Insolvent Estate in Ontario: Executor Duties and Debt Priority

An estate is insolvent when the debts are greater than the assets. It is more common than people expect, and it can leave an executor unsure who gets paid and in what order.

This article explains the general Ontario approach. Questions about formal bankruptcy rules, and how they interact with the estate, depend on the facts and are worth raising with a lawyer or other adviser before you pay anyone.

What makes an estate insolvent

The deceased's property, other than property passing by survivorship, vests in the personal representative as trustee, subject to payment of the deceased's debts. Jointly held property with a right of survivorship passes to the survivor and is not part of the estate. So the first step is to work out what is actually in the estate and compare it with what is owed.

Ontario's guidance says the estate is distributed once assets have been liquidated and the funeral and burial expenses and any debts have been paid. In an insolvent estate, that point is never reached for beneficiaries, so they generally receive nothing.

How debts are paid when assets fall short

Under the Trustee Act, where assets are insufficient, debts are paid proportionately without preference or priority, subject to existing liens. In plain words, the available money is shared in proportion to what each creditor is owed, and no creditor is ranked ahead of another. You do not get to pay the creditor you prefer, or the one who is calling most often, first.

A lien is a security interest in specific property, and it can change who is entitled to what. Whether a particular debt is secured is a question to confirm with a lawyer. Whether the federal bankruptcy rules should be used for an estate depends on the circumstances and is a decision to make with advice, not by guesswork.

Protections for the executor

A personal representative who acted honestly and reasonably may be relieved by the court in an insolvent estate. 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.

You can also contest a claim you doubt. An estate trustee may serve a written notice contesting a creditor's claim. 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. The same process applies to unliquidated claims.

Duties and cautions in a short estate

• Do not distribute to beneficiaries until you know the estate can cover its debts.
• File all required returns for the deceased and make sure any balance owing is dealt with before distributing.
• Remember that distributing without a clearance certificate when tax is owing makes you personally liable for the unpaid amounts, up to the value distributed.
• Keep accurate records of assets, money received and liabilities, since accounts may be reviewed.
• If the deceased owned real property, the estate normally must be probated, although probate is not always required to administer an estate. Whether and how you can sell real property to pay debts has limits and preconditions, so confirm the steps with a lawyer before you list it.
• If you pay the funeral or an urgent bill yourself, you may recover it from the estate, but the court may later disallow it.

If the deceased rented their home, the tenancy is deemed terminated 30 days after death where there are no other tenants. Until the tenancy ends, the landlord must preserve the tenant's property, except unsafe or unhygienic items, and give the executor, administrator or a family member reasonable access to remove it. If the estate makes a claim within six months of death, the landlord must pay over the net sale proceeds (after reasonable costs and rent arrears) or return retained property. If other tenants remain, the 30-day rule does not apply.

What to do next

• Make a full list of assets and debts, including secured debts and anything passing outside the estate.
• Hold off on paying individual creditors or beneficiaries until you have the whole picture.
• Give creditors the proper notices and keep proof that you did.
• Pay for necessary costs such as insurance on a vacant house, and keep receipts.
• Get legal and tax advice about the order of payment, any liens, bankruptcy options and the clearance certificate before you distribute anything.

If you have not started acting, remember that a person named as estate trustee does not have to act. If you have started and want out, an executor must apply to court to step down.

Frequently asked questions