What Is a Holdback at Closing in Ontario and When Is It Used?

You are reading your closing documents and see the word holdback. Some of the money you expected to pay or receive is being kept back, and you want to know why, who is keeping it and when it comes loose.

There is no single holdback in Ontario real estate. Some come from legislation, some from federal tax rules and some from the agreement between buyer and seller. This article explains the main ones so you can ask your lawyer the right questions.

What a holdback is in plain words

A holdback is a portion of money that is not paid out right away. It is kept back as protection until something happens, such as a deadline passing, a repair being finished or a tax certificate being issued. The person or office holding it, and the trigger for release, depend on where the holdback comes from.

• A construction holdback, which comes from the Construction Act.
• A holdback by a buyer when the seller is a non-resident of Canada, which comes from federal tax rules.
• A holdback for repairs or unfinished work, which comes from your agreement.
• A deposit held in trust, which is not strictly a holdback but is often confused with one.

Construction holdbacks under the Construction Act

The Construction Act, s. 22(1), requires each payer on a construction contract to hold back 10% of the price of services or materials until liens expire or are satisfied. This matters when work was done on a property, for example a renovation or a new build.

A contractor's lien generally expires 60 days after the certificate of substantial performance is published, or after the contract is completed, abandoned or terminated (s. 31(2)). The final holdback is paid within 14 days after liens have expired or been satisfied (s. 26(8)).

These holdback rules have been amended in recent years and more changes were proposed, so confirm the current version of the Act with a lawyer before relying on any timeline.

When the seller is a non-resident

A non-resident who sells taxable Canadian property, such as Ontario real estate, must notify the CRA (Form T2062) within 10 days of the sale. Late notice carries a penalty of $25 a day (minimum $100, maximum $2,500). The CRA issues a certificate of compliance (T2068) once payment or acceptable security is provided.

If no certificate of compliance has been issued, the buyer may become liable for the seller's tax (Income Tax Act, s. 116(5)). The buyer can therefore hold back 25% of the proceeds (50% for certain property types), less any certificate limit. If you are buying from someone who lives outside Canada, raise this early with your lawyer.

Repair holdbacks and the deposit

Sometimes a buyer and seller agree that part of the sale proceeds stays in trust after closing, for example because work is unfinished. That kind of holdback is a matter of contract. How much is held, who holds it and what triggers release depend entirely on the wording you both signed, so read it closely.

The deposit works differently. When a brokerage holds the buyer's deposit in trust, it first deducts the commission owing. The balance owing to the seller may be released only when the transaction is completed, or with the mutual written consent of both parties.

What to do next

• Find the holdback in your documents and note who holds it and for how long.
• Ask your lawyer which rule or clause created it.
• Confirm in writing what event releases the money.
• If work was done on the property, ask about construction liens and the current Construction Act rules.
• If either party lives outside Canada, ask about the CRA certificate of compliance before closing.

A lawyer or accountant can confirm how a holdback applies to your sale or purchase.

Frequently asked questions