Construction Holdback Obligations in Ontario: A Guide for Owners, Contractors, and Subcontractors
Construction Holdback Obligations in Ontario: A Guide for Owners, Contractors, and Subcontractors
In Ontario construction projects, statutory holdback obligations play a critical role in protecting contractors, subcontractors, and suppliers who contribute labour or materials to a project. The Construction Act requires that a portion of contract payments be withheld to secure potential construction lien claims.
Understanding construction holdback rules in Ontario is essential for owners, contractors, developers, and trades working on construction projects. Failure to comply with these rules can expose parties to lien claims, breach of trust allegations, and costly litigation.
This article explains how construction holdback works in Ontario, including the 10% statutory holdback requirement, when holdback can be released, and the major changes introduced in 2026.
What Is a Construction Holdback in Ontario?
A construction holdback is a mandatory retention of funds required under Ontario’s Construction Act. The purpose of the holdback is to ensure that funds remain available to satisfy potential construction lien claims by parties who supply services or materials to an improvement.
Under section 22 of the Construction Act:
- Each payer must retain 10% of the value of the services or materials supplied under a contract or subcontract.
- The holdback applies throughout the entire construction payment chain.
- The holdback must be retained until lien rights expire or are otherwise resolved.
In practice, this means that every level of the construction pyramid must retain holdback, including:
- Owners paying contractors
- Contractors paying subcontractors
- Subcontractors paying sub-trades
The 10% Statutory Holdback Requirement
The 10% holdback rule is one of the core features of Ontario construction law.
For every payment made under a construction contract or subcontract:
- 10% must be withheld as statutory holdback
- The holdback must be retained until the applicable lien preservation period expires
- If liens are preserved, the holdback may be used to satisfy those claims
The holdback requirement ensures that parties who perform work or supply materials have financial security even if they are not paid by the party directly above them in the construction chain.
Types of Construction Holdback
Ontario construction law recognizes two primary types of holdback.
Basic Holdback
The basic holdback is the standard 10% retention applied to payments under a construction contract.
It is designed to protect lien claimants and remains in place until lien rights relating to the improvement expire.
Finishing Holdback
Where a contract has been certified as substantially performed, but minor work remains outstanding, a separate finishing holdback may be retained to cover the remaining work. Once the project is fully completed and the relevant lien periods expire, the finishing holdback can be released.
When Can Holdback Be Released?
The release of holdback under the Construction Act typically occurs in several scenarios.
Substantial Performance of the Contract
Once a contract is substantially performed, a Certificate of Substantial Performance may be issued and published. After the applicable lien period expires without any liens being preserved, the basic holdback can be released.
Completion of a Subcontract
Subcontractors may obtain early release of holdback where their work has been certified as totally completed, even if the overall project continues.
Deemed Completion
A contract may be deemed completed where the remaining work is minimal—specifically where the cost of completion is the lesser of 1% of the contract price or $5,000.
Annual or Phased Release
For large construction projects exceeding certain thresholds, the Construction Act permits annual or phased release of holdback.
Major 2026 Changes to Construction Holdback Rules
Significant amendments to the Construction Act came into force on January 1, 2026, changing how holdback must be released on long construction projects.
Mandatory Annual Release of Holdback
For contracts lasting longer than one year, the annual release of accrued holdback is now mandatory.
Key requirements include:
- Owners must publish a Notice of Annual Release of Holdback within 14 days of each contract anniversary.
- Holdback must be paid between 60 and 74 days after publication of the notice, provided no liens exist.
- Contractors and subcontractors must flow the holdback payments down the construction chain within 14 days of receipt.
Importantly, the annual release of holdback no longer triggers lien expiry periods, which remain tied to substantial performance, completion, termination, or abandonment of the project.
Limits on Set-Off Against Holdback
Recent amendments also clarify that set-off against holdback funds is generally prohibited except in limited circumstances.
Set-off may only occur where:
- the contract is terminated, or
- the project is abandoned,
and only after the applicable lien periods have expired.
Risks of Failing to Comply with Holdback Obligations
Failure to comply with construction holdback obligations in Ontario can lead to serious legal consequences, including:
- Exposure to construction lien claims
- Liability for breach of trust under the Construction Act
- Priority disputes with mortgage lenders
- Expensive construction litigation
For owners and developers, failing to retain the required holdback may eliminate an important defence against lien claims.
When to Consult a Construction Lawyer
Construction holdback rules can become complex, particularly for:
- Large multi-year construction projects
- Phased developments
- Disputed lien claims
- Trust fund disputes
Obtaining early legal advice can help prevent costly mistakes and ensure compliance with the Construction Act holdback requirements.
Speak With an Ontario Construction Lien Lawyer
If you are an owner, contractor, subcontractor, or supplier dealing with construction holdback issues, it is important to understand your rights and obligations under Ontario’s Construction Act.
Our firm represents clients in construction lien disputes, holdback claims, trust fund litigation, and construction payment disputes across Ontario.
Contact us today to discuss your matter with an experienced construction litigation lawyer.