A contracting company’s bank balance is usually not its own money. Ontario’s Construction Act section 8 turns amounts owing to and received by a contractor or subcontractor on a project into a trust fund for the people below it in the payment chain. Buy the shares and you buy that trust, its deficiency, and the personal liability attached to it.
Key takeaways
SECTION 01 OF 10
Marginal note Contractor’s and subcontractor’s trust: section 8(1) covers amounts “owing to a contractor or subcontractor, whether or not due or payable” and amounts received on the contract price, all of which constitute “a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement”.
The trust does not wait for a cheque: an unbilled progress claim is trust property while still a line on the aged receivables listing. Subsection (2) forbids the trustee to “appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use” until everyone who supplied that improvement is paid: misuse of project funds.
SECTION 02 OF 10
The trust follows “improvement”, defined in section 1(1) to include “the installation of industrial, mechanical, electrical or other equipment on the land or on any building, structure or works on the land that is essential to the normal or intended use of the land”.
It runs at every level: a subcontractor paid by the general is a trustee for its own suppliers, and section 7(1) impresses a separate trust on what an owner receives to finance the work. The test is whether the target supplies services or materials to an improvement — hence trades and construction businesses and electrical contractors.
SECTION 03 OF 10
Section 8.1 came into force on 1 July 2018, per the amendment table beneath it. Every section 8 trustee “shall comply with the following requirements respecting the trust funds of which he or she is trustee”, and paragraph 1 is the account rule: “The trust funds shall be deposited into a bank account in the trustee’s name.”
One account per job is not required. Paragraph 3 permits pooling by “a trustee of more than one trust under section 8” so long as records are kept “separately in respect of each trust”, and subsection 8.1(2) protects that: funds so pooled “are deemed to be traceable”.
Note the limit — it covers funds from separate trusts. The words commingle, segregate and separate account appear nowhere in the Act, confirmed against the full text, and no primary source I could retrieve says what follows when trust money is mixed with the trustee’s own operating money. So I state nothing; Treadstone Law on breach of trust is orientation, not the rule.
SECTION 04 OF 10
Paragraph 2 of section 8.1(1) is the buyer’s best request: “The trustee shall maintain written records respecting the trust funds, detailing the amounts that are received into and paid out of the funds”, plus transfers. A target that cannot produce them is not complying, and O. Reg. 304/18 prescribes nothing further, mentioning neither section 8.1 nor trusts.
Nor can a buyer compel them: section 39(1) gives that right only to “Any person having a lien or who is the beneficiary of a trust under Part II or who is a mortgagee” — a prospective purchaser is none of the three. So the trust ledger and a job-by-job reconciliation have to be closing conditions instead: reviewing bank statements line by line.
SECTION 05 OF 10
“Holdback” is defined in section 1(1) as “the 10 per cent of the value of the services or materials supplied under a contract or subcontract required to be withheld from payment by Part IV”; section 22(1) obliges each payer to retain it, and section 8(1) folds it into the trust expressly. See what must be withheld.
Part I.1 is why a bank snapshot tells you little. Section 6.4(1): “an owner shall pay the amount payable under a proper invoice no later than 28 days after receiving the proper invoice”, and section 6.5(1) gives the contractor seven days from receipt to pay its subcontractors. A badly timed closing therefore shows a cash-rich company holding a payment due out on Friday. See work in progress on a contracting business, prompt payment and the subcontractor’s remedy.
SECTION 06 OF 10
A shortfall is not automatically a breach. Paying the right people discharges the trust pro tanto under section 10(1); section 11(1) lets a trustee who funded the work “out of money that is not subject to a trust under this Part” take an equal amount back out; section 12 permits set-off on that improvement. Each is a defence the target must evidence — the paragraph 2 records.
SECTION 07 OF 10
Section 13(1), marginal note Liability for breach of trust, extends liability past the corporation to “every director or officer of a corporation” and to “any person, including an employee or agent of the corporation, who has effective control of a corporation or its relevant activities”. The trigger is conduct: such a person “who assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust” by the corporation is personally liable.
