Comingled and Compliant: Construction Act trust obligations after Morin Bros. – Part II
October 2026In Part I of this discussion series we examined the breach of trust regime under the Construction Act, the Morin Bros. decision[1], and offered the reasons for our respectful disagreement to the court’s finding that maintaining a separate trust account is required under the Act. We also reviewed the legislative history set out in Striking the Balance[2] which rejected separate trust accounts in favour of enhanced record keeping, and the St. Mary’s Cement decision[3] which established that the failure to account for trust funds, not the failure to segregate them, constitutes a breach of trust. Part I concluded that diligent project-by-project record keeping, not the maintenance of a separate bank account, is the extent of the statutory requirement and the best defence to a breach of trust claim.
In Part II we address three further issues arising from Morin Bros. First, the treatment of interest as trust money following Great Northern and its practical implications for trustees, second, the principle that liability for breach of trust is measured by the extent of the breach, and practical strategies for contractors to limit that exposure, and finally, how contractors can transform some of their operating costs into trust fund payments.
Key Takeaways
- Interest on trust funds is part of the trust fund.
- Liability for breach of trust is measured by the extent of the breach, not the value of the contract.
- Overhead expenses directly related to site costs can be eliminated as overhead and transformed into trust fund payments by organizing them into a separate corporation (a “SiteCo“) that operates as a separate legal entity, provided the SiteCo is properly documented with market-based pricing, a written subcontract, and regular invoicing to avoid a court piercing the corporate veil.
Analysis
Interest and trust funds
In Great Northern Insulation Services Ltd. v. King Road Paving and Landscaping Inc.,[4] the Court of Appeal for Ontario held that interest on trust funds is also trust money under s. 8(1) of the Act.[5] Interest at an agreed upon rate in a contract or subcontract is included in the definition of “price” under the Act and constitutes an amount owing to a subcontractor relating to the improvement. The decision was applied in Morin Bros.[6]
The practical significance of Great Northern and Morin Bros. is that a trustee’s exposure continues growing after the funds are received. Because accruing interest is impressed with the trust, the trustee’s liability increases for as long as the principal remains unpaid. A trustee who treats interest as a contractual afterthought risks misunderstanding its true exposure – the amount of interest may ultimately dwarf the original principal owing.
Trustee contractors can take several practical steps to minimize their exposure to ballooning interest claims:
- Know the applicable interest rate and its trigger. An unfavourable contractual rate compounds quickly and should be identified early, before a dispute is crystallized.[7]
- Treat disputed amounts as a running clock. Resolving a disputed invoice promptly limits the period over which interest accrues. Using adjudication can assist in resolving matters quickly.
- When payments are delayed, contractors should extend their s. 8.1 record-keeping obligations to interest, not just principal. A trustee’s records should capture how interest was calculated so it can produce convincing evidence of its interest exposure rather than leaving that calculation to be reconstructed, and potentially inflated, by the claimant.
- Address interest expressly in settlement and payment discussions. Settling only the principal and leaving accrued interest open risks a later breach of trust claim treating that unresolved interest as an ongoing, independently growing breach.
Limiting liability: the extent of breach, not the value of contract
A breach of trust claim under the Construction Act is not equivalent to a breach of contract claim. The contractor’s liability is measured by the extent of the breach – the amount by which the contractor failed to apply trust funds in accordance with its obligations under s. 8.1 – not by the amount owing under the contract. The contractor’s maximum exposure is the total value of trust funds it received, and the burden falls on the contractor to reduce that exposure by producing records demonstrating it applied the funds consistent with the trust.[8]
In practice, contractors do not maintain separate segregated accounts for each project. They finance their operations from a single general account, drawing on it for subcontractor payments, overhead, and other expenses in the expectation that each project will produce a profit after final payment, or at worst break even. A contractor will, in the ordinary course, typically use trust funds for overhead costs before all subcontractors on a given project are paid – particularly where cash flow is constrained and financing costs rise. Doing so is always a breach of trust, but the breach only gives rise to a claim for damages if the contractor does not pay its subcontractors what it received from the owner. In practice this occurs if the owner delays payments to the subcontractor or does not pay the contractor in full for the work performed.
Morin Bros. illustrates the consequence of failing to account for the trust funds. The contractor refused to provide any evidence of the dollar amount by which it had breached the trust. The court noted that the owner paid Bond some, but not all, of the amounts owing. Had Bond kept and produced records showing what it actually received from the owner, it could have limited its exposure on Morin Bros.’ breach of trust claim to that shortfall.
Absent such records, the theoretical extent of a contractor’s breach of trust liability is the full amount it received. The best defence, therefore, aside from simply not using trust funds before subcontractors are paid, is to keep records that affirmatively prove how funds received were applied – the same records discussed in Part I of this series.
Because of the real-world practice of many contractors, the best advice to give is that to which they will listen rather than the advice (do not breach the trust) they will ignore. That advice is to have sufficient and accurate accounting records. A second option may include converting some of their overhead costs into trust fund payments, discussed below.
