Advertising for Creditors Before Distributing an Ontario Estate

You are the executor of an Ontario estate, and you want to pay the beneficiaries. Before you do, you have heard that you should give notice to creditors and wait. The natural question is whether doing that makes it safe to distribute.

The short answer is that it helps a great deal with ordinary creditor claims, but it is not a complete shield. This article explains what the protection covers, where it stops, how tax clearance is a separate layer, and what the court can do if something goes wrong.

Where creditor notice fits in the order of administration

In Ontario, the estate is distributed under a will once the assets have been liquidated and the funeral and burial expenses and any debts have been paid. Distribution to beneficiaries comes near the end, not the start.

The difficulty is that you may not know about every debt. Some creditors surface only after word of the death spreads. Notice to creditors is the tool the Trustee Act gives you to deal with that uncertainty before you hand out the estate.

What Trustee Act section 53(1) protects

After you have given the required notice for creditors to send in their claims, and once that period has expired, an estate trustee may distribute the estate having regard only to the claims they then have notice of. You are not liable for claims you had no notice of at the time of distribution.

Two points matter in practice:

• The protection depends on giving the required notice and letting the period run out. Check with a lawyer on exactly what the notice must look like and how long the period is for your estate.
• The protection is measured by the claims you have notice of at the time of distribution. How this applies to a particular debt depends on your situation, so it is worth confirming with a lawyer.

Where the protection stops: creditors can follow the assets

Section 53(2) preserves a creditor's or claimant's right to follow the estate's assets into the hands of the people who received them, even after a distribution that protects you as trustee.

That means the protection is personal to you. A late creditor may not be able to pursue you, but may still be able to reach what the beneficiaries received. Beneficiaries should understand that money received early could, in some cases, have to be dealt with if a valid claim appears later.

The tax layer: creditor notice does not protect you from the CRA

Tax is a separate track. Before distributing any property, the legal representative of a deceased taxpayer must obtain a clearance certificate from the Minister, confirming that all tax amounts have been paid or that security for them has been accepted.

If you distribute without the certificate, you are personally liable for the unpaid tax amounts, up to the value of the property you distributed, and the Minister may assess you at any time. Giving notice to creditors does not change that.

• The certificate is requested on Form TX19, "Asking for a Clearance Certificate", after the required returns are filed and assessed and all income taxes are paid or secured.
• Supporting documents include a statement of distributions made to date and a statement of the proposed distribution of any holdback or residual amount.
• An estate with a GST/HST number also needs Form GST352 for clearance.
• The personal-liability rule applies to any distribution, including an interim one. How large a holdback to keep depends on the facts, so ask a lawyer or accountant before you pay anything out early.

If something goes wrong: relief from the court

The court may relieve a trustee who is personally liable for a breach of trust, wholly or partly, if the trustee acted honestly and reasonably and ought fairly to be excused for the breach and for not obtaining the court's directions.

A similar kind of relief is available to a personal representative who overpays a creditor or claimant, if they acted honestly and reasonably to protect or conserve the estate's assets.

Relief is discretionary. It is a safety net, not a plan, and good records of what you did and why are what make a request for relief credible.

What to do next

• Pay or set aside funeral costs and the debts you know about before thinking about distribution.
• Give the required notice to creditors and let the period expire before distributing.
• Keep accurate records of assets, payments and the notices you gave.
• File the returns, pay the tax and request the CRA clearance certificate before distributing, using Form TX19 and, if registered for GST/HST, Form GST352.
• Before any early or interim payment to a beneficiary, ask a lawyer or accountant how much to hold back.
• Tell beneficiaries that creditors may still have rights against what they receive.

Frequently asked questions