A contractor doesn't choose to become a trustee — the moment an owner's cheque clears, the law treats part of it as belonging to someone else. The books either show that clearly, or they don't, and there's very little middle ground once a claim is made.
Key takeaways
Trust obligations in construction don't announce themselves. There's no separate account a contractor is told to open the day a job starts, no form to sign — just a legal characterization that attaches automatically to money the moment it's paid, whether or not the bookkeeping was ever set up to track it that way. The firms that can defend a trust claim are the ones whose books already show, without reconstruction, exactly where that money went and why.
In Ontario, the mechanism is described plainly by Treadstone Law's own construction-trust material: “when an owner writes a cheque to a general contractor, the law treats part of that money as belonging to the subcontractors and suppliers” who are owed on the project — the contractor becomes a trustee, someone holding property for the benefit of others, without ever having agreed to the role. A breach happens “when someone who holds construction trust funds uses them for a purpose that does not include payment of those who are owed money,” and the article's named examples of how that happens in practice are worth reading as a checklist of what not to do: redirecting funds to cover overhead on a different project, paying corporate debt ahead of the subcontractors the money was meant for, or simply depositing trust money into the general operating account without tracking which payments came out of it.
British Columbia's Builders Lien Act states the same idea as a hard rule rather than a principle: s.10(1) provides that “money received by a contractor or subcontractor on account of the price of the contract or subcontract constitutes a trust fund for the benefit of persons engaged in connection with the improvement,” and the contractor or subcontractor is the trustee of it. Read alongside Ontario's material, the two provinces describe the identical underlying obligation — the difference is how much structure each one builds around it.
The detail that should worry any firm running trust money through a general account is this, stated directly: “the Construction Act does not require proof of fraudulent intent” to establish a breach. A firm that genuinely meant to pay every subcontractor, and simply used a cash-flow bridge from one project's receipts to cover another project's payroll for two weeks, has still used trust funds for a purpose outside the trust — the fact that it intended to make everyone whole eventually is not a defence to the breach itself. That reframes what bookkeeping is actually for here: it isn't proving good intentions, it's showing that money received on account of a specific improvement was in fact applied to that improvement's beneficiaries, transaction by transaction.
The personal exposure compounds this. Where a corporation receives construction funds and “a director or officer of that corporation directs or acquiesces in the misuse of those funds,” that individual can be held personally liable for the breach — the corporate shield doesn't cover a decision made with knowledge of where the money should have gone. A controller who flags a cash-flow gap and a principal who signs off on covering it anyway are both inside that exposure the moment the transfer clears.
Worked example: reconstructing where a payment went
An owner pays a general contractor $180,000.00 against a certified progress draw. Of that, $18,000.00 (the Construction Act's standard 10% holdback) is retained; the remaining $162,000.00 is trust money that has to reach the subcontractors and suppliers whose work the draw represents.
A defensible ledger doesn't record that $162,000.00 as a lump-sum deposit to general revenue. It records it against the specific job, then traces the disbursements out: say $95,000.00 to the framing subcontractor, $41,000.00 to the electrical subcontractor, $26,000.00 to a materials supplier — a full $162,000.00 accounted for, with the paper trail showing each payment was made from that receipt to a beneficiary of that trust, not routed through an undifferentiated operating balance first. If a claim is ever made, that ledger is the entire defence; without it, the firm is reconstructing intent from bank statements after the fact, which is a much harder position.
BC's Builders Lien Act doesn't stop at the trust characterization — it mandates the account structure that makes the trust enforceable. Section 5(1) requires the owner to “establish a holdback account at a savings institution for each contract” and administer it “together with the contractor.” Section 5(2)(c) then locks it: money in that account “must not be paid out of the account without the agreement of all the persons who administer the account.” Section 10(4) adds a separate protection specific to that structure — money held in a s.5 holdback account “is not subject to garnishment,” meaning a creditor chasing the contractor for an unrelated debt can't reach it. And under s.14, a trust action against a contractor or subcontractor “must not be commenced later than one year after” the head contract or the improvement is completed, abandoned or terminated — a clear outer limit that Ontario's material, by contrast, describes only as “strict and unforgiving” without stating the number. A firm working in both provinces gets a genuine structural template from BC's holdback-account requirement worth applying voluntarily to Ontario trust money even though Ontario's Act doesn't mandate the same segregated account — a jointly-controlled, project-specific account is a stronger defence than a general ledger code no matter which province's Act is technically in force.
The record-keeping that defends a trust claim overlaps almost entirely with a separate, unrelated obligation: under the Income Tax Act, s.230(1) requires every business to keep records and books of account, and s.230(4)(b) sets the retention period at six years from the end of the last taxation year the records relate to. Income Tax Regulation 5800(1)(c) applies the same six-year clock to a non-corporate business's general ledger and special contracts, measured from the end of the year the business ceased, while a corporation's core records under ITR 5800(1)(a)–(b) must survive two years past dissolution. A job-by-job trust ledger built to defend a Construction Act claim, kept for the tax-mandated period, does double duty — it's the same file a bookkeeper should already be retaining, just organized so it also answers the trust question the day someone asks it.
Getting the invoice side of this right matters just as much as the disbursement side — see how the payment clock that generates this money is tracked, and if a payment dispute ends up unresolved, what a lien claim package needs to show alongside it.
Ontario's Construction Act imposes the trust obligation on the money itself, but the sourced material describes the breach patterns — commingling into a general operating account without tracking — rather than a statutory account-segregation mandate. British Columbia goes further and requires a dedicated, jointly-administered holdback account by statute; adopting that discipline voluntarily is good practice everywhere.
Yes. Where a director or officer directs or acquiesces in the misuse of construction trust funds, that individual can be held personally liable for the breach, separate from the corporation's own liability.
Not for whether a breach occurred. The Construction Act does not require proof of fraudulent intent — using trust money for a purpose outside the trust is the breach, regardless of whether repayment was always the plan.
A trust action must not be commenced later than one year after the head contract or the improvement is completed, abandoned or terminated. No comparable published limitation figure was found for Ontario in this material — its own guidance describes deadlines as strict without stating one.
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