Construction Industry Tax Rules in Ontario

The 7 Tax Rules That Define Construction Accounting in Ontario

Construction is one of the most heavily regulated industries for tax. A general business has revenue, expenses and a return; a construction company layers on subcontractor reporting, statutory holdbacks, job-level revenue recognition and trade-specific HST rules. These are the seven that matter most.

1. T5018 subcontractor reporting. If construction is your primary business, you must file a T5018 information return listing payments made to each subcontractor during the year. The CRA matches these against the subcontractors' own returns.
2. The 10% statutory holdback. Ontario's Construction Act requires 10% of each payment to be held back and released only after the lien period closes. This changes when revenue and HST are recognized.
3. HST on construction services. Most construction and renovation services in Ontario are taxable at 13% HST, with input tax credits available on materials, equipment and subcontractors.
4. HST on new residential construction. Building or substantially renovating housing carries its own HST rules, including the self-supply rule and the New Housing Rebate, which differ from ordinary services.
5. Work-in-progress (WIP). Long jobs that span a year-end require revenue and costs to be recognized on the work completed, not just on what has been billed or paid.
6. WSIB coverage. Most construction work in Ontario requires WSIB registration and premiums, including mandatory coverage for many independent operators in the sector.
7. Equipment capital cost allowance. Trucks, excavators, tools and heavy equipment are capital assets claimed through capital cost allowance over time, not expensed all at once.

1. T5018 Subcontractor Reporting

This is the rule that catches the most construction companies off guard. If your principal business activity is construction, the CRA requires a T5018 information return that reports the total payments you made to each subcontractor during your reporting period. It is a reporting obligation, not a tax, but missing it carries penalties and is a frequent audit trigger because the CRA cross-references your T5018 against what your subcontractors reported as income.

2. The 10% Statutory Holdback

Under Ontario's Construction Act, a portion of each progress payment, generally 10%, is held back to protect against liens and is released only after the statutory lien period expires. The accounting trap is timing: the holdback receivable is not the same as cash, and the HST treatment of holdbacks follows specific rules rather than ordinary billing. Recording holdbacks correctly on both the receivable and payable side is one of the most common things we fix on construction books.

3 & 4. HST on Construction and New Housing

Most construction and renovation services in Ontario are subject to 13% HST, and you claim input tax credits on the HST you pay for materials, equipment and subcontractors. The picture changes for new residential construction. Building or substantially renovating a home brings in the self-supply rule, the New Housing Rebate and place-of-supply considerations that do not apply to ordinary contracting. Treating a new-build the same as a service contract is a costly mistake we see often.

5. Work-in-Progress on Jobs That Cross a Year-End

When a job starts in one fiscal year and finishes in the next, you cannot simply count the cash that came in. The work completed but not yet billed, and the costs incurred on it, must be recognized so the year reflects the true state of each project. Getting WIP right matters for an accurate tax return and for the financial statements lenders and bonding companies rely on.

6. WSIB for the Trades

Construction is one of the few industries in Ontario where WSIB coverage is mandatory for many independent operators and owners, not just for employees. Premiums are based on insurable earnings by rate group, and the reporting runs alongside payroll. WSIB is not income tax, but it is a compliance cost that has to be planned for and reconciled.

7. Equipment Capital Cost Allowance

The trucks, excavators, trailers and tools a construction company buys are capital assets. You do not deduct the full cost in the year of purchase; instead you claim capital cost allowance over time according to the asset class. Setting up CCA correctly, and capturing every eligible asset, is often a meaningful deduction that gets missed on do-it-yourself construction books.

A Simple Worked Example

Consider a $100,000 progress billing on a commercial job:

The company billed $100,000 plus HST, but $10,000 is held back and shows as a receivable rather than cash, and the HST on the holdback follows its own timing rule. Multiply this across many active jobs and it is easy to see why construction bookkeeping needs to be built for the industry, not adapted from a generic template.