Payment Holdback Required:

Question: Is it illegal to pay a final construction invoice in full without keeping the required 10% holdback in Ontario?

Answer: PKM Legal Services can help homeowners and project owners avoid unlawful construction payment practices by explaining Ontario’s statutory holdback rules under Construction Act, R.S.O. 1990, c. C.30, which generally require a 10% holdback until lien claim periods expire, and can create payment and personal-liability risk if you pay out the full amount without the required holdback or acceptable holdback form.   For practical next steps, review your contract for substantial performance timing, confirm lien expiry, and if you already paid without retaining the holdback, get advice on the safest way to correct course before disputes escalate; call (519) 410-5250 to speak with a paralegal serving your community.

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Statutory Required Payment Holdbacks

Why It Is That Paying the Final Invoice In Full Upon Project Completion Is Actually Illegal

There are likely few times when paying an invoice in full is against the law.  Indeed, failing to pay an invoice in full is usually against the law by constituting as a breach of contract; however, in the realm of construction or renovation, meaning projects to improve a property, paying in full without retaining a holdback may be, and likely is, unlawful.

Note: Please contact PKM Legal Services by phone at: (519) 410-5250 to discuss any specific questions that you may have.

The Law

The Construction Act, R.S.O. 1990, c. 30, formerly known as the Construction Lien Act, statutorily requires the owner of a construction project or renovation project involving improvements to property, whether residential, commercial, industrial, agricultural, or other type, to holdback ten (10%) percent from payments due until the expiry of the time in which a lien may be preserved.  Furthermore, where a project owner fails to properly holdback payment as statutorily required, the project owner may be held liable for payment to any and all subcontractors, subtrades, suppliers, among others, who were unpaid by the contractor or subcontractors along the chain of supply.  Specifically, the Construction Act states:

As per the Construction Act, a ten (10%) percent holdback is required from each party involved within a property improvement project whether such is a construction project or a renovation project. This means that the property owner must withhold ten (10%) percent when paying the general contractor, who must then withhold ten (10%) percent when paying subcontractors, and so on throughout the various layers of payors within the labour and material supply chain of the project.  The holdback requirement will be lifted once the risk of a lien being filed against the improved property expires, which usually occurs sixty (60) days after the project is completed or a Certificate of Substantial Performance is issued.

Interestingly, and most contractors will know this; however, small project owners, such as homeowners as laypeople will unknowing, the homeowner that pays the invoice from a contractor in full upon completion of a renovation contract, whether roofing, landscaping, building an addition, replacing kitchen cabinetry, or other household improvements, is required to holdback ten (10%) percent.  Failing to do so is a breach of trust whereas the Construction Act, statutorily, creates a trusteeship and by failing to act in accordance to the trusteeship, the homeowner, among others, could be found liable for breach of trust.

Conclusion

Owners of projects, along with everyone throughout the supply chain, from contractors to subcontractors, and so on, are required to holdback ten (10%) percent of payment upon the completion or issuance of a Certificate of Substantial Completion.  Generally, the holdback provision expires after sixty (60) days.