Recent amendments to the Construction Act propose changes to the holdbacks process in Ontario. While the amendments have not yet been implemented, the changes included within Bill 216 received Royal Assent on November 6, 2024.
The changes to the holdbacks process were introduced to provide for greater cash flow from project owners to contractors as well as subcontractors & trades over the period of a long-term construction project lasting over one year. The provisions include a new annual release of holdbacks on the anniversary date which is based on the date of the signed contract.
Subject to any liens, owners will now need to payout holdbacks annually to contractors each anniversary date of a long-term project. Contractors will then have two weeks from receipt of the annual holdback release to payout holdbacks to subcontractors & trades.
While transitionary measures will be incorporated, the changes when implemented will apply to all construction projects in progress or to be started in Ontario regardless of when the original contracts were signed. For any contracts signed prior to the implementation of the new rules, the release of annual holdbacks will be deferred to the second anniversary date to provide more time for owners to obtain the necessary cashflow.
Given the legal nature of the amendments to the Construction Act, we suggest you consult your lawyer to determine the specific implications to your construction business.
In terms of cashflow, owners and financiers of large construction projects will have to reconsider the timing and process for financing as more cash will be required at earlier stages of large projects compared to the current rules.
For contractors as well as subcontractors & trades, the changes mean more timely receipt of cash which is a welcomed change. However, it is important to note the corporate tax implications in that holdbacks receivable are included in taxable income in the year received. Similarly, holdbacks payable are included as a deduction to taxable income in the year paid. Corporations should plan for these corporate tax implications in conjunction with the changes to the timing of holdback cashflows.
Should you have any questions regarding the tax treatment of holdbacks or if you would like guidance on the related tax position of your corporation, we would be happy to assist.
Resources:
https://www.regulatoryregistry.gov.on.ca/proposal/49093
https://www.blg.com/en/insights/2024/12/are-you-prepared-for-the-new-changes-to-ontarios-construction-act
https://www.dentons.com/en/insights/articles/2024/november/25/changes-to-ontarios-construction-act
