Introduction

Holdbacks are a central feature of Ontario’s construction payment regime and play a critical role in balancing the interests of owners, contractors, and subcontractors. While they are often viewed as a delay in payment, holdbacks are designed to protect against lien claims and ensure funds remain available to satisfy unpaid parties.

For contractors, subcontractors, and suppliers, understanding how holdbacks operate, and when they must be released, is essential to managing cash flow and protecting payment rights. This article provides a practical overview of how holdbacks work under Ontario’s Construction Act, including key requirements and recent changes relating to the annual release of holdback.

What is Holdback?

A holdback is a statutory requirement that obligates a payer to retain a portion of the contract price as security for potential lien claims. The retention of holdback is not optional, and failure to properly retain holdback can expose a payer to additional liability beyond the contract price.

In Ontario, the basic holdback is 10% of the value of services or materials supplied to an improvement. This amount must be retained from each payment made under a contract or subcontract at each level of the construction pyramid.

Purpose of Holdback

The holdback regime is intended to protect lien claimants by ensuring funds are available to satisfy valid claims, while at the same time limiting an owner’s liability by capping exposure to the holdback amount, subject to certain exceptions.

It also promotes the orderly flow of funds down the construction pyramid and balances the competing interests of payment certainty and lien protection. While holdbacks can impact cash flow, they remain a key component of the broader lien framework.

How Holdbacks Work in Practice

At each level of the construction pyramid, parties are generally required to retain 10% holdback from payments made to the next tier. For example, an owner retains holdback from the general contractor, the contractor retains holdback from subcontractors, and subcontractors retain holdback from their subcontractors or suppliers. This creates a cascading structure of holdbacks throughout the project.

Importantly, holdbacks are not physically retained at each level of the construction pyramid. Rather, they are typically maintained at the highest level and accounted for on a notional basis down the chain. It is therefore critical that holdback is properly calculated and retained. Failure to do so can result in a loss of statutory protection and expose the payer to liability for amounts that should have been withheld.

When Must Holdback Be Released?

Holdback is not intended to be retained indefinitely. Subject to certain conditions, it is generally released once the risk of lien claims has passed. The timing of release is tied directly to the expiry of lien rights, and parties must ensure that those rights have fully expired before releasing any retained funds.

Determining when holdback must be released first requires an understanding of which version of the Construction Act applies. While the triggering events for release are generally similar, the legislative approach has evolved over time:

• Under the former Construction Lien Act, release of holdback was largely permissive, in that parties “may” make payment of the holdback where all liens that may be claimed against that holdback have expired, been satisfied, or discharged

• The Construction Act provided mandatory holdback and later introduced phased or annual release of holdback once certain applicable conditions are satisfied

• More recent amendments that came into effect in January 2026 go a step further by providing for the mandatory annual release of holdback on qualifying projects, reflecting a continued shift toward improving cash flow within the construction industry. Under this regime, all holdback accrued under a contract must be released on each anniversary of the contract. Owners are required to publish a notice of annual release of holdback within 14 days of the anniversary, specifying the amount of holdback to be paid. The holdback must then be released no earlier than 60 days and no later than 74 days following publication of the notice, unless there is a subsisting lien that has not been vacated. Once released, the contractor and each subcontractor must pass the holdback down the contractual chain within 14 days of receipt, and no set-off is permitted at any level. Read more on the recent amendment here.

Determining the correct timing for release of holdback requires careful attention to the applicable version of the Construction Act, the relevant lien deadlines, and the status of any preserved claims.

Where a lien has been registered, holdback should not be released until the lien is resolved, discharged, or otherwise satisfied. Releasing holdback prematurely can expose a payer to significant liability, including the risk of having to pay twice.

Holdbacks are Tied to Lien Claims

Holdbacks are closely tied to lien rights and form a central part of the statutory payment protection scheme under the Construction Act. The retained holdback represents the primary fund available to satisfy lien claims, ensuring that unpaid contractors, subcontractors, and suppliers have a source of recovery tied to the project.

Where holdback is properly retained, it can also limit an owner’s exposure, as liability for lien claims is generally capped at the amount of holdback, subject to certain statutory exceptions.

From a practical perspective, holdbacks and liens should be viewed as two components of the same overall payment protection regime. Proper holdback practices not only ensure compliance with the legislation but also provide a critical safeguard against downstream payment issues. Failure to treat holdbacks with the same level of care as lien rights can significantly increase financial risk on a project.

Read more about liens here.

Practical Considerations

Given the strict requirements under the Construction Act, parties should:

• Ensure holdbacks are properly calculated and retained at each level
• Track lien deadlines carefully and verify that no lien is registered before releasing holdback
• Confirm whether annual holdback release applies on longer-term projects
• Seek advice where there is any uncertainty regarding entitlement or timing of release of holdback

As with liens, the holdback regime is technical and time sensitive. Missteps, whether in calculating, retaining, or releasing holdback, can have significant financial consequences, including the loss of statutory protections and exposure to liability beyond the contract price.

In practice, issues often arise not from a misunderstanding of the basic concepts, but from the application of the rules to specific project circumstances. The recent introduction of mandatory annual holdback release adds a further layer of complexity, requiring careful coordination and strict compliance with notice and timing requirements.

Given these risks, parties should approach holdbacks proactively and ensure that appropriate systems and processes are in place to track obligations throughout the life of a project. Early and informed decision making can help avoid costly disputes and preserve available protections.

Where there is any uncertainty, it is always advisable to seek expert advice.