Bookkeeping for Canadian Contractors and Trades
- Targeted Accounting
- Bookkeeping
Stay Ahead With Expert Bookkeeping Insights!
Table of Contents
Why Construction Is Different
Most bookkeeping advice assumes you sell something and get paid for it. Construction assumes progress billing, retained amounts, subcontractor chains, and a gap of months between spending money and collecting it.
That structural difference produces four specific accounting problems that general guidance doesn’t address, and getting any of them wrong is expensive. Contractors also carry more compliance surface than most small businesses — sales tax, payroll, subcontractor reporting and workers’ compensation all at once.
Key Takeaways
- GST/HST on a statutory holdback generally isn’t payable until the holdback is released — remitting early is an interest-free loan to the CRA.
- If construction is your primary source of income, you must file T5018 slips for subcontractor payments.
- Workers’ compensation coverage is mandatory for most construction operators, including many who consider themselves independent.
- Certain pickup trucks are motor vehicles rather than passenger vehicles, escaping the CCA cost cap entirely.
- Without job costing you know whether the business made money, not whether the job did — and those are different questions.
Holdbacks and Sales Tax
Provincial construction and lien legislation requires a percentage of each payment — 10% in several provinces, including Ontario under the Construction Act — to be held back against lien claims for a statutory period. That money is earned but not yet payable.
The GST/HST treatment follows that logic. Where an amount is held back under a construction lien or similar statute, the tax on the holdback generally becomes payable on the earlier of the day the holdback is actually paid and the day the lien period expires — not when you issued the progress invoice.
Contractors who remit tax on the full invoice including holdback are paying the CRA money they have not received, sometimes for months, on every job simultaneously. On a business running $2 million in annual billings, the working capital tied up is substantial. Your accounting software will not handle this automatically; it requires a deliberate setup with the holdback tracked separately.
The reverse applies to holdbacks you retain from subcontractors: don’t claim the input tax credit until the corresponding point.
T5018 Slips
If construction activities are your primary source of business income, you must report payments made to subcontractors for construction services on a T5018 Statement of Contract Payments, filed with an accompanying summary.
You choose whether to report on a calendar-year or fiscal-year basis, and the return is due six months after the end of the reporting period you chose. It sits alongside the other fiscal-year dates in our Canadian business tax filing calendar. The threshold for reporting a given subcontractor is modest, so in practice most subcontractors you use will need a slip.
The practical requirement is to collect each subcontractor’s business number or SIN before you pay them. Chasing that information six months later, from someone who has moved on to another general contractor, is the reason most T5018 filings are late. Make it part of onboarding, alongside proof of workers’ compensation clearance and insurance.
Workers' Compensation
Construction is treated distinctly by every provincial workers’ compensation authority. In Ontario, mandatory WSIB coverage extends to independent operators, sole proprietors and partners in construction — not just to those with employees — with narrow exemptions. Manitoba and British Columbia have their own rules and their own definitions.
Two practical points. Obtain a clearance certificate from every subcontractor before they start and keep it current, because without one you can be held liable for their premiums. And classify your own payroll correctly: rates vary sharply by classification unit, and an incorrect classification produces either an underpayment to be assessed later or an overpayment nobody refunds unless you ask.
Trucks, Tools and Mileage
The vehicle rules genuinely favour trades, and most don’t take advantage.
A passenger vehicle is subject to a capital cost ceiling for CCA, a lease deduction limit and an interest limit. A motor vehicle that isn’t a passenger vehicle has none of those caps. Certain pickup trucks fall outside the passenger vehicle definition — broadly, those seating no more than the driver and two passengers and used predominantly to transport goods or equipment in the course of business, and separately, vehicles used substantially at a remote or special work site.
The distinction is defined precisely in the legislation and the tests are specific. It is worth confirming before purchase rather than after, because the difference in deductible cost on a $75,000 truck is significant.
Tools are ordinary capital assets, with lower-cost tools often falling into a class written off at 100%. Keep purchase records — tool theft is common on sites and an insurance claim needs a cost basis.
Mileage still requires a logbook — the rules are in our sole proprietor tax guide. Travel from home to a regular place of business is personal; travel between job sites is business. For trades without a fixed shop, more travel qualifies than in most industries, which makes the log more valuable rather than less.
Job Costing
A P&L tells you the business made $180,000 last year. Job costing tells you that four jobs made $240,000 and three lost $60,000 — which is the information that changes what you bid on next.
Set it up so every cost carries a job identifier: materials at purchase, subcontractor invoices, and labour hours at the point they’re recorded. Job costing support is one of the deciding features when choosing accounting software. Labour is the one most often skipped and the one that most distorts the picture, because unallocated labour makes every job look more profitable than it was.
Then compare estimate to actual on every completed job, and do it while the job is fresh. The pattern that emerges — consistently underestimating a particular type of work, or a particular client’s change orders — is worth more than any tax planning available to a contractor.
The Cash Flow Problem
Construction businesses fail while profitable more often than almost any other industry, because the structure of the work consumes cash. You buy materials and pay labour in month one, invoice at month end, get paid in month two or three, and wait out the lien period for the holdback.
Three controls help more than anything else: bill progress claims promptly and on schedule rather than when there’s time; require deposits on material-heavy work so you’re not financing supply; and track the holdback receivable as a real asset with a release date attached, so you collect it rather than writing it off by neglect. Holdbacks that nobody chased are one of the most common write-offs we see in trades files.
Progress Billing and Long-Term Contracts
A job that starts in October and finishes in March spans your year end, and how you report it determines which year the profit lands in.
The general principle is that revenue on a long-term contract is recognised as the work is performed, not when invoiced or collected. In practice most small contractors track this by percentage of completion, measured by costs incurred against total estimated costs. A job 60% through its budgeted cost is treated as 60% earned, regardless of what has been billed.
That produces two balance sheet items most contractors have never heard of and both of which matter. Where you have earned more than you have billed, the difference is an asset — unbilled revenue. Where you have billed more than you have earned, typically after a large deposit or front-loaded draw, the difference is a liability: you are holding money for work not yet done. Contractors who treat every deposit as revenue report profits in the wrong year and, more dangerously, spend money that is still owed as work.
There are simplifications available for smaller contractors and for contracts of short duration, and the specific method should be settled with your accountant and then applied consistently. Switching method between years to smooth results is exactly the pattern that invites questions.
Change orders
Change orders are where contract profit is most often lost, and the failure is documentation rather than pricing. Work performed on a verbal instruction, with the paperwork to follow, frequently ends up disputed or unbilled — and in the meantime it has consumed labour and materials that are sitting in your job costs making the original scope look unprofitable.
Treat a change order as a mini-contract: written, priced, signed, and entered into the job cost record before the work starts. Where a client genuinely needs work to proceed immediately, send written confirmation the same day. The discipline costs minutes and is the difference between a profitable job and an argument.
Liens as a collection tool
Construction lien legislation exists to protect contractors and subcontractors, and it operates on strict timelines that begin running from events such as last supply of services or materials, or substantial completion. Miss the window and the remedy is gone.
You do not need to intend to register a lien to benefit from knowing the deadline. Simply tracking the lien expiry date alongside each holdback receivable tells you when a polite reminder needs to become a firm one. Contractors who track it collect more, earlier, and rarely need to use it.
Books That Understand Holdbacks and Job Costs?
Our bookkeeping service works with Ontario, Manitoba and BC trades — progress billing, T5018s, WSIB reconciliation and job-level reporting.
