- Once the notice to creditors has been given and its time has run out, a trustee is not liable for assets distributed if they had no notice of a claim.
- A creditor may still follow estate assets into the hands of the people who received them.
- Distributing without a clearance certificate can make the representative personally liable for unpaid tax, up to the value distributed.
Beneficiaries often want to be paid quickly, but an estate trustee must first deal with the deceased's debts. Pay out too early and a claim you did not know about may land on you personally.
This article explains how notice to creditors works, what protection it gives, and the other points that should make you pause before distributing.
Debts come before gifts
Under a will, the estate is normally distributed only after the assets are liquidated and the funeral and burial expenses and debts are paid. Funeral expenses cannot be deducted when calculating Estate Administration Tax.
Funeral costs also come up in other places. The CPP death benefit can go to the person or institution that paid, or is responsible for paying, the funeral expenses, and funeral expenses cannot be deducted on the deceased's final tax return.
The order in which different debts must be paid can be complicated, especially if the estate cannot cover everything. That depends on the facts, and a lawyer can confirm the order before you pay anyone.
Giving notice to creditors
Once an estate trustee has given the court-style notice to creditors and the time in the notice has run out, they may distribute to the people entitled. They are not liable for assets distributed if they had no notice of a claim at the time of distribution.
The length of time to allow is set out in the notice itself, so get the wording and timing right with legal help rather than guessing.
The limits of that protection
- A creditor or claimant can still follow the estate assets into the hands of the people who received them.
- The creditor-notice protection does not apply to heirs, next of kin, devisees or legatees claiming as such, so it cannot be used to cut off a missing beneficiary.
- If you actually knew of a claim, the protection does not help, because it depends on having no notice of the claim at the time of distribution.
If a beneficiary cannot be found, the statute deals with it on the final passing of accounts. A personal representative or trustee must then pay into court any money belonging to a minor, a mentally incapable person, or a person whose address is unknown. If the Public Guardian and Trustee is guardian of property for the person entitled, the money is paid to the Public Guardian and Trustee instead of into court.
Other reasons not to distribute yet
| Issue | What to know |
|---|---|
| Tax clearance | A legal representative must obtain a clearance certificate before distributing, and distributing without one makes the representative personally liable for unpaid tax up to the value distributed |
| Timing of the request | Ask after all returns are assessed, the tax is paid or secured, and proof of your authority has been sent to the CRA |
| Interim payments | A certificate is not needed before each distribution, as long as you keep enough property to pay any liability to the CRA |
| Final tax return | A final T1 return must be filed for every person who dies. For a death between January 1 and October 31 it is due April 30 of the following year, and for a death between November 1 and December 31 it is due 6 months after the death |
| Business income | If the deceased, or a spouse or common-law partner living with them, carried on a business, the final return is due June 15 of the following year for deaths from January 1 to December 15. Payment is still due on the regular date |
| Spouse's equalization | Do not distribute within six months after the death unless the surviving spouse consents in writing or the court authorizes it |
| Dependant support claims | Once served with notice of a support application, do not distribute until it is disposed of, unless all persons entitled to apply consent or the court orders otherwise |
If you have already paid too early
Paying too early can expose you to personal liability for the shortfall. The court may relieve a trustee wholly or partly from personal liability for a breach of trust if the trustee acted honestly and reasonably and ought fairly to be excused. That is up to the judge and cannot be counted on.
No Ontario law requires an estate trustee to pass accounts at fixed intervals, and an estate trustee need not pass accounts unless the court compels it at the request of a person with an interest, such as a beneficiary or creditor. If accounts are passed, the judge may make a full inquiry into the whole estate and look into complaints of misconduct, neglect or default.
- List every debt, claim and tax return you know about.
- Give the court-style notice to creditors and keep a record of when you gave it.
- Wait until the time in the notice has run out.
- Deal with the tax clearance certificate before final distribution.
- Keep enough back to cover possible liabilities, and get legal advice before releasing the rest.
Frequently asked questions
Am I protected if I give notice to creditors?
Once the notice has been given and its time has run out, you are not liable for assets distributed if you had no notice of a claim at the time. A creditor may still follow the assets into the hands of the people who received them.
Does the notice protect me against a beneficiary's claim?
No. The protection does not apply to heirs, next of kin, devisees or legatees claiming as such.
Do I need a CRA clearance certificate?
A legal representative must obtain one before distributing, and distributing without it makes the representative personally liable for unpaid tax up to the value distributed. You do not need one before each interim distribution if you keep enough property to cover any liability.
Can a court excuse me if I distributed too soon?
It may, if you acted honestly and reasonably and ought fairly to be excused. It is a discretion, so get advice early.
Sources
- Family Law Act, R.S.O. 1990, c. F.3 (e-Laws) — Ontario e-Laws
- Succession Law Reform Act, R.S.O. 1990, c. S.26 (e-Laws) — Ontario e-Laws
- Trustee Act, R.S.O. 1990, c. T.23 (e-Laws) — Ontario e-Laws
- Trustee Act, R.S.O. 1990, c. T.23 (e-Laws) — Ontario e-Laws
- CRA – Filing and payment due dates (deceased) — canada.ca
- Income Tax Act s. 159 (Justice Laws) — Justice Laws (federal)
- CRA – Apply for a clearance certificate — canada.ca
- CRA – Information Circular IC82-6, Clearance Certificate — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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