Changes to Trust Provisions Under the Construction Act
The Construction Act (the “Act”) has had many amendments and the construction projects are now in force for contracts entered into after July 1st, 2018. The trust provisions of the Act have been amended and are contained in ss.7-13.
Section 7 of the Act provides that all amounts received by an owner that are used in the financing of an improvement…constitute a trust fund for the benefit of the contractor. The owner is not permitted to appropriate or convert any part of the trust fund to the owner’s own use or to any use inconsistent with the trust until the contractor is paid all amounts related to the improvement owed to the contractor by the owner. These clauses have not changed. If there is a breach of this section of the Act, there is personal liability for all directors, officers and persons in control of the trust fund. The caselaw has made it clear that the owner may not use the funds to cover overhead of the owner in the development of the property.
A similar trust is created for the contractor and subcontractors. The same obligation regarding the trust monies and their use applies. The change occurs in s. 8.1. This section requires that contractors and subcontractors create a trust account in a financial institution in their name. The trustee (contractor or subcontractor) shall maintain written records respecting the trust funds with details of the amounts that are received in and paid out of the funds. The trust bank account is to be separate from the general operating bank account of the contractor or subcontractor. The bank trust account may be used for various projects but detailed records must be kept and each of the projects need to be clear and separate from overhead. Overhead can only be paid once all sub-trades have been paid.
The trust funds deposited in the trust bank account are traceable, which means that if funds are paid out of the bank trust account, and not in accordance with the trust provisions, they are traceable.
These requirements are substantial changes to the manner in which contractors and subcontractors operate in Ontario. Breach of these provisions can lead to serious consequences for these companies and their guiding individuals.
Advice should be sought regarding the set-up of the trust accounts, records required, and various issues relating to the use of the trust fund set offs and potential breaches. Additionally, lien claimants will want to consider adding a trust claim with the lien claim. The Construction Act now permits trust claims to be added to lien claims.[ssba]