Introduction

Construction liens are a routine part of life for Ontario contractors — a statutory right that preserves the contractor's claim to payment against the owner's property when invoices go unpaid. The lien process interacts with cash flow, income recognition, and HST in ways that every incorporated contractor should understand.

What Is a Construction Lien?

Under Ontario's Construction Act, a contractor, subcontractor, or supplier who has provided services or materials to a project has the right to register a lien against the title of the property being improved. The lien attaches to the property and serves as security for the amount claimed.

A lien must be registered within prescribed deadlines after the last date of supply — generally 60 days. Perfecting a lien (preserving it legally) requires commencing an action in court within 90 days of registration.

The lien system is the statutory mechanism that protects contractors from non-payment on a project, and it sits alongside the holdback system — not as an alternative to it, but as an additional remedy.

Income Recognition When a Lien Is Outstanding

A pending lien dispute does not automatically alter the income recognition treatment of the work performed. Under the accrual basis, revenue is generally recognised when earned — when the right to payment is established by the work being performed, regardless of whether payment has been received.

Where a lien is outstanding because the owner disputes the amount owing — not just the timing of payment — the analysis is more nuanced. If the right to receive a specific amount is genuinely in dispute (the owner claims deficiencies, the contractor claims the full amount), the portion that is in dispute may not be income until the dispute is resolved.

The reserve for doubtful accounts under section 20(1)(l) of the Income Tax Act can also be relevant here — where amounts have been billed but their collection is in genuine doubt due to a lien dispute, a reserve for the doubtful amount may be available.

The income tax treatment of a lien dispute should be reviewed with a CPA for significant amounts, as the facts of the dispute determine the appropriate approach.

HST and Lien Disputes

For HST purposes, the general rule is that HST on a taxable supply is due when the earlier of an invoice being issued or payment being received. A pending lien dispute does not defer HST obligations on amounts already invoiced.

Where a contractor has issued invoices for all work performed (triggering HST obligations) but has not been paid due to a lien dispute, the contractor may have collected HST that is technically owed to the CRA before the dispute is resolved — creating a remittance obligation that precedes the cash receipt.

This is a genuine cash flow issue for contractors in protracted lien disputes. Understanding the HST timing is part of managing the financial position during litigation.

Bad Debt Relief on Uncollectable Amounts

Where a lien dispute is ultimately resolved in a way that results in the contractor receiving less than the invoiced amount — or nothing at all — the contractor may be entitled to a bad debt adjustment under section 231 of the Excise Tax Act, reducing the HST remittance obligation by the HST on the uncollectable amount.

The bad debt adjustment requires that: (1) the full amount was previously included in net tax (the HST was reported and remitted), (2) the amount has been written off as a bad debt in the books, and (3) the debt is genuinely uncollectable.

For corporate income tax purposes, a bad debt written off may be deductible as a business expense in the year it becomes reasonably established that the debt is uncollectable, or as a reserve in earlier years.

When to Speak With a CPA

For contractors navigating active lien disputes, the intersection of income recognition, HST timing, and potential bad debt adjustments requires specific CPA review. Getting the income and HST treatment right for a disputed project prevents overpayments to the CRA while also ensuring the corporation is not misreporting income.

Rotaru CPA works with incorporated contractors on construction project accounting and CRA compliance. Book a consultation to discuss a lien or payment dispute on your projects.