What Happens If a British Columbia Estate Owes More Than It Has?

You have started sorting out a loved one's affairs and the numbers look bad. The debts may be larger than everything the person owned. That is stressful, and it raises a hard question: who pays, and what are you personally on the hook for?

This article explains how British Columbia law treats an estate that may not cover its debts. It covers the executor's limited liability, how gifts in a will can be reduced, what stays outside the estate, the bankruptcy option, and the steps that protect you before anything is handed out. Every estate is different, so use this as a map and not a verdict.

This article covers the law of British Columbia.

Is the estate really insolvent, and who pays?

In BC, the estate is simply the property of the person who died. An executor or administrator (a personal representative) has the authority the deceased would have had if living, and must use it to administer and distribute the estate and to account to beneficiaries and creditors. Settling debts, including taxes owed to the CRA, comes before distributing what is left to the beneficiaries.

Federal bankruptcy law defines an insolvent person as someone who is not bankrupt, has provable liabilities of at least one thousand dollars, and meets one of three tests: unable to meet obligations as they generally become due, has ceased paying current obligations in the ordinary course, or has property that is not, at a fair valuation, enough to pay all obligations due and accruing due.

Before you conclude anything, a diligent search for the deceased's property and liabilities is required of anyone applying for an estate grant.

The estate's assets are the source of payment. A personal representative is liable for the deceased's wrongful acts or breaches only to the extent of the assets belonging to the estate, subject to the exceptions in that section. A representative who renounces and has not intermeddled is not liable under that provision, and personal liability mainly comes from the representative's own acts, such as distributing improperly, not from the debts themselves.

How gifts are cut when assets run short

WESA s. 50 applies when the estate cannot satisfy all debts and gifts. It is subject to a contrary intention in the will, and land and personal property are reduced together. Unless the will says otherwise, assets are reduced in this order:

There is an exception: if the will-maker charged land with payment of debts or pecuniary gifts, that land is primarily liable for them, and a contrary intention in the will overrides the s. 50 order.

Gifts of mortgaged or loan-secured property work differently. A gift of property subject to a purchase money security interest generally passes with the debt, and between people claiming through the will-maker the beneficiary's interest is primarily liable to pay the secured debt. The will can change this, but a general direction to pay debts does not by itself show that intention. Loan terms vary by lender, so check the actual documents.

What sits outside the estate, and the bankruptcy option

A benefit payable to a designated beneficiary under a WESA Part 5 benefit plan, such as an RRSP or similar plan, does not form part of the participant's estate and is not subject to the claims of the participant's creditors. This depends on a valid designation. If the estate itself is the beneficiary, or no designation takes effect, the benefit is part of the estate and available to creditors.

If the estate cannot pay its debts, the executor or administrator may, with leave of the court, make an assignment of all the deceased's property for the general benefit of creditors. It takes effect when filed with the official receiver.

In a bankruptcy distribution, payments are made subject to the rights of secured creditors. First come reasonable funeral and testamentary expenses of a deceased bankrupt incurred by the legal representative. Then come costs of administration, including the trustee's fees and legal costs, the levy under s. 147, and unpaid wages. Later paragraphs cover items such as municipal taxes, landlord arrears and certain Crown claims. How Crown claims rank depends on the current law, so it is worth confirming with a lawyer or accountant.

Protecting yourself before anything is distributed

• Notice to creditors: a personal representative may publish a notice in the Gazette requiring claims within a stated period that must not be less than 30 days from publication. After that period, the representative is not liable for claims not presented in time. A creditor's right to recover estate assets from whoever received them is not prejudiced, so recipients can still be pursued.
• Waiting period: the estate must not generally be distributed within 210 days after the grant except by court order. Earlier distribution is allowed with the consent of all beneficiaries and all persons who may bring a wills variation claim.
• CRA clearance certificate: a legal representative who distributes property without one while tax is owing is personally liable for the unpaid amounts, up to the value of the assets distributed. The request is made on Form TX19. Once issued, liability for unpaid tax shifts from the representative to the estate, trust, corporation or the people who received the assets.
• Disputed claims: you can give written notice disputing a claim. If it is already due, the claimant must start a proceeding within 180 days or the claim is forever barred. This does not apply to beneficial-interest claims by beneficiaries or intestate successors, or to wills variation claims.

What to do next

• List every asset and debt you can find, and keep records of what you learn.
• Do not distribute anything, or pay one creditor ahead of others, until you have advice.
• Check which accounts and plans have a named beneficiary, since those may sit outside the estate.
• Keep funeral and administration costs documented, since in a bankruptcy reasonable funeral and testamentary expenses are paid first, followed by costs of administration.
• Ask a lawyer whether a notice to creditors, a CRA clearance certificate or an assignment into bankruptcy suits this estate.

Frequently asked questions