Construction holdbacks: when they become income and when the GST/HST is due

Holdbacks are the part of construction accounting that most general bookkeeping never handles properly. A percentage of every progress billing is retained by the owner until the job is finished and the lien period runs out, which means the money is earned but not payable, invoiced but not collectible, and taxable — but not yet. Get the timing wrong and you either report income a year early or remit GST/HST on cash you have not received. This guide sets out how holdbacks sit on the corporate return and on the GST/HST return.

What a holdback actually is

Construction contracts normally let the contractor render progress billings as work proceeds, usually payable once the purchaser or the purchaser’s architect or engineer agrees the billed work is satisfactorily complete. Layered on top, the contract — and in most provinces the lien legislation — requires the purchaser to withhold a percentage of each progress payment until the whole job is done and the lien period has run. That withheld amount is the holdback.

The percentage and the release timing are set provincially, not federally, so a contractor working across provincial lines is working under more than one set of rules. Check the lien statute that governs each contract rather than assuming the terms you know from home apply everywhere. What is consistent across the country is how the CRA treats the money once the rules of the contract are known, and that is the part this guide covers.

When a holdback receivable becomes income

The important idea is that invoicing is not the trigger. The CRA’s position on contractors is that the amount of a progress billing, less the holdback, becomes receivable and goes into income when the purchaser or the purchaser’s architect or engineer approves the billing for payment. The holdbacks are treated separately: the aggregate of the holdbacks becomes receivable, and must be included in income, on the later of the day the certificate covering them is issued and the day the lien period expires.

Where there is no formal contract, or the contract does not require an architect or engineer to approve progress billings, the amount net of holdbacks is treated as receivable on the date the billing is made. And any amount actually received — including an amount that should have been held back but was not — goes into income in the year it is received, regardless of what the paperwork says.

There is an alternative. A contractor may choose to report all amounts billed to the purchaser, including holdbacks and amounts not yet approved for payment, and the CRA will accept that provided the contractor does it consistently from year to year. That consistency requirement is the whole point: the method has to be a policy, not a year-by-year choice made to suit the tax result.

The other side: holdbacks you withhold from subcontractors

The mirror image matters just as much, because it is where deductions get claimed too early. In computing costs for the year, a contractor includes the gross amount of an approved subcontractor progress billing less the holdback, plus the total of the holdbacks withheld from subcontractors that are paid or payable in the year under the relevant provincial statute or the subcontract.

What you cannot deduct is a holdback withheld from a subcontractor where your liability for it has not yet been established by the certificate the contract requires. Nor can you deduct the gross amount of a subcontractor billing that requires approval before payment and has not received it. If you are also reporting those subcontractor payments on the annual information return, the amounts and the timing need to line up — see the guide to T5018 subcontractor reporting for how that return works.

When the GST/HST on a holdback becomes payable

This is the rule most worth committing to memory, because getting it wrong costs real cash flow. Where, in accordance with federal or provincial law or a written agreement for the construction, renovation, alteration or repair of real property, a purchaser retains part of a payment as a holdback until the work is satisfactorily done, the GST/HST on the holdback amount becomes payable on the earlier of:

• the day the purchaser pays you the holdback, and
• the day the holdback period expires.

The CRA is explicit that the tax is collectible on the earlier of those dates even if you already issued an invoice and charged GST/HST on the holdback amount. In other words, showing the tax on the progress invoice does not accelerate when you have to remit it. Contractors who remit on the invoice date are financing the government out of working capital, sometimes for months.

The deferral is not automatic, though. If there is neither a holdback provision in federal or provincial law nor a written agreement for the construction, renovation, alteration or repair of the real property, the general timing rule applies instead. The general rule also applies where the purchaser simply pays the full amount and retains nothing, even if the agreement or the legislation would have permitted a holdback. Verbal arrangements and handshake deals therefore do not get the deferral.

Substantial completion is a different rule

A separate special rule catches written contracts to construct, renovate, alter or repair real property where the work is substantially complete but nobody has paid. If a contractor substantially completes the work specified in the contract and the purchaser has not paid and the payment has not become due, the GST/HST becomes payable by the end of the month after the month in which the work was substantially completed. The CRA generally treats work as substantially complete when 90% or more of it is finished.

Crucially, that rule does not apply to the holdback portion. The holdback keeps its own timing. A single job can therefore have two different GST/HST payability dates running at once — one for the substantially completed work and one for the retained holdback. Anyone filing on a summary from a bank feed will never see that distinction.

How to set the books up

Holdbacks belong in their own balance-sheet accounts. A holdback receivable account, separate from ordinary accounts receivable, and a holdback payable account, separate from ordinary accounts payable, with the contract, the certificate date and the lien expiry date recorded against each balance. That single structural change does most of the work: it tells you what is genuinely collectible, it supports the GST/HST timing if the CRA asks, and it stops holdbacks from quietly inflating the receivables figure a lender is looking at.

It also matters for input tax credits on the payable side, since the timing of what you can claim follows the same logic in reverse — the input tax credit rules are worth reading alongside this. Keep the supporting records: business records and supporting documents generally have to be kept for six years from the end of the last tax year they relate to.

Where contractors get caught

Three patterns come up repeatedly. The first is remitting GST/HST on the holdback in the period it was invoiced, which hands over tax on cash that may not arrive for a year. The second is deducting subcontractor holdbacks before liability for them has been established, which overstates costs in the current year and leaves nothing to deduct when the money actually goes out. The third is switching between the net-of-holdback method and the full-billings method depending on which produces the better result — exactly the inconsistency the CRA’s acceptance of the alternative method is conditioned on avoiding.

Getting it right

None of this is exotic; it is just specific, and general-purpose bookkeeping does not do it. If you run a construction company, construction accounting in BC handled by someone who works with holdbacks, progress billings and lien periods keeps the timing defensible in both directions. The same applies to incorporated contractors anywhere in Canada, and it is worth setting up before the first big job rather than untangling afterwards.

This article is general information for Canadian construction businesses and is current as of July 2026. Holdback percentages and release rules are set by provincial lien legislation and differ by province — confirm the rules that apply to your contracts and your year. It is not tax advice; please speak with a CPA before acting on anything here.