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How are Holdbacks Treated for Tax Purposes?

July 25, 2017

Tax Question:

How are holdbacks treated for tax purposes?


The construction industry has special tax rules relating to when the income is recognized for tax purposes.


A holdback amount on each invoice (i.e. 10% of the progress billing) is a typical billing method in the construction industry. The customer does not pay this amount until they have approved the work as 100% completed and without deficiencies. If there are any holdbacks on the receivable or payable, and the lien period has not expired, those receivables can be excluded from income. If the receivables are excluded from income, the related payables must also be excluded from the expense.

If the contract is for less than two years, the contractor has the option of using the “completion method” of accounting for income for tax purposes. When using the “completion method” the holdback is not a concern because revenue is not recognized for tax purposes prior to the contract’s completion. The holdbacks would not be taxable until they are released upon the project’s completion.

For accounting purposes, the holdbacks may be recognized as income. The payables must also be treated similarly. As well, if choosing this method they would not recognize the profits from the job until it is completed and any anticipated losses from the job would not be recognized until completion. However, if the contractor is using the percentage of “completion method” then profits and losses are recognized as the job progresses. If you use the “percentage of completion method” you could deduct it when calculating taxable income for the year, as the proceeds are not yet due.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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