Construction Contractors: GST/HST and T5018 Compliance + Contractor Tax Reporting Canada: How to Avoid Penalties, Reduce Audit Risk, and Maximize Deductions — A Montreal CPA Firm Near You Explains

Introduction
Understanding GST/HST and T5018 compliance for construction contractors is essential for anyone working in trades, construction, renovation, subcontracting, general contracting, commercial builds, home improvement, or real estate development. The construction industry is one of the most heavily audited sectors by CRA and Revenu Québec due to high cash transactions, subcontractor payments, GST/QST complexity, and the mandatory T5018 reporting system. Mistakes in GST/HST, QST, payroll, or subcontractor slips can lead to reassessments, penalties, interest, and even frozen government refunds. This guide explains how contractors can stay compliant, reduce audit risk, and maximize tax deductions.

Why Proper Tax Compliance Matters for Contractors
Construction projects often involve multiple subcontractors, staged payments, cash flow crunches, and large material purchases. Without proper GST/QST and T5018 systems in place, contractors risk losing deductions, triggering audits, or facing penalties. Strong tax planning helps contractors stay profitable, compliant, and protected from CRA and ARQ scrutiny.

What Is the T5018 Statement of Contract Payments?
CRA requires construction businesses to file a T5018 slip if they pay subcontractors for construction services. This slip reports:
the subcontractor’s name
business number or SIN
total amounts paid
GST/HST included
T5018 filing applies to contractors, subcontractors, renovation companies, plumbers, electricians, and anyone in a construction business with subcontractor payments. CRA uses T5018 data to match income reported by subcontractors — any mismatches trigger audits.

Who Must File T5018 Slips?
Any business in the construction sector that pays subcontractors more than $500 must file T5018 slips annually. Québec has parallel compliance requirements under its provincial system. Corporations, self-employed contractors, and partnerships must all comply. Even small contractors may be obligated to file.

Consequences of Not Filing T5018 Slips
Failure to file results in:
penalties per slip
late-filing interest
CRA review of GST/HST claims
potential audits of subcontractors and the contractor
CRA aggressively enforces T5018 compliance because the construction sector has historically shown high levels of underreported income.

GST/HST and QST Rules for Construction Contractors
GST/QST rules are complex for contractors because tax treatment depends on:
the nature of the work (construction, renovation, repair)
commercial vs residential projects
whether the customer is GST registered
progress billing, deposits, and advances
TSP (Taxable Self-Supply) rules for new housing
Contractors must charge GST/HST and QST correctly and claim input tax credits on materials and subcontractor charges.

Charging GST/HST/QST on Construction Services
Contractors must apply GST and QST on most construction services, including:
labour and installation
materials supplied as part of the job
renovation and repair work
commercial and industrial projects
Residential construction still requires GST/QST unless specific exemptions apply.

Input Tax Credits (ITCs) and Input Tax Refunds (ITRs)
Contractors may claim ITCs/ITRs for GST/QST paid on:
materials
subcontractor invoices
building supplies
equipment rentals
fuel and tools
administrative expenses
CRA and ARQ often audit ITC/ITR claims because of missing or incorrect documentation.

Self-Supply Rules for New Residential Housing
Builders of new residential housing must apply tax to the fair market value of the property, even if they do not sell it (for example, when turning a build into a rental). This is called the self-supply rule. It is one of the most misunderstood and heavily audited construction-sector rules.

Contractor Deductions: Maximizing Tax Savings
Contractors may deduct:
tools and equipment
vehicle expenses
fuel, maintenance, and insurance
safety gear and protective clothing
home office expenses
construction materials
subcontractor payments
equipment rentals
These deductions must be documented to avoid reassessment.

Vehicle and Mileage Deductions
Contractors can deduct actual vehicle expenses or use mileage logs. Heavy trucks, trailers, and work vehicles can be depreciated. CRA audits contractor vehicle claims often, especially those with high fuel deductions and no logs.

Home Office Deduction for Contractors
Contractors running administrative duties from home may deduct a portion of rent, utilities, internet, and property taxes. Documentation must show the space is used regularly for business.

Payroll Requirements for Workers and Labourers
Contractors must follow payroll and labour compliance rules, including:
CPP/QPP, EI/QPIP withholding
vacation pay
statutory holidays
source deductions
Construction payroll is heavily audited because contractors often mix employees and subcontractors improperly. Misclassification can trigger back taxes.

Contractor vs Subcontractor Classification
CRA reviews whether subcontractors are truly independent or should be employees. Factors include:
control of work
ownership of tools
risk of loss
opportunity for profit
Businesses misclassifying workers face large payroll reassessments.

Bookkeeping Requirements for Contractors
Contractors must maintain:
invoices and contracts
supplier receipts
time logs
material receipts
equipment rental invoices
subcontractor records
bank deposits and payouts
CRA and ARQ require detailed job costing documentation.

Audit Risks for Construction Contractors
CRA and Revenu Québec audits are triggered by:
missing T5018 slips
incorrect GST/QST treatment
large cash expenses
vehicle deductions without logs
low profit margins
unusual subcontractor payments
incorrect payroll classification
Construction is permanently on CRA’s high-risk list.

Progress Billing and Tax Timing
GST/QST applies when an invoice is sent or payment is received, whichever comes first. Deposits, milestone payments, and holdbacks all have specific GST/QST rules. Incorrect tax timing is a common reason for reassessment.

Holdbacks and GST/QST
Construction holdbacks are taxable when released, not when earned. Contractors must track holdbacks separately from invoices.

Why Many Contractors Face Reassessments
poor bookkeeping
missing receipts
incorrect GST/QST coding
no subcontractor slips
misclassified workers
improper T5018 filing
CRA focuses heavily on this industry. Proper documentation prevents penalties.

Mackisen Strategy
Mackisen CPA helps contractors with GST/QST filings, T5018 slips, payroll compliance, subcontractor classification, bookkeeping cleanup, vehicle deduction optimization, audit defense, incorporation strategies, and job-costing systems. We ensure contractors remain profitable and fully compliant.

Real Client Experience
A Montréal contractor faced reassessment for missing T5018 slips; Mackisen reconstructed all subcontractor records and avoided penalties. A renovation company misreported GST/QST on progress payments; we corrected filings and negotiated reductions. A contractor overclaimed fuel expenses without a log; we rebuilt proper logs and protected deductions. A residential builder triggered self-supply rules unknowingly; Mackisen handled compliance and tax planning.

Common Questions
Do all contractors need to file T5018 slips? Yes if paying subcontractors in construction.
Do contractors charge GST/QST on labour? Yes in most cases.
Are tools deductible? Yes when used for business.
Can CRA reclassify subcontractors as employees? Yes.
Do contractors get audited often? Extremely often.
Is incorporation beneficial? Yes for tax deferral and liability planning.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps construction contractors reduce taxes, eliminate audit risk, file T5018 slips correctly, and maximize deductions. Our deep industry expertise gives contractors the protection and financial clarity they need to grow profitably.