Construction Holdbacks in Ontario: HST Timing, WIP, and the 2026 Annual Release Rules

Last reviewed: July 2026

A construction holdback sits in three different systems on three different clocks: the Construction Act clock that says when it must be released, the HST clock that says when the tax on it becomes payable, and the income tax clock that says when it becomes income. Ontario changed the first of those clocks effective January 1, 2026. Contractors whose bookkeeping still assumes the old model are now tracking the wrong dates.

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 at all.

The three clocks at a glance

Clock	Governed by	Key timing rule
Release of holdback	Ontario Construction Act, as amended January 1, 2026	Owner publishes a notice of annual release within 14 days of each contract anniversary. Payment due 60 to 74 days after publication
HST on the holdback	Excise Tax Act, subsection 168(7)	Tax becomes payable on the earlier of the day the holdback is paid out and the day the holdback period expires
Income tax on the holdback	Income Tax Act, CRA administrative position	Holdback amounts the contractor is not yet legally entitled to receive are generally excluded from income until entitlement arises

What changed for Ontario holdbacks on January 1, 2026?

Ontario moved to a mandatory annual release of holdback. Under the amended Construction Act, the release is now scheduled rather than negotiated, and the owner's ability to refuse it has been narrowed considerably.

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, stating the amount and the payment date

• Payment of the released holdback is then due between 60 and 74 days after that publication, provided no liens have been preserved or perfected in the meantime

• Once a contractor receives it, the contractor has 14 days to release the accrued holdback to the tier below

• The former ability to issue a notice of non-payment of holdback has been eliminated

Two further changes matter to cash flow. A "proper invoice" is now deemed compliant unless the owner delivers written notice of a deficiency within seven days of receiving it, which tightens the payment clock in the contractor's favour. And adjudication can now be started up to 90 days after a project is complete, and can address contract interpretation disputes rather than narrow payment questions alone.

The transition date to put in your forecast

Transition is where this becomes a real number rather than a legal update.

• Contracts entered into on or after January 1, 2026: annual release runs from the first anniversary of the contract

• Contracts already in place before January 1, 2026: annual release begins on the second anniversary following January 1, 2026, and all accumulated holdback becomes due at that point

Read the second bullet twice if you have long-running projects. There is a date coming when a large accumulated holdback becomes payable in one movement. Both the receipt of it and the obligation to pass it down the chain belong in your cash flow forecast now, not in the month it lands.

This is legal territory rather than accounting territory, and contract-specific questions belong with a construction lawyer. The point for the books is that holdback release is now scheduled and predictable, which means it can finally be forecast properly.

When does HST become payable on a holdback?

Under subsection 168(7) of the Excise Tax Act, GST/HST on a statutory or contractual holdback becomes payable on the earlier of the day the holdback is paid out and the day the holdback period expires under the written agreement or the applicable legislation.

In practice, on a $100,000 progress draw in Ontario with 10% held back: the contractor is paid $90,000 plus 13% HST on that amount. The HST on the $10,000 holdback is not yet payable, so it is not yet the contractor's to remit.

There are two ways contractors lose money on this rule.

Remitting too early. The invoice shows 13% HST on the gross $100,000, the bookkeeper posts the full HST amount to the liability account, and the contractor remits tax on money sitting in someone else's bank account. Across several concurrent projects, that is real working capital handed to the CRA months ahead of schedule, every quarter.

Forgetting it entirely. The holdback period expires, nobody books the HST, and the amount never appears on a return. That one returns later with interest attached.

One important limit on the relief: if the tax is actually collected from the customer before it becomes payable, it must be remitted with the return for the reporting period in which it was collected. The deferral only applies while the money is genuinely still held back.

The bookkeeping fix is a dedicated holdback receivable account, with the HST inside each holdback tracked separately and released when the holdback period ends. Unglamorous, and it is the difference between an accurate HST return and an estimate.

How do holdbacks and WIP affect the corporate tax return?

For financial reporting, revenue on a construction contract is recognized as the work is performed, which is what the work in progress account exists to capture. WIP is work performed but not yet billed, and it belongs on the balance sheet.

For income tax, holdbacks follow a different path. The CRA's long-standing position is that a holdback amount a contractor is not yet legally entitled to receive is not included in income until that entitlement arises, typically on certification. The same dollar can therefore be revenue for accounting purposes and not yet income for tax purposes in the same fiscal year.

