How do construction holdbacks and liens affect buying a construction company in Ontario?

Buying a construction company in Ontario means buying a business that sits in the middle of a chain of payments, and the Construction Act (R.S.O. 1990, c. C.30) governs that chain. Section 22(1) says each payer on a contract or subcontract under which a lien may arise must retain a holdback, calculated on the price of the services or materials as they are actually supplied, until the liens that may be claimed against it have expired or been satisfied, discharged or otherwise provided for. The company you are looking at may be holding money for its subcontractors, waiting on money held by owners, or both. This page covers Ontario only and only the buyer’s side. If you are buying a company in another province, check the rules where it operates.

Holdbacks run in two directions

A contractor can be both a payee and a payer. Its customer, the owner, retains holdback from what it pays the contractor. The contractor in turn retains holdback from what it pays its subcontractors. Section 22(2) adds a separate holdback for finishing work after the contract has been certified or declared substantially performed. Section 22(4) lets some or all of a holdback be kept in other permitted forms, such as a bond, so the cash a seller points to may not be the whole picture. For each live contract, ask for the holdback the company is owed, the holdback it is retaining, and which of the two has been released.

Release depends on liens, so the calendar matters

Section 26 sets when holdback is paid. Following each anniversary of the date the contract was entered into, the owner publishes a notice of annual release of holdback and pays the accrued holdback to the contractor at least 60 days but not later than 74 days after that notice, unless a lien has been preserved or perfected and the conditions in section 26(4) apply. For holdback not paid that way, payment follows after the liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for, with the owner paying the contractor within 14 days and the contractor paying a subcontractor within 14 days of receiving it. A buyer valuing the receivables should not assume holdback arrives on the closing date, and a seller’s statement that it is “as good as collected” is something to test against this timetable and each contract’s certificates.

Lien periods and what survives your closing

The Act fixes the lien periods. Under section 31, unless preserved under section 34, liens for work up to the certified or declared date of substantial performance expire at the end of the 60-day period following the earliest of the events that section lists, and work after that date is treated separately. Under section 36, a preserved lien expires unless it is perfected before the end of the 90-day period following the last day it could have been preserved. These rules are subject to the Act’s conditions, so have counsel read them against each project. A lien is a charge on the holdbacks required to be retained and, subject to section 17(3), on certain additional amounts a payer owes (section 21), and an owner is personally liable for required holdbacks to lien claimants with valid liens against the owner’s interest in the premises, subject to the section 23 limits. Ask which projects still have open lien periods, and which have liens already preserved.

Trust duties follow the company

Section 8(1) makes amounts owing to or received by a contractor or subcontractor on account of the contract or subcontract price, including holdback it is owed or has received, a trust fund for the subcontractors and suppliers it owes. Under section 8(2) the contractor is the trustee and must not appropriate or convert those funds to its own use or any use inconsistent with the trust until those it owes are paid. Section 8.1 requires the trust funds to be deposited in a bank account in the trustee’s name, with written records of what is received and paid out. Sections 11 and 12 allow limited retentions, subject to Part IV. If you buy the shares, the company and its trustee obligations continue, and BDC notes that purchasing shares comes with a very different set of responsibilities compared to purchasing assets. Ask for the trust records and an accounting of any shortfall before you rely on the company’s cash.

• A schedule of every live contract showing holdback owed to the company, holdback retained by the company, and the release date or route under section 26
• The status of each project’s substantial performance certificate or declaration, since lien periods under section 31 run from stated events
• Any preserved or perfected liens, and the dates that start the 90-day perfection period under section 36
• The section 8.1 bank account and written trust records, reconciled to what the company owes subcontractors and suppliers
• Current WSIB clearances on live jobs, since a person who directly retains a contractor must obtain one before the contractor starts work under the WSIA, section 141.2

Check the WSIB side as well

The Workplace Safety and Insurance Act, 1997, section 141.2, requires a person who directly retains a contractor or subcontractor to perform construction work to obtain a certificate before permitting it to begin, except for exempt home renovation work, and the WSIB’s policy says starting construction work without a clearance is an offence for both the principal and the contractor. The same policy says an account must be in good standing to be eligible for a clearance. Ask whether the target’s account is in good standing, and for the clearances in effect on each job. For the broader checks on licences and insurance for a general contractor, see buying a general contractor in Canada.