{"id":6401,"date":"2023-05-25T14:50:35","date_gmt":"2023-05-25T18:50:35","guid":{"rendered":"https:\/\/www.millerthomson.com\/ontario-superior-court-legal-characterization-holdback-amounts-first-nations-lands\/"},"modified":"2025-12-24T14:31:45","modified_gmt":"2025-12-24T19:31:45","slug":"ontario-superior-court-legal-characterization-holdback-amounts-first-nations-lands","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/construction-and-infrastructure-law\/ontario-superior-court-legal-characterization-holdback-amounts-first-nations-lands\/","title":{"rendered":"Ontario Superior Court provides insight on the legal characterization of holdback amounts concerning a project on First Nations lands"},"content":{"rendered":"\n

Case commentary – Northwest Angle 33 First Nation. v. Razar Contracting Services Ltd.et al<\/em>., 2023 ONSC 1233<\/h2>\n\n\n\n

A recent decision of the Ontario Superior Court of Justice has provided useful insight into how a trust claim under the Construction Act<\/em>, R.S.O. 1990 c. C.30 (the \u201cAct<\/strong>\u201d) can be advanced on First Nations lands and how statutory and contractual holdback amounts will be legally characterized by the court.<\/p>\n\n\n\n

Facts<\/h2>\n\n\n\n

In February 2020, North West Angle 33 First Nation (the \u201cFirst Nation<\/strong>\u201d) contracted with Razar Contracting Services Ltd.(\u201cRazar<\/strong>\u201d) for the construction of a water system to provide safe drinking water to the residents of the First Nation (the \u201cContract<\/strong>\u201d). Pursuant to the terms of the Contract, the First Nation was required to retain a 10% statutory holdback and 2% maintenance holdback from progress payments made to Razar.[1]<\/a><\/p>\n\n\n\n

On May 18, 2022, through exercising its rights pursuant to the Contract, the First Nation took over the balance of the Contract work from Razar as a result of uncorrected defaults. The express terms of the Contract held that if the First Nation was to take over any part of the work from Razar, then Razar\u2019s right to any further payment under the Contract would be extinguished<\/em>.[2]<\/a><\/p>\n\n\n\n

As of May 18, 2022, the 10% statutory holdback retained by the First Nation amounted to $1,003,768 and the 2% maintenance holdback amounted to $200,752.75. The total holdback funds retained by the First Nation as of the date that it assumed completion of the Contract amounted to $1,204,516.55.[3]<\/a> As of the date of the Court\u2019s decision, the project was still ongoing and had not been deemed substantially complete<\/em>.<\/p>\n\n\n\n

In Mid-may 2021, the Project Engineer, JR Cousins Consultants Ltd., began receiving written notices from Razar\u2019s suppliers and subcontractors indicating that they had not been paid by Razar. The total amounts claimed by Razar\u2019s suppliers and subcontractors amounted to $1,913,038.14.[4]<\/a>  Pro-Gen (Thunder Bay) Inc. (\u201cPro-Gen<\/strong>\u201d) was a subcontractor on the project who commenced a claim against Razar with respect to unpaid amounts owing for work performed on the project. In a separate proceeding, Pro-Gen obtained default judgment against Razar and a Notice of Garnishment in the amount of $207,637.68 and served this Notice on the First Nation, as garnishee.<\/p>\n\n\n\n

On October 17, 2022, the First Nation was served with a Requirement to Pay from the Canada Revenue Agency (the \u201cCRA<\/strong>\u201d) in relation to unremitted payroll source deductions, whereby the CRA demanded payment of $281.473.77 (claimed as owing by Razar) from any amounts that the First Nation would otherwise pay to Razar.[5]<\/a> The total amounts claimed by Pro-Gen and the CRA were in addition to the $1,913,038.14 claimed by Razar\u2019s other suppliers and subcontractors.<\/p>\n\n\n\n

The First Nation (disclaiming any beneficial interest in the subject holdback fund) commenced an Application seeking, among other things, an interpleader order pursuant to Rule 43.02(1) of Ontario\u2019s Rules of Civil Procedure, <\/em>ordering the First Nation to pay the amount of $1,204,516.55 (the \u201cFund<\/strong>\u201d) into Court; and an order for a claims process to be established with respect to the distribution of the subject (statutory\/contractual maintenance) holdback funds.<\/p>\n\n\n\n

Analysis<\/h2>\n\n\n\n

Are the trust provisions of the Act applicable given that the project was located on federal and First Nations land?<\/h3>\n\n\n\n

Notwithstanding the fact that the subject project was located on Federal and First Nations land, the Court held that the trust provisions of the Act applied and the subject holdback funds are a proper trust fund for the benefit of unpaid suppliers and subcontractors pursuant to Section 8 of the Act. The Court cited the decision in Skukowski v. James Conci Holdings Inc<\/em>., 1998 CarswellOnt 4119 (Ont. Gen. Div.) and found that the Act was provincial legislation of general application, and therefore, applicable to the First Nations pursuant to Section 88 of the Indian Act<\/em>, R.S.C., 1985, c. I-5.[6]<\/a> Further, the Court followed the decision in Skukowsk<\/em>i and held that a trust claim can be advanced with respect to an improvement on Federal land, including First Nations land.[7]<\/a><\/p>\n\n\n\n

Legal characterization of the holdback fund<\/h3>\n\n\n\n

The Court analyzed whether the subject holdback fund under the Contract was the property of Razar or whether the holdback represented a debt payable to it. The legal characterization of the holdback fund would be determinative of Pro-Gen\u2019s and CRA\u2019s right to priority.<\/p>\n\n\n\n

Pro-Gen argued that the holdback fund was not a trust fund but rather an amount payable to Razar under the Contract. Therefore, Pro-Gen argued that it should be permitted to obtain its judgment against Razar in priority to other potential claimants. The CRA argued that the holdback fund should be deemed as funds held in trust for the Crown and that Section 227 of the Income Tax Act<\/em>, R.S.C., 1985, c.1 gave the CRA priority over the subject holdback fund.<\/p>\n\n\n\n

In determining the legal characterization of the holdback fund, the Court examined the Contract to assess the intent of the parties. The Court found that the parties clearly intended that Razar would have no claim to the subject holdback fund in the event that the Project was taken out of Razar\u2019s hands prior to substantial completion. Accordingly, the Court found it reasonable to infer that because the parties intended for Razar\u2019s rights to the holdback to be extinguished if the Project was taken over, the holdback should be available to unpaid suppliers and subcontractors of Razar.[8]<\/a> Therefore, the proposition that the holdback was either the property of Razar or a debt owing to Razar was contrary to the intention of the parties.[9]<\/a><\/p>\n\n\n\n

The Court found that the deemed trust provisions under the Income Tax Act<\/em> would only afford the CRA with rights to the funds that Razar actually held. Therefore, if the contractor has no claim to any portion of the subject holdback funds, then neither does the CRA.<\/p>\n\n\n\n

Accordingly, the Court found that both Pro-Gen and the CRA did not have priority over the subject holdback fund.[10]<\/a><\/p>\n\n\n\n

The Court’s determination<\/h2>\n\n\n\n

The Court granted the First Nation\u2019s Interpleader order requiring the First Nation to deposit the applicable holdback funds in the amount of $1,204,526.55, with the Accountant of the Court. The various claims to the fund will be determined in a summary proceeding to follow.<\/p>\n\n\n\n

Key takeaways<\/h2>\n\n\n\n