Contractors and trades
Construction holdbacks in Ontario: HST timing, WIP, and the 2026 annual release rules
Last reviewed: August 2026
Ontario's mandatory annual holdback release started January 1, 2026. When HST on a construction holdback is payable, and how holdbacks sit against WIP.
A construction holdback runs on three clocks. The Construction Act says when it has to be released, subsection 168(7) of the Excise Tax Act says when the HST becomes payable, and the Income Tax Act says when it becomes income. Ontario reset the first of those on January 1, 2026, so books built around the old release model are tracking dates that no longer apply.
Get the HST clock wrong in one direction and you remit tax on money you have not been paid. Get it wrong in the other and the amount never reaches a return, which is the version that comes back with interest.
The three clocks
| Clock | Set by | Timing rule |
|---|---|---|
| Release of the holdback | Construction Act, as amended January 1, 2026 | Notice of annual release within 14 days of each contract anniversary, payment 60 to 74 days after publication |
| HST on the holdback | Excise Tax Act, subsection 168(7) | Payable on the earlier of the day the holdback is paid out and the day it is required to be paid out |
| Income tax on the holdback | Income Tax Act, and CRA's position on contractors | An amount you are not yet entitled to receive stays out of income until entitlement arises |
The holdback itself has not changed. Ontario's Construction Act defines the basic holdback as 10 per cent of the value of the services or materials supplied, and it runs up and down the chain. The owner holds back from the general contractor, the general contractor holds back from you, and you hold back from your subcontractors. Whether a lien has been preserved, and whether a particular holdback is safe to release, is a question for a construction lawyer. What follows is the tax and the bookkeeping, which is where our work with contractors usually starts.
What changed on January 1, 2026
Release of holdback in Ontario is now scheduled rather than negotiated. The mechanics:
- The owner must publish a notice of annual release of holdback within 14 days after each anniversary of the date the contract was entered into
- Payment of the released holdback is due 60 to 74 days after that publication, where no lien has been preserved or perfected
- Once a contractor receives it, the accrued holdback has to go down to the next tier within 14 days
- The owner's ability to give a notice of non-payment of holdback has been removed
Two related changes move cash as well. A proper invoice is deemed compliant unless the owner gives written notice of a deficiency within seven days of receiving it, and adjudication can now be started up to 90 days after a contract is complete, over contract interpretation as well as payment.
The transition is the part to forecast. Contracts entered into on or after January 1, 2026 release annually from the first anniversary. Contracts already running begin annual release on the second anniversary following January 1, 2026, with the accumulated holdback due at that point. On long jobs there is a date when a large balance arrives and the obligation to pass money down the chain lands in the same month.
When the HST on a holdback becomes payable
GST/HST is normally payable on the earlier of the day the consideration is paid and the day it becomes due, which for most contractors is the day the progress invoice goes out. Holdbacks are carved out of that. CRA's time of liability memorandum says that where a recipient holds back part of the consideration pending full and satisfactory performance under provincial law or a written construction agreement, "no tax is payable on the amount required to be held back until the day that the holdback is paid out or the day the holdback is required to be paid out, whichever is earlier".
Read the second half of that carefully. Once the holdback is required to be paid out, the HST is payable whether or not the customer has sent the money. A holdback due for eight months while you argue about deficiencies is still HST you owe.
On a $100,000 progress draw with 10 per cent held back, you are paid $90,000 plus 13 per cent HST on that amount. The $1,300 of HST on the $10,000 holdback is not yet yours to remit. Two ways contractors lose on this:
Remitting too early. The invoice shows HST on the gross figure, the bookkeeper posts all of it to HST payable, and the business funds the CRA early on every open job.
Missing it at expiry. The holdback period runs out, nobody books the HST, and the amount never reaches a return.
One limit on the relief matters: if you actually collect the tax from the customer before it becomes payable, it goes into the return for the period in which you collected it. The rest of your progress billing follows the ordinary timing rules, which we cover in HST on progress billings and substantial completion.
A $180,000 contract across a year end
Take a $180,000 contract plus HST with a 10 per cent holdback, a December 31 year end, and a holdback that is not released until the following March.
| Amount | |
|---|---|
| Contract value | $180,000 |
| Holdback at 10% | $18,000 |
| Billed and collectible during the job | $162,000 |
| HST on the full contract at 13% | $23,400 |
| HST payable with the progress billings | $21,060 |
| HST on the holdback, deferred | $2,340 |
For income tax, CRA's interpretation bulletin on the income of contractors, IT-92R2, puts the inclusion date at the later of the day the final certificate is issued and the day the lien period expires. Two qualifications sit beside it. A contractor may include holdbacks in income earlier, provided the treatment is applied consistently year to year, and any amount actually received goes into income regardless. The bulletin is archived and predates the 2026 release regime, so we confirm the position against the contract and the certification record.
| Recognised on billing | Recognised when receivable | |
|---|---|---|
| Revenue in year one | $180,000 | $162,000 |
| Corporate tax on the $18,000 at 11.2% | $2,016, in year one | $2,016, in year two |
| HST remitted before release | $2,340 | nil |
| Cash out ahead of the money | $4,356 | nil |
That rate is 9 per cent federal plus the Ontario lower rate of 2.2 per cent, which applies from July 1, 2026 and is prorated for a year straddling that date. $4,356 leaves the business months before the $18,000 arrives, on one contract. A contractor holding $240,000 of holdbacks across a book of work is looking at roughly $26,900 of corporate tax and $31,200 of HST out the door early.
Holdbacks and WIP are two different balances
They get confused because both describe work you have done and have not been paid for. Work in progress is work performed and not yet billed. A holdback is work performed, billed, and withheld under the contract. One sits in unbilled revenue, the other in a receivable you cannot collect yet.
For financial reporting, revenue follows the work performed, which is what the WIP account captures. For tax, holdbacks follow entitlement. The same dollar can be accounting revenue in one year and taxable income in the next, and the gap is a reconciling item on the T2. The cost coding and labour burden that make a WIP schedule reliable are in our guide to job costing and WIP for contractors.
The ledger needs a WIP schedule by job, a holdback receivable by job carrying the release date and the HST inside it, and a reconciliation of both into the tax provision at year end.
The holdbacks you are holding
The 10 per cent you retain from your subcontractors behaves the same way in reverse. Your subcontractor should not be charging HST on the held-back portion yet, so you have no input tax credit to claim on it yet. If a sub bills the full HST on day one, sort it out then rather than three years later during a review.
Keep holdback payable out of accounts payable for the same reason you keep holdback receivable out of AR. If a tenth of every job sits in the aging, the aging stops working as a collection tool, and the cash flow forecast treats $80,000 of subcontractor holdbacks as though it were due in 30 days. Before you release one, check the sub's WSIB clearance is still valid, because a lapsed one can leave their premiums with you.
Five questions the file should answer in a minute
- What is the total holdback receivable right now, by project?
- When is each one scheduled for release under the annual release rules?
- How much HST sits inside those holdbacks, unremitted and correctly so?
- What is unbilled WIP by job, and the gross margin on each?
- Which jobs are cash negative this month while showing a profit on paper?
If those take two days and a call to a bookkeeper, the system is costing money. Set up properly, the holdback released in a period is a number you pull off a report. Our bookkeeping and HST page covers the chart of accounts behind it.
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General information only, current at August 2026. Tax rules change and GST/HST status is fact-specific. Confirm your own position before relying on anything here.