Can an owner use a letter of credit instead of holding back cash under the Construction Act in Ontario?

Yes, in many circumstances. The Construction Act permits holdback obligations to be satisfied using an irrevocable letter of credit or an equivalent form of security, rather than requiring an owner or payer to physically set aside and retain cash throughout the holdback period, provided the security meets the requirements the Act and the specific project's arrangements call for. This is common on larger commercial and institutional projects, where tying up significant cash for the full duration of a project's holdback period is impractical, and a bank-issued letter of credit can serve the same protective purpose for subcontractors and suppliers.

The key point is that the substitute security has to actually provide equivalent protection to the parties holdback is meant to protect - it isn't a way to avoid the holdback obligation itself, only a way to satisfy it in a more practical form. Whether a specific letter of credit or bond properly satisfies the Construction Act's requirements, and how it interacts with a lien claim or holdback release timing, can get technical, so this is generally worth confirming with a lawyer familiar with construction financing before relying on it as your holdback mechanism.