What if the Estate Cannot Pay the Deceased's Tax Debt in Ontario?

Sometimes the deceased's debts, including a balance owing to the Canada Revenue Agency (CRA), are larger than what the estate holds. If you are the estate trustee, the worry is understandable: who is responsible, and could it fall on you or on the family?

This article explains the general rules in Ontario and federal tax law. Insolvent estates raise hard questions about the order in which debts are paid, so this is a situation where legal advice early on is worth having.

Where the tax debt is paid from

The legal representative is usually the executor named in the will. Balances owing to CRA are paid out of the estate's assets. An Ontario estate trustee's duties include winding up the deceased's affairs and paying taxes, bills and other debts before distributing what is left. Funeral and burial expenses and debts are paid before the estate is distributed to beneficiaries.

That means beneficiaries are generally last in line. If the estate runs short, there may be nothing to distribute to them. The exact order in which different debts are paid when an estate is insolvent depends on Ontario law and the facts, so confirm it with a lawyer before paying any creditor.

The clearance certificate and your personal risk

Every legal representative other than a trustee in bankruptcy must obtain a certificate from the Minister before distributing property under their control. The certificate confirms that all tax amounts have been paid or that security has been accepted.

A representative who distributes property without a clearance certificate is personally liable for the unpaid amounts up to the value of the property distributed. The Minister can assess the representative at any time.

There is an important limit for insolvent estates: a clearance certificate generally cannot be obtained if the estate does not have enough assets to pay all the tax, interest and penalties owed to CRA. Whether and when you can safely distribute assets depends on your situation, so it is worth confirming with a lawyer before you hand anything out.

What CRA can collect, and from whom

A certificate covers only amounts owing when it is issued. If more assets are found later, another certificate is needed before distributing them.

The rules above name the representative and certain recipients of property. Family members who are neither the representative nor a recipient of estate property are not named in them, but whether a particular person has any exposure depends on the facts, such as joint accounts or property they received. Ask a lawyer to confirm your family's position.

Ways to reduce the pressure

• Tax from deemed dispositions at death can, if the representative elects and provides security acceptable to the Minister, be paid in up to 10 equal consecutive annual instalments. The first is due on the normal payment date and each later one on its anniversary.
• Optional returns can lower total tax, because certain credits and deductions can be claimed more than once and each return starts again at the lowest brackets.
• Spousal rollovers can defer tax on property passing to a spouse or common-law partner, though the representative can elect out of the rollover one property at a time.

Instalments need security, so they help mainly when an estate has assets that are hard to sell quickly. They do not remove the debt.

What to do next

• Pause distributions to beneficiaries until you know what the estate owes.
• List the estate's assets with date-of-death values and the debts owing, including the CRA balance.
• Make sure all returns are filed, since a clearance certificate request comes after returns are filed and assessed.
• Keep track of funeral costs and other debts, which are paid before beneficiaries receive anything.
• Speak to a lawyer about the order of payment and your own protection as representative.

Acting carefully and documenting each step is the best protection a representative has. If the estate is clearly short, getting advice before paying anyone is usually far less costly than correcting a payment afterwards.

Frequently asked questions