Insolvent Estate in Ontario: Order of Payment to Creditors

As estate trustee you may find that the debts are larger than the assets. Credit cards, a loan, a tax bill and funeral costs all arrive, and the bank account cannot cover them. Creditors may be calling, and family may be asking about the house.

This article explains why order matters, shows the priority list in the Bankruptcy and Insolvency Act as a point of comparison, and describes the tax risks that a trustee cannot ignore. It does not say which order applies in your estate, and a lawyer should confirm that before you pay anything.

What makes an estate insolvent, and why order matters

An insolvent estate is one where the debts and costs are more than the assets.

How this applies depends on your situation, so it is worth confirming with a lawyer before you pay any creditor or distribute anything to beneficiaries.

The bankruptcy priority list as a comparison

The Bankruptcy and Insolvency Act sets a priority order for a bankrupt's estate, subject to secured creditors. It is a bankruptcy rule, useful as a comparison, and not the Ontario estate-administration rule. Its early entries are shown below.

Do not treat this table as your answer. Secured creditors, such as a mortgage lender with security on the house, are dealt with separately, and whether the estate should go through a formal bankruptcy process is a question for a lawyer or licensed insolvency professional.

Income tax: the creditor a trustee cannot overlook

Before distributing property, a legal representative must obtain a clearance certificate, and if they distribute without one and tax is owing, they are personally liable for the amounts to the extent of the value of the property distributed. A clearance certificate confirms the estate has paid all income tax, interest and penalties owed, or that security has been accepted. You apply with Form TX19, and Form GST352 as well if the deceased had a GST/HST number.

Request the certificate only after the required returns are filed, notices of assessment are received, and taxes, CPP and EI amounts, interest and penalties are paid or secured. CRA acknowledges the request within 45 days, and assessment can take up to 120 days if all documents are provided. Once the certificate is issued, liability rests with the estate and the people who received the assets rather than the representative, though newly found assets need another certificate before they are distributed.

Tax bills can be larger than people expect. Unmatured RRSP value is included in the deceased's income for the year of death, and the tax is on the final return whoever receives the money. Unpaid interest, rent or remuneration that accrued before death is also included in the final year's income.

Deadlines and penalties that add to the debt

• Final return: April 30 of the following year for deaths from January 1 to October 31, or six months after death for deaths from November 1 to December 31.
• Balance owing is due on the same date as the filing deadline, even where a later filing date applies, as for some self-employed people.
• Late-filing penalty: 5% of the balance plus 1% for each full month late, up to 12 months, plus interest.
• T3 return: due 90 days after the trust's year-end, and a late T3 can attract $25 a day, minimum $100 and maximum $2,500.

Avoidable penalties make an insolvent estate worse, so file on time even when the money is tight.

What to do next

• Stop distributions to beneficiaries and do not pay creditors ahead of others until you have advice.
• Make a full list of assets, secured debts, unsecured debts and costs.
• Contact the deceased's insurers, bank and credit card companies, as Ontario's seniors guide advises.
• File the final return and any required returns on time.
• Keep every receipt, letter and note of who you paid and why.
• Ask an estates lawyer whether the estate should be administered informally or go through a formal insolvency process.

Do not ignore creditor letters. Reply in writing, say you are the estate trustee and that you are reviewing the estate, and avoid admitting liability or promising payment.

Frequently asked questions