How Much Should an Ontario Executor Hold Back Before Paying Out?

Beneficiaries understandably want their shares quickly. Executors, on the other hand, are worried about what might still turn up: a tax bill, a late creditor, or a final cost of administration. A holdback is the amount you keep in the estate until those risks are resolved.

There is no simple formula, and you should be wary of anyone offering one. This article explains the main items a holdback is meant to cover and how timing rules from the CRA and the creditor process shape the decision.

Why holding back protects you

As legal representative, the executor must file all required returns for the deceased, make sure any balance owing is paid before distributing the estate, and confirm that all balances owing to the CRA are resolved. Ontario's official guidance also says the estate is distributed once assets have been liquidated and the funeral and burial expenses and any debts have been paid.

If you pay everything out and a bill later appears, you may have to answer for it personally. A holdback keeps money available so that does not happen.

What a holdback needs to cover

• Income tax on the final T1 return. For a death from January 1 to October 31, it is due April 30 of the following year; for a death from November 1 to December 31, it is due 6 months after the death. If the deceased or their spouse or common-law partner living with them was operating a business on the date of death, the deadline moves to June 15 of the following year for deaths from January 1 to December 15, but payment is still due on the regular date.
• Tax on the estate itself. A T3 trust return must be filed no later than 90 days after the trust's tax year-end, and any balance owing is due within the same 90 days. A trust must file if its total income from all sources is more than $500, or if it makes a capital distribution to beneficiaries even at $500 or less.
• Expenses properly incurred in carrying out the trust, whether paid from the estate or paid personally and recovered, though the court may later disallow them.
• Executor compensation, if it has not yet been paid or approved.
• Claims from creditors you know about or that might still be made.

If the estate pays executor fees, it must also file a T4 Summary and the related T4 slips. Legal and accounting costs of finishing the administration are further items worth estimating.

The clearance certificate and timing

A clearance certificate confirms that the estate has paid all amounts of income tax. You request it on Form TX19 only after the required returns are filed and assessed and taxes are paid or secured. It should not be sent at the same time as the returns. The CRA acknowledges the request within 45 days, and the assessment can take up to 120 days.

If the deceased had a GST/HST number, a separate Form GST352 is also needed. For corporations being wound up or dissolved, a clearance certificate is also required before distributing corporate property.

This timing is why many executors keep a holdback until the certificate arrives. The wait can be several months, so plan for that when you tell beneficiaries when to expect final payment.

Creditors and insolvent estates

A personal representative who gives the notices the court would have directed may distribute the assets and is not liable for amounts distributed to anyone whose claim they had no notice of at the time. That protection does not apply to heirs, next of kin, devisees or legatees claiming as such.

If you dispute a creditor's claim, you may serve a written notice contesting it. The claimant must apply to court within 30 days of receiving it, or within a further three months if a judge allows. Otherwise the claim is deemed abandoned and forever barred.

If the assets are not enough to pay everything, debts are paid proportionately without preference or priority, subject to existing liens. The court may relieve a personal representative who acted honestly and reasonably. In that situation, get advice before paying anyone.

Setting a reasonable amount

No statute sets a holdback percentage, so the figure is a judgment call. Work from specific, documented items rather than a round number, and write down how you arrived at it.

• List every outstanding item: tax, fees, costs, claims and expenses.
• Estimate each with the best information available, such as a prior-year return or a quote.
• Add a margin for the unknown, and record your reasoning.
• Consider an interim distribution only if the holdback still comfortably covers the list.
• Tell beneficiaries what is being held and why, and when you expect to release it.
• Check the amount with a lawyer or accountant if the estate is complex, has a business, or may be insolvent.

Frequently asked questions