GST on construction holdbacks: when the tax is actually payable

Updated August 8, 2026 · A plain-English guide from the team behind Footings

Every contractor who bills progress draws with a lien holdback eventually asks the same question: do I charge and remit GST on the whole draw, including the 10% I won't see for months — or only on the part I can actually collect? The answer is written into the tax law, most invoicing software ignores it, and getting it right is worth real cash flow.

The rule

Where a construction contract has a holdback required or permitted by a builders lien statute, GST/HST on the held-back portion generally does not become payable when the progress billing is issued. It becomes payable when the holdback is paid, or falls due under the lien legislation — whichever comes first. In the Excise Tax Act this is section 168(7); accountants call it the holdback timing rule.

In working terms: a progress invoice carries GST on the amount net of holdback, and the tax on the held-back amount travels with the holdback — invoiced when the holdback is released.

A worked example

A $100,000 job, billed in one draw, 10% holdback, BC.

Progress invoice: work billed $100,000 · GST 5% on the $90,000 collectable portion = $4,500 · less holdback $10,000 → amount due $94,500.

Holdback release invoice (after the lien period clears): holdback released $10,000 · GST 5% = $500 → amount due $10,500.

Across the whole job the customer pays exactly $5,000 of GST — the same total as taxing everything up front. What changes is when it is payable.

Why the timing matters

Charge all $5,000 on the progress invoice and you remit GST on $10,000 you might not collect for months — the government is holding your money interest-free while the lien period runs. On a company running several jobs with 10% held on each, that's a permanent slice of working capital parked with the CRA for no reason.

It also matters at the other end. A general contractor's payables clerk who receives a holdback release invoice with no GST on it will usually flag it, because their own ITC timing follows the same rule — they expect the tax to arrive with the release. Tax-free release invoices cause phone calls.

The two common wrong ways

All the tax up front, release billed tax-free. The totals come out right over the job's life, but the remittance timing is early, the cash-flow cost is yours, and release invoices look wrong to the people paying them.
Tax on the gross, holdback taken off the total including tax. Now the holdback account and the tax account disagree with the contract, and reconciling the release months later becomes archaeology.

What your paperwork should show

A progress invoice that states the full value of work, calculates GST on the net-of-holdback amount, shows the holdback deduction, and totals to what's actually collectable. A separate holdback release invoice, issued when the lien period clears, that carries the released amount plus its GST. And books that track the holdback receivable on its own line, so at any moment you can see how much of your money is sitting in other people's holdbacks.

This is exactly how Footings bills it: set a holdback percentage on the invoice and the GST calculates on the net automatically; when the lien period clears, one click raises the release invoice with the deferred tax on it, and the holdback receivable account empties itself. The GST worksheet then reflects the correct timing without anyone thinking about section numbers.

The honest caveat: this guide covers the common case — lien holdbacks under provincial builders lien legislation on taxable construction work. Contractual holdbacks that aren't lien holdbacks, deficiency holdbacks, and multi-period jobs each have wrinkles. Confirm your situation with your accountant before relying on it; the timing rule is real, but so are the edge cases.