Contractors, who are GST/HST registrants, collect GST/HST on behalf of the applicable government entity. A contractor, carrying on business in Canada, must register for GST/HST and obtain a “business number” if its revenues exceed $30,000 in a single calendar quarter or in four consecutive calendar quarters.
From an accounting perspective, GST and HST collected on a contractor’s sales are not revenues of the contractor, but liabilities. Contractors who are GST/HST registrants are also eligible to claim, for refund, the GST/HST paid on all of their purchases in the form of input tax credits. The net payable (receivable) is remitted to (refunded by) CRA on a periodic basis (monthly, quarterly, annually).
General Timing Rules
Generally, GST/HST becomes payable on the date payment is made or the date payment becomes due, whichever is the earlier date. For GST/HST purposes, payment becomes due the earliest of the day: (i) the invoice is first issued; (ii) the contractor would have issued an invoice, except for an undue delay; and (iii) the recipient (client) is required to pay an amount to the contractor under a written agreement. However, it is important to remember that there are special timing rules that apply to certain types of construction payments.
Special Timing Rules For Certified Progress Payments
It is very common in the construction industry for the contract to provide for monthly or other periodic payments to the contractor based upon the value of work completed as certified by someone other than the contractor. When the scheduled work is completed, an application for payment is issued. Subsequently, the payment certifier, usually an engineer or architect, issues a certificate stating the value of work completed and the value of materials delivered to the site as of the date of the application. The client/owner is then required by the contract to pay the amount certified within a certain period of time after the engineer, or architect has issued the certificate.
In this situation, the application for payment is NOT considered to be an invoice for GST/HST purposes, since it is only a request that a certificate for payment be issued. Therefore, GST/HST does not become payable when the application is issued.
Where an invoice is not issued in respect of the certified amount, GST/HST becomes payable on the amount certified on the day the client pays the amount, or on the day the client has to pay the amount under the terms of the contract, whichever day is earlier.
Example: A contractor submits a monthly progress application on June 30th for work performed in the previous 30-day period. That amount is certified on July 8th and is due and payable under the contract on July 18th. No invoice is issued in respect of the certified amount. The GST is payable on the certified amount on July 18th, unless payment is made earlier.
The same timing situation would apply in the case of progress payments made under subcontract agreements where such agreements state that payments to the subcontractor are dependant upon the amount being certified.
Completed Construction Contracts
A special GST/HST provision applies to written construction contracts when the billing or invoice has been unduly delayed. Where the construction work has been substantially completed, (90% or more) and the owner has not paid for the work, or the payment has not become due, GST/HST becomes payable on the last day of the month following the month in which the work was substantially completed.
Example: The contractor substantially completes a project on October 20th but has not billed the owner and the owner has not paid the contractor. GST/HST is payable on November 30th.
Special Timing Rules For Holdbacks
Payments on construction contracts are normally subject to statutory holdbacks under applicable provincial lien legislation. GST/HST payable on the holdback amount does not become payable until the day the holdback amount is paid or the day on which the holdback period expires under the written agreement or applicable legislation, whichever is earlier.
Example: A contractor submits a monthly progress draw on June 30th for work performed in the previous 30-day period. That amount is subject to a statutory holdback of 10%. The statutory holdback period does not expire until September. The GST/HST on the holdback amount would not be payable until September unless payment of the holdback amount is made earlier.
Builder Lien Holdbacks
GST/HST is payable on a builder lien holdback only when the holdback is released. When a lien is filed, the portion of the holdback that is withheld to satisfy the lien is not released. Often this amount is paid into court. GST/HST is payable on that amount on the day the holdback amount is paid out or the day it becomes payable, whichever is earlier.
Source: Construction Accounting Best Practices by Canadian Construction Association