Construction Act Trust Claims in Ontario: When Misuse of Project Funds Is a Breach of Trust

On most construction projects, money moves through several hands before it reaches the people who actually did the work. An owner pays a general contractor; the general pays subcontractors; subcontractors pay their own suppliers and workers. That chain works fine when everyone is solvent and honest. But when a contractor pockets funds that were meant to flow downstream, Ontario's Construction Act gives the people who were left unpaid a powerful remedy — the Construction Act trust claim. Understanding how that remedy works, and how it differs from an ordinary payment dispute, can make the difference between recovering your money and standing in line with unsecured creditors.

This article explains the trust framework as it exists under Ontario law as of writing — but construction law changes, and the details that apply to your project depend on your specific facts. Speak with a licensed Ontario lawyer before taking any steps.

What the Trust Provisions Actually Do

Money Held in Trust — Not the Contractor's Own

Think of the trust provisions this way: when an owner writes a cheque to a general contractor, the law treats part of that money as belonging to the subcontractors and suppliers who will do the underlying work — even before those subcontractors have invoiced, and even before the general contractor has passed the money along.

The contractor is not the beneficial owner of those funds. The contractor is a trustee — someone who holds property for the benefit of others. That is the core concept, and it has serious consequences. A trustee who dips into trust money for their own purposes is not just breaching a contract. They are committing a breach of trust, which is a different legal wrong entirely with different remedies and different rules about who can be held responsible.

Ontario's Construction Act creates this trust relationship at every level of the payment chain. Funds received by an owner's lender can be subject to trust obligations. Funds received by the general contractor from the owner are held in trust for subcontractors and suppliers. Funds received by a subcontractor from the general are in turn held in trust for that subcontractor's own suppliers and workers. Each layer of the payment chain carries its own trust obligation.

What Qualifies as "Trust Funds"

Not every dollar that flows through a construction project is automatically trust money. As of writing, the Construction Act generally provides that amounts received by a contractor or subcontractor on account of a contract price, or by way of a loan or advance to finance the contract, become trust funds. The key trigger is that the money was paid in connection with the improvement — it is intended, at least in part, to pay those further down the chain.

Contractors and subcontractors are required to use those funds to pay the people who are owed money before using any surplus for their own purposes. If there is a genuine surplus after everyone downstream has been paid, the contractor can keep it. The problem arises when they spend the money before paying — or when they never intend to pay at all.

What Counts as a Breach of Trust

Diverting Funds to the Wrong Pocket

A breach of trust occurs when someone who holds construction trust funds uses them for a purpose that does not include payment of those who are owed money under the relevant contract. Common examples include:

• Using project payments to cover overhead, rent, or payroll on an entirely different project
• Withdrawing funds to pay the corporation's bank line of credit instead of subcontractors
• Transferring money to a related company or to the principals of the business
• Simply depositing trust funds into a general operating account and spending them without tracking what was paid to whom

It is worth noting that the Construction Act does not require proof of fraudulent intent. A contractor who honestly believed they were juggling cash flow but never got around to paying their subcontractors can still be found to have breached the statutory trust. The intent to defraud can make the case more serious, but it is not a prerequisite. What matters is whether the funds were applied for the purposes the statute requires.

Personal Liability: Directors and Officers Are Not Safe Behind the Corporation

Why a Corporate Shell Does Not Protect Everyone

One of the most important features of a Construction Act trust claim Ontario is that it can pierce the corporate structure and hold individual directors and officers personally liable. This is unusual — Ontario law normally shields directors and officers from the debts of their corporation. Trust law works differently.

If a corporation receives construction funds and a director or officer of that corporation directs or acquiesces in the misuse of those funds — spending them on the corporation's own debts rather than paying subcontractors — that individual can be held personally liable for the breach of trust. They do not have to have personally taken the money. Being the person in charge who allowed it to happen, or who made the decision to pay other creditors first, can be enough.

This exposure matters enormously in insolvency situations. When a general contractor becomes insolvent, unsecured creditors line up and often receive cents on the dollar. But a trust claim is different: the beneficiaries of the trust are not ordinary unsecured creditors. They have a claim to specific funds that should never have been the contractor's property in the first place. And if those funds have been dissipated, they may be able to pursue the individuals who caused that to happen.

How Trust Claims Differ from Lien Claims and Contract Claims

Three Distinct Remedies, Different Strengths

Unpaid subcontractors and suppliers on Ontario projects typically have three potential avenues. Understanding the differences matters for strategy.

A contract claim is the most familiar: you sue for the money owed under your agreement. This works when the party you contracted with is solvent and has assets. It gives you a judgment, but a judgment is only as good as the debtor's ability to pay.

A lien claim under the Construction Act lets you register a charge against the owner's land, even if you have no direct contract with the owner. The lien secures your claim against the property itself and can force holdback money to be set aside. Liens are time-sensitive — strict deadlines apply to preserving and perfecting a lien, and missing them can be fatal to the claim.

A trust claim is different in kind. It does not depend on the land. It follows the money. If trust funds were improperly diverted, you may be able to trace where they went and recover them — or recover their equivalent value from the person who diverted them, including a director or officer personally. Trust claims can also survive the bankruptcy of the corporate contractor in ways that ordinary contract claims cannot.

In practice, well-advised claimants often pursue all three remedies at once, since each protects a different risk.

Frequently asked questions