What Does an Ontario Estate Trustee Owe Creditors Before Distributing?

As an estate trustee, you hold the estate for the people entitled to it, but only after the debts are paid.

This article explains the creditor-notice protection, the waiting periods that can apply, and the other situations where distributing early can create personal liability. The exact form and timing of a notice depend on the facts, so a lawyer should confirm them.

Creditors come before beneficiaries

Unless the will says otherwise, the deceased's debts and funeral and testamentary expenses are paid out of the residuary estate, shared rateably according to the value of each part. The Certificate of Appointment gives the estate trustee authority to manage the estate's assets and pay its debts.

A person wronged by the deceased (other than in libel or slander) may sue the executor or administrator for the wrong. A lawsuit of that kind cannot be brought more than two years after the death.

How creditor notice protects you

If a personal representative gives notice to creditors of the kind the court would have directed, they may distribute the estate once the time in the notice has expired, taking account of the claims they know about. They are then not liable to any creditor whose claim they had no notice of at the time of distribution.

There is an important limit. The protection covers only creditors whose claims were unknown when the estate was distributed, and you must still have regard to the claims you have notice of at that time. If you know of a debt, you cannot ignore it because it was not part of the notice.

Waiting periods and other limits on distributing

A dependant's support application cannot be made more than six months after the grant of letters probate or letters of administration. The court may allow an application at any time for any part of the estate still undistributed on the date of the application.

The consequences of getting this wrong are personal. A representative who distributes in breach of the dependant-support rule is personally liable to pay the amount distributed. After service, you may still make reasonable advances for support. If you distribute in breach of the Family Law Act's six-month or notice rules, you can also be personally liable to the surviving spouse when the undistributed estate is not enough to satisfy the court's order, limited to the lesser of the amount distributed and the amount needed to satisfy the order.

Tax clearance and insolvent estates

The legal representative must file a final T1 return, and a T3 return may also be needed for the estate. Before distributing property you control, you must obtain a clearance certificate, and if you distribute without one you can be personally liable for unpaid amounts, but not for more than the value of the property distributed. The certificate is requested on Form TX19 only after the returns are filed and the notices of assessment received.

If the assets are not enough to pay all debts, the Crown's debts, the personal representative's debts and other creditors' debts are paid proportionately, with no debt ranking ahead of another. This does not affect liens the deceased gave over their property during their lifetime. Because of the risk, get legal advice before paying any one creditor in full.

What to do next

• Make a list of every debt you know about, including taxes, and keep records of how you found each one.
• Ask a lawyer how to word and give creditor notice and how long the notice period should run.
• Check whether a spouse, a dependant or the intestacy rules delay distribution.
• Complete the tax returns and request the clearance certificate before distributing.
• Keep distributions on hold if the estate may be insolvent until you have advice.

Frequently asked questions