Recent amendments to the Construction Act (Ontario) have changed the holdbacks process in Ontario. The amendments, introduced through Bill 216, received Royal Assent on November 6, 2024, and are now in effect as of January 1, 2026.
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 updated rules include a new annual release of holdbacks, generally based on the anniversary date of the signed contract.
Subject to any liens, owners are now required to release holdbacks annually to contractors on qualifying long-term projects. Contractors then have two weeks from receipt of the annual holdback release to pay holdbacks to subcontractors and trades.
Importantly, while annual holdback release is now required, the previously proposed annual lien expiry requirement was removed. Existing lien expiry rules under the Construction Act largely remain unchanged.
Transition measures have also been introduced. For contracts entered into after January 1, 2026, the annual release of holdback rules apply immediately. For contracts signed prior to that date, transition provisions may delay when the new annual release requirements begin.
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.
Need Guidance on the Tax Implications of Ontario’s New Holdback Rules?
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. Our Tax Services team at Welch LLP can help you understand the impact and plan accordingly.
Resources:
