Accounting and tax for construction companies and trades in Canada

Business structure for tradespeople and contractors

Most tradespeople start as sole proprietors — reporting income on Schedule T2125 of the T1 return. This is the simplest structure, with no corporate filing requirement and lower accounting costs. Once net income exceeds approximately $80,000–$100,000 consistently, incorporation usually makes sense for the tax deferral benefits.

A corporation for a construction business is typically a standard business corporation (not a professional corporation) incorporated provincially or federally. The corporation is the contractor — it enters into contracts, holds equipment, employs workers, and earns income. The owner is typically the sole or majority shareholder and draws a salary or dividends.

Partnerships are also common in construction, particularly where two or more tradespeople with complementary skills work together. A partnership files a T5013 information return and allocates income to partners who report it on their individual T1s.

HST in construction: the essentials

Construction services are generally taxable for HST purposes, but the rules around residential housing are complex and getting them wrong is expensive.

Commercial construction

Straightforward: contractors charge HST on their invoices, claim ITCs on materials and subcontractors, and remit the net. The property owner pays HST and, if they are a GST/HST registrant, claims ITCs on the full cost of construction. Keep records of all HST charged and paid.

New residential construction

The builder (whoever constructs new residential housing for sale) must collect HST on the sale price. The federal New Housing Rebate provides a partial rebate (up to $6,300 federally) for purchasers of new homes under $450,000. Most provinces have provincial components to the new housing rebate as well — Ontario's rebate is up to $24,000 on the Ontario portion of HST. The rebate can be assigned to the builder at closing, reducing the cash the buyer needs to bring.

Important: if the builder is building a home for themselves to live in (not for sale), they must self-supply — pay HST on the fair market value of the home as if they sold it to themselves when they first occupy it. This catches many owner-builders off guard.

Renovations to existing residential property

Renovations to existing residential property by a contractor are taxable services — HST applies. There is no rebate for renovating your own home. The homeowner cannot recover the HST. However, the home accessibility tax credit (federal) provides a 15% non-refundable credit on up to $20,000 of qualifying accessibility renovations (widening doorways, grab bars, etc.).

CCA for equipment and vehicles

Construction companies have significant capital equipment — and the CCA rules determine how quickly you can deduct those costs.

• Class 38 — Heavy equipment (30%): Bulldozers, excavators, front-end loaders, cranes, and similar equipment primarily used for moving, excavating, or compacting earth. Half-year rule applies in the year of purchase (you claim half the normal CCA amount).
• Class 10 — Motor vehicles and some equipment (30%): Pickup trucks, light construction equipment. If the vehicle is a passenger vehicle, the capital cost ceiling ($34,000 for most vehicles, $61,000 for ZEVs as of 2024) may apply.
• Class 43 — Manufacturing and processing equipment (30%): Some specialized construction equipment used in manufacturing or processing may fall here.
• Class 12 — Small tools (100%): Tools costing less than $500 are deducted 100% in the year of purchase.
• Class 8 — Miscellaneous equipment (20%): Scaffolding, portable office trailers, and other equipment that does not fit a specific class.

The Accelerated Investment Incentive (AII) provides 1.5x the normal first-year CCA deduction for new or remanufactured eligible property. Immediate expensing rules (up to $1.5M per year for CCPCs) allow full deduction in the year of purchase for many eligible assets acquired after 2021. These rules are phasing out by 2028 — take advantage while available.

Subcontractors vs. employees: the most-audited issue in construction

CRA audits construction companies specifically for misclassified workers. The stakes are high: if a worker who was paid as a subcontractor (no CPP, no EI, T4A issued) is reclassified as an employee, the company owes the employer's share of CPP and EI, the employee's share that should have been withheld, income tax that should have been withheld, plus interest and penalties — often going back three years or more.

The four-factor test in construction

• Control: Does the worker follow your daily direction about how to do the work, or do they decide? A subcontractor decides how to complete the scope — a framing crew that chooses their own approach is more like a contractor than one told exactly how and when to nail each stud.
• Tools: A genuine subcontractor brings their own tools and equipment. If you supply every tool and the worker has no significant capital investment in the trade, they look like an employee.
• Profit/loss: Can the worker make more money by being efficient (bid a job, finish it quickly, profit on the margin) or lose money if they bid wrong? If they earn a straight hourly rate with no upside or downside, they are an employee.
• Integration: Is their service integral to your core business? A roofer who only works for you, year after year, is likely integrated as an employee. A concrete contractor with their own company, multiple clients, and their own insurance has a genuine business.

