Holdback
A holdback is the portion of a construction contract price that the payer legally retains until the lien period expires, and it is not recognised as revenue until it becomes receivable.
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Key facts
| Category | Corporate tax |
|---|---|
| Also known as | construction holdback, retainage |
| Typical amount | A percentage of each progress billing, set by provincial lien legislation |
| Released | After the statutory period following substantial completion |
| Income recognition | Excluded until the contractor has a legal right to receive it |
| Paying side | Not deductible until it becomes payable |
| Authority | Canada Revenue Agency; Revenu Québec |
What it means in practice
Construction contracts commonly withhold a percentage of each progress billing as security against liens and deficiencies, released only after the statutory period following substantial completion. For tax purposes the holdback is excluded from income until the contractor has a legal right to receive it. Recognising it too early accelerates tax on money not yet collected — a frequent and cash-damaging error on contractor returns. The mirror applies on the paying side: a holdback you retain is not deductible until it becomes payable.
Where contractor returns go wrong
Accounting systems commonly record the full progress billing as revenue, holdback included, because that is what the invoice says. For tax the holdback portion comes out until the right to receive it arises — so the bookkeeping figure and the tax figure legitimately differ, and the reconciliation has to be maintained. Recognising it early accelerates tax onto money not yet collected. On a contractor with several projects in progress, the difference between the two treatments across a year can be material enough to create a real cash problem in a profitable year. The reverse error appears on the paying side, where a general contractor deducts holdbacks retained from subcontractors before they become payable. Both sides need the same discipline, in opposite directions.
FAQ
When does the holdback become taxable income?
Does GST/QST apply to the holdback portion?
Need this applied to your situation?
A definition only gets you so far. Talk to a Montréal CPA about what this means for your return — in English or French.