GST/QST Rules for Construction Contractors in Quebec: Subcontractors, Rebates, and Audit Red Flags

Introduction

Construction contractors in Quebec are among the most frequently audited industries for GST/QST compliance. Whether you operate in residential renovation, commercial projects, subcontracting, new builds, or mixed-use real estate, the rules surrounding taxable supplies, rebates, contractor–subcontractor relationships, and documentation are particularly strict. Many contractors lose thousands in denied ITCs/ITRs or face penalties because they misunderstand the rules for subcontracting, progress billings, self-assessment, or exemption claims.

This guide explains the GST/QST obligations for general contractors and subcontractors, common audit mistakes, available rebates, and how to protect your business from assessments.

Legal and Regulatory Framework

GST and QST for construction services are governed by the Excise Tax Act (ETA) and the Quebec Taxation Act (TAA).

Taxability of Construction Services

Construction services — including labour, materials, renovations, repairs, and improvements — are generally taxable at 5% GST and 9.975% QST.

Mandatory GST/QST Registration

Contractors must register for GST/QST if annual worldwide taxable revenues exceed $30,000.

Progress Billings

Under ETA and TAA, GST/QST must be charged on:

• progress payments

• holdbacks

• milestone invoices

• certifications of completion

Tax applies when the invoice is issued or when payment is received, whichever comes first.

Self-Assessment Rules

Contractors must self-assess QST/GST when:

• using materials withdrawn from inventory

• transferring materials to non-commercial activities

• performing improvements for exempt clients

Subcontractors

Subcontractors must charge GST/QST unless:

• they are below the small-supplier threshold

• they perform zero-rated services (rare in construction)

General contractors must verify subcontractors’ valid GST/QST numbers to protect their ITCs/ITRs.

Key Court Decisions

1. Construction JJM Inc., 2021 QCCQ — Incorrect progress billing leads to reassessment

The contractor failed to remit GST/QST at invoicing stage. Court confirmed tax applies when invoice is issued, not when project is paid.

2. RQ v. Plâtrage M. (2019) — Non-registered subcontractors invalidate ITCs

General contractor claimed ITCs for invoices issued by subcontractors who were not GST/QST registered. ITCs were denied.

3. Habitation Quebec Inc., 2022 — Withdrawn materials must be self-assessed

Contractor withdrew inventory supplies for a related project without self-assessing QST. Court upheld assessment.

4. Entreprises B. Inc., 2018 — Cash payments trigger audit

Large cash payments to subcontractors were considered high-risk. Missing receipts led to denied ITCs.

These rulings confirm the sensitivity of construction audits and the importance of proper documentation.

Why CRA and Revenu Québec Target Construction Contractors

The construction industry is high-risk due to:

1. Frequent subcontracting
   Risk of unregistered or fraudulent subcontractors issuing invalid invoices.

2. High use of cash
   Leads to unreported revenue and missing documentation.

3. Progress billing complexity
   Timing errors cause tax discrepancies.

4. Large material purchases
   Often incorrectly classified or lacking proper ITC/ITR support.

5. Renovations and new housing rebates
   Many incorrectly claimed or omitted.

6. Inventory withdrawals
   Often not self-assessed properly.

7. Real estate development
   Complex GST/QST rules for substantial renovations, new builds, and mixed-use properties.

Auditors routinely analyze bank deposits, material purchases, subcontractor lists, and building permits.

Mackisen Strategy: How We Protect Construction Contractors

We use a construction-specific tax compliance approach to prevent GST/QST assessments.

1. Subcontractor Verification System

We confirm each subcontractor’s GST/QST registration and invoice compliance.

2. Progress Billing Compliance

We ensure:

• proper timing of tax

• correct treatment of holdbacks

• correct application on milestone payments

• alignment between contracts, invoices, and payments

3. Materials and Inventory Review

We verify:

• classification of materials

• self-assessment obligations

• commercial-use tests

4. New Housing Rebates

We assist contractors and clients in claiming:

• GST/HST New Housing Rebate

• QST New Housing Rebate

• Substantial renovation rebate qualifications

5. Audit Defence

We manage:

• contract reviews

• supplier confirmations

• bank reconciliation

• proof of taxable vs exempt activities

• explanation of progress billing structures

6. Voluntary Disclosure

If errors occurred (especially with subcontractors or self-assessment), we file voluntary disclosures to reduce penalties.

Real Client Experience

A Montreal renovation company was reassessed for $118,000 because subcontractors were issuing invoices without valid QST numbers, and progress billing taxes were applied incorrectly.

Mackisen:

1. Identified invalid subcontractor invoices.

2. Corrected progress billing tax timing.

3. Submitted revised GST/QST returns.

4. Filed voluntary disclosure for missing self-assessment.

5. Reduced the assessment by 72 percent.

Outcome: Final balance dropped to under $33,000, with penalties removed.

Common Questions

Do subcontractors need to charge GST/QST?

Yes, unless they qualify as small suppliers under $30,000 revenue.

Does GST/QST apply to holdbacks?

Yes. Tax applies when the invoice is issued, even if the holdback is released later.

Can contractors claim ITCs for tools and equipment?

Yes, if used in commercial activities.

Are residential renovations taxable?

Yes, except for certain medical or accessibility-related modifications.

Do I need to self-assess QST for materials I use myself?

Yes, if they were purchased for resale but consumed in your own project.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency, and protection from audit risk.

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Construction contractors face strict GST/QST rules. Learn tax rules for subcontractors, progress billing, rebates, and audit risks in Quebec.