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GST/HST Accounting Rules for Contractors in Canada’s Construction Industry

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 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 periodically (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, the 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 contractor to provide monthly or other periodic payments to the contractor based on the value of work completed as certified by someone other than the contractor. When the scheduled work is completed, a payment application 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 after the engineer, or architect has issued the certificate.

In this situation, the payment application 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.

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 dependent 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

In construction contracts, a “holdback” refers to a specific sum of money, typically a percentage of the total contract value, held by the client or owner as a form of security or assurance. Payments on construction contracts are typically subject to statutory holdbacks under applicable provincial lien legislation. The GST/HST payable on the holdback amount becomes due on the day the holdback 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.

Holdbacks are retained to ensure the contractor’s adherence to quality standards, provide a financial buffer for potential deficiencies or defects, safeguard against construction liens, and motivate the contractor to fulfill their contractual obligations and meet project deadlines.

Builder Lien Holdbacks

A builder’s lien holdback is a financial strategy that is often used in construction projects to ensure that contractors, subcontractors, and suppliers are paid for their work and materials. It reserves a portion of the project funds until the work is completed so if there is any dispute about the payment of these individuals this money can be used to protect the interests of these parties. 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 in 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.

Properly Managing Your GST Collection Funds

It is important to understand that managing GST collection is not just about compliance; it’s also about financial responsibility. Here’s where you should pay close attention:

  • Separate GST Collection Account: Opening a separate account for the collection of GST keeps your business income and your GST funds separate, and it is the easiest way to ensure that this money is not being spent prematurely.
  • The Importance of Awareness: Many contractors overlook the fact that GST and HST collected are not their money but rather government funds. Ensuring awareness among your team and colleagues is crucial. These funds must be safeguarded and kept aside for tax obligations.
    Source: Construction Accounting Best Practices by Canadian Construction Association

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