Confirm the treatment against your actual contract wording and certification process before relying on it. The general principle is stable, the application depends on the paperwork.

Practically, a construction corporation's books need three things running in parallel:

1. A WIP schedule by job, so earned and unbilled work is visible

2. A holdback receivable by job, so billed, unpaid amounts are visible along with which release clock each is on

3. A reconciliation of both into the tax provision, so the year-end figure is defensible rather than derived

Most of the messy construction files that reach our desk are not messy because of carelessness. They are messy because everything was recorded when the cash moved, and cash timing is the one basis that cannot tell you whether a job made money.

Five questions a well-run contractor file answers in a minute

A construction corporation with holdback and WIP tracking in order can answer all of these without a phone call:

1. What is the total holdback receivable right now, by project?

2. When is each one scheduled for release under the annual release rules?

3. How much HST sits inside those holdbacks, unremitted and correctly so?

4. What is unbilled WIP by job, and what is the gross margin on each?

5. Which jobs are cash-negative this month despite being profitable on paper?

If those answers take two days and a call to a bookkeeper, the system is costing money. Contractors rarely fail because of bad jobs. They fail because good jobs were funded out of the wrong pocket.

Frequently asked questions

When does HST become payable on a construction holdback?

Under subsection 168(7) of the Excise Tax Act, HST on a statutory or contractual holdback becomes payable on the earlier of the day the holdback is paid out and the day the holdback period expires under the agreement or the applicable legislation.

Do I charge HST on the holdback amount?

Yes. HST applies to the full contract value including the holdback portion. The question is timing, not whether the tax applies.

What changed about Ontario holdbacks in 2026?

Effective January 1, 2026, Ontario moved to a mandatory annual release of holdback. The owner publishes a notice within 14 days of each contract anniversary, payment is due 60 to 74 days later if no liens have been preserved or perfected, and notices of non-payment of holdback were eliminated.

When does the new annual release apply to contracts signed before 2026?

For contracts already in place before January 1, 2026, the annual release begins on the second anniversary following that date, at which point all accumulated holdback becomes due.

What is the statutory holdback percentage in Ontario?

The Construction Act sets the statutory holdback as a percentage of the contract price. Confirm the current percentage and how it applies to your contract, since contract terms can also create additional contractual holdbacks on top of the statutory amount.

Is a holdback revenue in the year it is billed?

For accounting purposes, revenue follows the work performed. For income tax, holdback amounts you are not yet legally entitled to receive are generally excluded until entitlement arises. The two figures can differ within the same year and the difference has to be tracked.

Should a construction corporation use cash or accrual accounting?

Corporations report on an accrual basis. If the bookkeeping inside an accrual entity is effectively cash-based, the interim numbers cannot tell you anything reliable about job profitability.

My bookkeeper does not track WIP or holdbacks separately. Is that a problem?

It is the most common gap in construction files and the one that makes year-end expensive. It is usually fixable within a single cleanup engagement.

Key takeaways

• Ontario's mandatory annual holdback release took effect January 1, 2026. Notice within 14 days of each contract anniversary, payment due 60 to 74 days after

• Pre-2026 contracts phase in on the second anniversary after January 1, 2026, with all accumulated holdback due then. Forecast that payment now

• HST on a holdback is payable on the earlier of payment and expiry of the holdback period. Remitting on the gross invoice hands the CRA your working capital early

• If the HST is collected before it is payable, it must still be remitted for the period of collection

• Accounting revenue, taxable income and HST timing on the same holdback dollar can fall in different periods. All three need tracking

Talk to an accountant who works with contractors

SKG Financial handles corporate tax, bookkeeping, HST and payroll for construction and trades corporations across Mississauga, Oakville, Vaughan, Markham, King City, Caledon and Burlington. Holdbacks, WIP, T5018 slips for your subcontractors and HST timing are routine work here. Holdback accounting is the single most common thing we fix when a construction corporation moves to us. More on how we handle accounting for contractors.

Fixed fees quoted up front. Year-round support, not one rushed conversation at year end.

Book a free 20-minute call

Reference: CRA GST/HST Memorandum 19-1, Real Property and the GST/HST on holdbacks under subsection 168(7). Construction Act amendments effective January 1, 2026. This page is general information, not advice on a specific contract. Contract and lien questions belong with a construction lawyer.