Holdbacks are where construction cash flow and sales tax collide. A customer retains part of each progress payment — commonly around 10% — until the project is complete and accepted. Get the GST/QST timing wrong and you either remit tax before you’ve been paid it, or you under-remit and owe interest. Here’s the rule, and how to book it.
The rule: tax on a statutory holdback is deferred
Under subsection 168(7) of the Excise Tax Act, when a statutory holdback is retained under a contract for the construction, renovation or repair of real property (there’s a parallel for vessels), the GST/HST on the holdback is not payable until the earlier of the day the payer is required to release the holdback and the day it is released. In practice, the tax on the retained 10% becomes payable when the holdback period under the applicable lien legislation ends or the holdback is actually paid. QST follows the same logic. So you don’t remit the government’s share of the holdback out of your own pocket while the money is still being held.
Two cautions. First, this is a holdback required by law (lien/« hypothèque légale » legislation) — a purely contractual holdback the parties invent may not get the same deferral, so confirm which you have. Second, if you charge and collect the GST/QST on the full invoice up front, the deferral in 168(7) doesn’t apply — you’ve made the tax payable, and you have to remit it. The deferral is a tool; invoicing sloppily throws it away.
How to book holdbacks
The point of good bookkeeping here is to keep the retained money, and the tax on it, visible and separate:
- Holdbacks receivable — the amounts your customers are retaining from you — tracked separately from ordinary accounts receivable, by contract, so you know exactly what’s outstanding and when the holdback period ends.
- Holdbacks payable — the amounts you are retaining from your subcontractors — tracked separately from ordinary payables, so you release them correctly (and remember these feed your T5018 when you pay them).
- The GST/QST on the holdback — recognized when the tax becomes payable (release or end of the holdback period), not when the progress invoice is issued.
Done right, your GST/QST returns reflect tax you’ve actually collected or that’s actually due — not tax on money sitting in someone else’s account.
Why it matters to your cash flow
On a big job, the holdback can be more cash than your margin. Remitting GST/QST on it months before you collect it is an interest-free loan to the government that you fund yourself. Tracking it properly keeps that money in your business until it’s genuinely due. It also keeps your revenue honest — a holdback booked as collected revenue overstates both your income and your receivables. This is one of the highest-value things a construction bookkeeper does; see how we set up contractor books, or read the full construction bookkeeping guide. General information, not advice for your specific contract.
Frequently asked questions
When do I remit GST/QST on a construction holdback?
For a statutory holdback on construction, renovation or repair of real property, the tax generally isn’t payable until the holdback is released or the holdback period ends (Excise Tax Act 168(7)), and QST follows. If you charged the tax on the full invoice up front, though, it’s already payable.
Should a holdback be booked as revenue right away?
Track it as holdbacks receivable, separate from ordinary receivables, by contract. Booking it as collected revenue overstates your income and receivables until the customer actually releases it.
Does the deferral apply to any holdback?
The 168(7) deferral is aimed at statutory holdbacks required under lien legislation for real-property construction, renovation or repair. A purely contractual holdback may not qualify — confirm which you have.
Sources
- Excise Tax Act – s. 168 (time GST/HST payable; holdbacks, 168(7))
- CRA – GST/HST Memoranda 19.1, Real Property and the GST/HST
- Revenu Québec – QST and GST/HST (consumption taxes)