Get a written independent contractor agreement, confirm the worker has their own GST/HST registration and WCB coverage, see their other clients, and document your analysis. A well-documented contractor relationship that later comes under CRA scrutiny is much easier to defend.

T4A obligations

Payments to non-incorporated subcontractors (sole proprietors) for services of $500 or more in a calendar year must be reported on a T4A slip. The recipient reports this income on their T1. Failure to issue T4As is itself a compliance risk during an audit.

Project-based accounting methods

Percentage of completion method

Under accrual accounting (required for corporations), revenue and expenses on long-term contracts are generally recognized using the percentage of completion method — you recognize revenue proportional to the stage of completion of the project. If a project is 40% complete at year-end, you recognize 40% of the contract revenue and the related costs. This provides a more accurate picture of financial position for lenders and investors.

Completed contract method

ASPE permits the completed contract method for certain types of contracts where outcome cannot be reliably estimated. Revenue is deferred until the project is substantially complete. This is less common for large construction companies but may be appropriate for smaller projects or those with significant uncertainty.

Practical bookkeeping

Regardless of the accounting method, good construction bookkeeping tracks costs by project (job costing). This means assigning labour, materials, equipment, and subcontractor costs to specific job codes so you can compare actual costs to your bid, identify where you are losing money, and provide accurate progress billing to clients.

Holdbacks under provincial construction lien acts

Every Canadian province has a construction lien act (Construction Act in Ontario, Builders Lien Act in BC, Prompt Payment and Construction Lien Act in Alberta) that requires owners to hold back a percentage (typically 10%) of each progress payment until the lien period expires after substantial completion. The purpose is to protect subcontractors and suppliers if the GC does not pay them.

Accounting for holdbacks

From the contractor's perspective, the holdback receivable is recognized as revenue when it is earned (at the time of billing) but not collected until the lien period passes. Holdbacks can represent significant amounts of cash tied up in projects — track them by project and as a separate receivable category on your balance sheet.

HST timing on holdbacks

For GST/HST purposes, the construction service is delivered progressively, and HST generally becomes payable when each progress billing is issued. The holdback portion is part of the consideration for the supply — CRA's position is that HST on the holdback is payable when the holdback amount becomes due, which is typically when the lien period expires. Your accountant can help you track HST remittances and ITCs correctly for holdbacks.

WCB and WSIB obligations

Workers' compensation coverage is mandatory for construction workers in every province. The specific rules about who must register and who can be treated as a contractor vary.

In British Columbia, WorkSafeBC requires everyone who performs construction work to have WCB coverage — either as a registered employer or as a personal optional protection registrant. Independent contractors who provide construction services must have their own WCB registration.

In Ontario, WSIB coverage is compulsory for construction industry workers. Independent operators must register if they are in the construction sector, even if they have no employees. When hiring subcontractors, get clearance certificates from WSIB before they start work. If a subcontractor does not have WSIB clearance and a worker is injured, the GC may become liable for the WSIB claim.

WCB premiums are a deductible business expense. Keep clearance certificates on file for every project.

CRA audit patterns in construction

Construction is consistently in CRA's top five most-audited sectors. Common issues that trigger audits:

• Cash payments to workers: Paying day labourers or workers in cash without T4 or T4A documentation is a significant audit risk. CRA's Underground Economy Initiative targets exactly this. Every payment should have a paper trail.
• Vehicle expenses claimed at 100%: Claiming full vehicle expenses for a truck or van that is also used personally is a standard audit issue. Keep a mileage log with dates, destinations, and business purposes. CRA auditors will ask for it.
• Personal expenses run through the company: Owner-operators who pay personal expenses from the corporate account — home renovations, personal vehicle costs, meals with friends — create shareholder benefit income if those expenses are not reimbursed. Keep personal and business expenses rigorously separate.
• Missing source deductions: Payroll is complex in construction with seasonal workers and varying hours. Missed remittances accumulate quickly. Use a payroll service or ensure monthly remittances are made on time.
• GST/HST on new housing: Builders who fail to collect and remit HST on new residential construction — particularly builders who live in or rent out new homes they built — face significant reassessments.

Frequently asked questions