Holdback홀드백 (잔금 보류)

What is it?

A holdback means money that is "held back" for a while. On closing (the day you pay the rest of the price and the home becomes yours), your lawyer does not send the whole price to the seller. Part of it stays in a lawyer’s trust account (an account that holds other people’s money separately). The money is released once the promised work is done or the legal issue is settled.

A holdback is not one single rule. In an Ontario home purchase you will meet three kinds: a holdback the two sides agree on, the withholding the federal Income Tax Act requires when the seller is a non-resident of Canada, and the construction lien holdback under Ontario’s Construction Act. Each has a different source and a different amount.

When is it used?

Amounts and conditions depend on your situation. Your lawyer decides which holdback, if any, applies to you.

Holdbacks you agree on (repairs, included items)

This is the most common kind. It is used when the final walkthrough shows that a promised repair was not done, an appliance listed in the contract is gone, or the home was damaged during the move. The buyer’s lawyer proposes to the seller’s lawyer that a set amount be held until the problem is fixed, and both sides agree in writing.

No law sets the amount. It is usually negotiated from a repair quote or the value of the item, and the money sits in one lawyer’s trust account. The seller does not have to agree to a holdback, so it is safer to write any repair promise into the contract from the start, with a deadline of "before closing".

The written agreement should say the amount, which lawyer holds it, what releases it (for example, a repair receipt), the deadline, and who gets the money if the deadline passes. Leaving these out leads to disputes later.

When the seller is a non-resident of Canada (Income Tax Act, s. 116)

If the seller does not live in Canada for tax purposes, the federal Income Tax Act can make the buyer responsible for the seller’s tax. The buyer must send a share of the price to the Canada Revenue Agency (CRA) on the seller’s behalf, and if they do not, the buyer is on the hook. That is why your lawyer holds back 25% of the price on closing.

When the seller reports the sale to the CRA and pays the tax or provides security, the CRA issues a certificate (a section 116 certificate, often called a clearance certificate). Once the certificate arrives, the held money is released to the seller. Without a certificate, the law says the buyer must send this money to the CRA within 30 days after the end of the month of the purchase. If the certificate is late, your lawyer decides, with this deadline in mind, how long to hold the money or whether to send it to the CRA, so be sure to ask.

The usual rate is 25%, but for some property, such as the building part of a rental property (depreciable property) or real estate held for resale rather than as a capital asset, the rate is 50% on that part. Your lawyer and accountant decide which rate applies.

The standard contract normally has a clause under which the seller gives a sworn statement (statutory declaration) on closing that they are a resident of Canada, and if not, the buyer may deduct the tax from the price. Check with your lawyer whether your contract has this clause and what it says.

Construction lien holdback (10% under the Construction Act)

Ontario’s Construction Act requires anyone who hires work on a property (an "improvement") to hold back 10% of the price of the work instead of paying it right away. If a contractor or supplier is not paid, they can register a lien (a claim on the property until they are paid), and this 10% is the fund that protects that lien. It is released only after the time to claim a lien has passed. The basic period is 60 days, counted from the earlier of the day a certificate of substantial performance (the work is mostly done) is published or the day the contract is completed, abandoned or ended (Construction Act, s. 31). For subcontractors and suppliers, the day they last supplied work or materials also counts, so ask your lawyer for the exact date.

This holdback applies when the buyer hires the work. The Act removes a "home buyer" (someone who pays no more than 30% of the price before the transfer and receives the home when it is ready to live in) from the definition of "owner". So in an ordinary resale or new-home purchase, the buyer does not have to hold back this 10%.

But if the seller did recent work and did not pay for it, the contractor can register a lien on the home. Your lawyer checks title before closing and, if a lien is there, requires the seller to clear it before closing. If your contract says the seller will finish work before closing and you legally count as an owner, section 5 (2) of the Act gives you the right to retain the holdback.

New homes and pre-construction are different

When you buy a new home from a builder, unfinished or damaged items are written on the PDI form at the pre-delivery inspection. Tarion says the PDI form is not a request for warranty service, and that items not fixed by the time you move in must be listed on an Initial Form or another warranty claim form. In other words, unfinished items in a new home are handled through the warranty process, not a closing holdback.

Builder contracts usually do not allow you to hold back closing funds because of PDI items. Check with your lawyer what your own contract says.

How is a holdback released?

1. Tell your lawyer as soon as a problem appears, before closing. A holdback cannot be created after closing is done.
2. The two lawyers agree in writing on the amount, who holds it, what releases it and the deadline. Holdbacks required by law, such as the non-resident withholding or a lien holdback, are kept under the law rather than by agreement.
3. On closing, that amount does not go to the seller. It stays in the lawyer’s trust account and shows as a separate line on the closing statement.
4. You send your lawyer proof that the condition is met: repair receipts, photos, the CRA certificate, or confirmation that the lien period has passed.
5. The money is paid to the seller, used for the repair or returned to you, as the agreement says. Money held back for a non-resident seller’s tax may instead be sent to the CRA (see the section 116 part above). If the two sides disagree, they negotiate again or a court decides.

Example