³ Those days are the day you sent the invoice, and the day you’d have sent it had you not dragged your feet. As such, sitting on an invoice until after your year-end defers nothing.

A holdback is different, because your right to the money isn’t clear yet. Until the completion certificate is signed and the holdback period runs out, others on the job can still claim against the fund, so your right stays contingent rather than absolute. The Canada Revenue Agency (CRA), the federal tax authority, has published how it treats all of this.⁴ A progress billing, less the holdback, is income when your customer or the architect or engineer acting for them approves the bill. Where your own contract makes an approval no part of getting paid at all (e.g. an owner who has agreed to settle every invoice on 90-day terms), that same billing goes into income when you bill it. Either way the holdback itself waits, and goes in during the year the second of two things happens: the completion certificate is signed, or the holdback period ends.

That guidance is an interpretation bulletin from December 1983 which the CRA has archived and no longer updates. So the treatment rests on how the CRA has said it will apply the law, rather than on a rule written into the law itself. The CRA still follows it, but it could change its published position without Parliament changing anything, and you would have less to argue with if it did.

The holdbacks you keep back from subcontractors

The CRA’s contractor guidance covers the trades you hire too, and it sets tests that run independently of the ones above.⁵ You can deduct materials delivered to the job site, whether or not they have been put in place. You can also deduct the approved amount of a subcontractor’s progress billing, after subtracting the holdback you retained. The holdback you retained comes off when it is paid or payable under your province’s statute or, where no statute applies, under the terms of the subcontract (e.g. a subcontract that makes release conditional on the engineer signing off on the main job). You can’t deduct it while a certificate your subcontract requires is still outstanding, and you can’t deduct a subcontractor billing that needs approval and hasn’t had it.

Nothing in the rules makes the two sides move together, but both figures come off the same job records. A file that defers one while ignoring the other usually isn’t tracking certificates at all.

GST/HST on holdbacks

GST/HST is the federal sales tax you add to what you charge your customers, at 5% of the invoice amount.⁶ In the harmonized provinces a provincial share is bundled into that rate, so you charge a single higher percentage that depends on the province.

Sales tax has its own holdback rule, keyed to different events than the income tax one, so one date won’t answer both questions. Tax on the holdback becomes collectible on the earlier of the day your customer pays the holdback and the day the holdback period expires.⁷ You owe it to the government on that day whether or not the money has reached you. Per the CRA, that stays true even if you already invoiced and charged the tax on the holdback amount.⁸

The later timing needs one of two bases, and the first is a holdback required by an Act of Parliament or of a provincial legislature. The second is a written agreement for constructing, renovating, altering or repairing land or a building.⁷ In British Columbia and Alberta the statutory holdback attaches to any contract a lien could arise under, written or not. So a handshake job in either province still qualifies on the first basis. What falls outside is a purely contractual retention on a job the lien statute doesn’t reach, with nothing in writing.

If your customer actually pays you the tax on the holdback, you are holding money collected as tax, in trust for the Crown.⁹ You have to remit it for that period whatever the timing rule says. We would therefore keep that tax off the progress invoice, which takes two lines rather than one. Charge sales tax on the amount you are being paid now, then show the holdback separately with no tax on it yet, noted as billable on release. You keep the cash on that tax until the holdback period ends, often two months or more. What it costs you is an unusual-looking invoice that some customers’ payables departments will query.

How often this changes

Re-run this at every year-end, and sooner if you take work in a new province. Re-run it too if your province amends its lien or prompt payment legislation, or if the CRA replaces its archived contractor bulletin. A fixed-price job that looks like running longer than two years is worth a call before it gets there, because different reporting methods open up at that length. Holdback percentages and release periods move over years rather than months, so the provincial check is the one worth diarising.

Closing thoughts

Most of what decides whether a holdback deferral survives happens long before the year-end, in how jobs get recorded while they are running. Where you can produce, for each job, the signed contract, the completion certificate and a list of every holdback, the tax treatment follows almost automatically. That list needs the amount, the job and the release date, and it has to total to the holdback figure in your accounts. Where holdbacks are instead lumped into one figure covering everything customers owe you, you won’t be able to prove the deferral years later. The cheapest fix is to record them in an account of their own from the start.

How we handle it

We track holdbacks receivable and holdbacks payable as separate balances by job, and tie each one to the date that releases it. We set up progress invoicing so the GST/HST on the holdback portion is billed when it becomes payable rather than up front. At year-end we prepare the T2, which is your corporation’s income tax return. We also file the T5018, the annual report of what you paid subcontractors, on whichever reporting period you have elected.