Subsection (2) closes the structuring route: effective control is a question of fact, and in deciding it “the court may disregard the form of any transaction and the separate corporate existence of any participant”. A nominee director is a fact to be weighed, not a wall; subsection (3) makes co-defendants “jointly and severally liable”.
The section carries no express due-diligence defence; the phrase appears nowhere in the Act. Treadstone Law’s due diligence defence page is filed under Tax and covers source deductions and GST/HST, not this Act; the tax analogue is the director liability a share buyer inherits.
SECTION 08 OF 10
On a share purchase the trustee does not change: the corporation that took the money is still the section 8 trustee, and the deficiency travels with it. Nothing in Part II discharges a trust because shares moved, and section 4 forecloses drafting around it — an agreement by a supplier “that this Act does not apply to the person or that the remedies provided by it are not available for the benefit of the person is void”. Read what a share purchase inherits beside a company with a bad history.
Personal exposure is separate, and prospective: buying shares does not itself make you a director. Section 13 does not reach back: it asks whether you assented to or acquiesced in conduct you knew or ought to have known was a breach. Finding a depleted fund on day one and running the account unchanged is what puts a new board inside that language — on which I found no retrievable authority, so I assert no outcome.
An asset purchase leaves the trustee corporation behind with its breach — the substance of leaving the corporation behind and why vendors prefer shares. Not a clean escape: the receivables the buyer takes are trust property in the vendor’s hands under section 8(1), the Act does not say what becomes of that character on assignment, and no source I could retrieve resolves it. Sections 13(1)(b) and 13(2) do settle that a buyer exercising effective control during a transition is inside the class the provision reaches. Price it: pricing the share/asset difference.
SECTION 09 OF 10
If the target fails, the trust is why the subcontractors are not merely unsecured. Section 67(1) of the Bankruptcy and Insolvency Act, marginal note Property of bankrupt, excludes from the estate “property held by the bankrupt in trust for any other person”. Treadstone Law contrasts a trust claim with a lien claim: the lien attaches to the property, the trust claim follows the money. How the exclusion applies to a statutory construction trust is case law; CanLII and the court sites returned 403s or JS shells to every fetch, so I cite no judgment. See buying from a trustee in bankruptcy and registered security.
The Act sets no limitation period for a trust claim; Part V’s expiry machinery is about liens. The general regime is the Limitations Act, 2002, section 4 of which provides that “a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered”, with a 15-year ultimate bar in section 15(2) and no breach-of-trust entry in the section 16(1) no-limitation list.
SECTION 10 OF 10
Check the age of each job first. Section 87.3(1): “This Act and the regulations, as they read on June 29, 2018, continue to apply with respect to an improvement” where, among other triggers, “a contract for the improvement was entered into before July 1, 2018”. Section 8.1 began that day, so a long-running improvement can sit under a version imposing no account or record duty — though the section 8 trust and section 13 liability pre-date the amendments and applied throughout.
What to quantify, on parameters of my own choosing rather than data: $2.4 million of project receivables, $310,000 in the bank at closing, and $1.9 million owed downstream on those same improvements. The trust bites on the full $2.71 million; the company’s own money is the $810,000 residual, and only once everyone downstream is paid. Run it job by job — each improvement is its own trust — alongside a receivables review and selling out of insolvency.
Two boundaries. This is Ontario law under the Construction Act, R.S.O. 1990, c. C.30; other provinces have their own statutes, not described here. And section 9, the Vendor’s trust, is triggered “Where the owner’s interest in a premises is sold by the owner” — it is about selling the land, not the contracting business, and is regularly misapplied.
No. Section 8(1) covers amounts owing to a contractor or subcontractor, whether or not due or payable, as well as amounts actually received — so an unbilled progress claim is trust property while it’s still just a line on the aged receivables listing.
Yes. On a share purchase, the corporation that took the money is still the section 8 trustee, and nothing in the Act discharges a trust because the shares changed hands — the deficiency travels with the company. An asset purchase, by contrast, can leave the trustee corporation and its breach behind.
Not necessarily. Section 13(1) reaches every director or officer as well as anyone with effective control of the corporation or its relevant activities, and section 13(2) lets a court disregard the form of any transaction and the corporation’s separate existence when deciding who had effective control.
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