Transforming an overhead cost into a subcontractor’s payment
The business case for SiteCo
One method of reducing a contractor’s financial liability for breach of trust is to move direct site expenses – capital equipment, machinery, site trailers, and dedicated site staff such as superintendents – into one or more related corporations (a “SiteCo“) and transform the SiteCo into a subcontractor separate from the operating company (“OpCo“) as a legally independent entity. Many larger construction businesses already use a SiteCo to segregate equipment acquisition and financing from OpCo’s income statement and balance sheet, which presents a clearer financial picture to lenders. What they often fail to do is complete the steps needed to make the SiteCo a fully independent corporation capable of being treated as a separate legal entity. These steps are neither complex nor expensive.
The failure to document the business activity of SiteCo
The business case for a SiteCo is often undermined by a lack of documentation establishing it as a genuinely separate business – a necessary prerequisite for a court to treat it as a separate legal entity. Common failures include: the SiteCo not charging OpCo for equipment at all; charging OpCo without any record of how the rate was calculated; and the absence of a written subcontract or rental agreement, with payments made irregularly by book entry rather than on a proper invoicing cycle. Because SiteCo and OpCo are by definition non-arm’s length, any one of these shortcomings may lead a court to pierce the corporate veil and treat SiteCo’s claims as part of OpCo’s overhead, thereby exposing OpCo to a greater claim for breach of trust.
SiteCo as a separate legal entity
Once a contractor treats SiteCo as a separate business bidding for work, the practical steps to transform OpCo’s overhead costs become straightforward. SiteCo should cost its equipment and dedicated site staff (including superintendents and site-specific clerical staff, provided they are SiteCo employees)[9] against comparative third-party pricing, retaining the supporting quotes, and applying a markup for overhead and profit consistent with OpCo’s own markup on the project. SiteCo and OpCo will sign a written subcontract or rental supply agreement on a standard form immediately after OpCo is awarded the contract. SiteCo should invoice OpCo monthly like any other subcontractor, and OpCo should pay SiteCo promptly out of the progress and final payments it receives. Finally, SiteCo should have the hallmarks of a separate business – its own bank accounts and financial statements, and rent paid to OpCo (in the absence of another rational basis, proportionate to its revenue relative to OpCo’s).
There is no legal reason why non-arm’s length parties cannot subcontract with each other, but if the arrangement is challenged in a breach of trust claim by an unpaid third-party subcontractor, it must pass the “smell test”. The arrangement will fail if the principals have skewed SiteCo’s pricing to extract profit rather than reflect genuine market terms. Done properly, however, the structure narrows OpCo’s breach of trust exposure and confers a further benefit in litigation: as a separate subcontractor, SiteCo can lien the project in its own name for what it is owed, and s. 30 of the Construction Act shields it from set-offs and counterclaims asserted against OpCo.
Conclusion
The main obligation of the contractor trustee is to protect the trust funds it receives from the owner, including any interest that accrues on those funds. Contractors who treat interest as a contractual afterthought risk finding that it forms the bulk of their liability. Because liability for breach of trust is measured by the extent of the breach rather than the value of the contract, contractors can take meaningful steps to limit their exposure. Structural measures, like appointing SiteCo as subcontractor to take on capital, equipment, and site services costs through a legitimate subcontract, may further narrow the exposure to a breach of trust claim. None of these strategies, however, displace the central lesson of this series: diligent, project-by-project record keeping, capturing both principal and interest, remains the best defence to a breach of trust claim.
This article is co-authored by Dylan Dilks and Ted Rotenberg. Dylan Dilks is a senior associate lawyer at Beale & Co LLP and Ted Rotenberg is a retired senior lawyer.
[1] Morin Bros. Building Supplies Inc. v. Bond Group Ottawa 2018 Inc. et al, 2025 ONSC 5561
[2] Striking the Balance: Expert Review of Ontario’s Construction Lien Act (2016), online (pdf).
[3] St. Mary’s Cement Corp. v. Construc Ltd., 1997 CanLII 12114 (ON CTGD)
[4] Great Northern Insulation Services Ltd. v. King Road Paving and Landscaping Inc., 2021 ONCA 367 (CanLII)
[5] Great Northern at para 16.
[7] Suppliers and subcontractors often have high boilerplate interest rates (18-24% per annum). High rates of interest are common for standard supplier/subcontractor credit agreements to reflect the risk of non-payment.
[8] Morin Bros. at para 125; s.8 of the Construction Act includes as trust funds any funds that are receivable but were not paid to the contractor. While in theory what the owner did not pay the contractor is part of the exposure of the contractor to the breach of trust claim of a subcontractor, the reality is that courts will not punish a contractor who genuinely cannot collect the receivable if the trust records are complete and verifiable.
[9] The authors recognize that under some circumstances SiteCo can have unionized employees, but this may involve labour relations and other considerations beyond the scope of this article.
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