When an Estate Can't Pay Everyone: Abatement of Gifts in Ontario

You have been told the estate does not have enough to pay everything the will promised. Perhaps cash was left to several people, and the bank account is smaller than expected. You want to know whose gift gets cut first and whether it is fair.

The order in which gifts shrink depends on the will and the facts, so this article does not set out a firm ranking, and a lawyer can confirm it for your situation. What it can do is explain the idea, show what usually reduces the estate before beneficiaries are reached, and give practical steps.

What abatement means

Abatement is the word for reducing gifts when there is not enough in the estate. Which gifts are reduced first, and whether gifts share the shortfall equally, depends on the will and the facts, so it is worth confirming with a lawyer.

The will's wording is the first place to look. If it says that one gift is to be paid ahead of the others, that wording matters. If it is silent, how this applies depends on your situation, so it is worth confirming with a lawyer.

Why a shortfall happens

Shortfalls are often caused by things the person did not have in mind when they signed the will. Common causes are listed below.

• Debts, such as credit cards, loans or a line of credit.
• Income tax on the final return, including tax on registered plans.
• Funeral costs, legal fees and the cost of running the estate.
• Assets that were sold or spent before death.
• Assets that pass outside the estate, such as jointly owned property that goes automatically to the other owner or plans with a named beneficiary.

That last point catches families out. Jointly owned assets that pass automatically to the other owner and RRSP, RRIF, TFSA and pension assets with a beneficiary designation are excluded from the value used for estate administration tax. Whether they are available to pay gifts or debts under the will depends on the facts, so it is worth confirming with a lawyer.

Tax can take a large bite

For an unmatured RRSP, the annuitant is considered to have received the fair market value of all the property in the plan just before death, and that amount is included in income on the return for the year of death. The tax is on the deceased's final return, whoever receives the RRSP money. So a beneficiary can receive the full plan value while the estate is left with the tax bill.

If a refund of premiums is paid to a qualifying survivor, being a spouse or common-law partner, or a financially dependent child or grandchild, the legal representative can reduce the amount reported on the final return, shifting the tax to that survivor. Where the money is paid to the estate and the survivor is an estate beneficiary, they can jointly file Form T2019.

Deadlines matter too. A final return for a death between January 1 and October 31 is due April 30 of the following year, and for a death from November 1 to December 31 it is due six months after death. Late filing brings a penalty of 5% of the balance owing plus 1% for each full month late, up to 12 months, and interest. Those costs reduce what is left for beneficiaries.

Estate administration tax and what is counted

For applications on or after January 1, 2020, there is no tax on estates valued at $50,000 or less, and $15 for every $1,000 or part of it for estates over $50,000. This is a cost of getting the grant, which in turn reduces what is left for beneficiaries.

What to do next

• List every asset and debt, and note which assets pass outside the will.
• Check the will for any wording about the order in which gifts are paid or reduced.
• File the required returns on time and keep the tax authority's assessments.
• Do not distribute to beneficiaries until you have a clearance certificate.
• Tell beneficiaries early if a shortfall looks likely, and keep written records.
• Get legal advice before you reduce any gift or pay debts out of order.

If you are a trustee, a clearance certificate confirms the estate has paid all income tax, interest and penalties owed, or that security has been accepted. If you are a beneficiary and think the reductions are wrong, it is worth speaking to an estates lawyer.

Frequently asked questions