Insolvent Estates in Ontario: Who Gets Paid First?

You have just learned that the person who died owed more than they owned. Credit cards, a line of credit, unpaid tax and funeral costs may all be arriving at once, and you are wondering who gets paid, and whether anyone is left with a bill.

This article explains how Ontario treats an estate that does not have enough assets to cover its debts. It is general information, not advice on your particular estate.

What an insolvent estate means

An estate is insolvent when its assets are not enough to pay its debts. The estate trustee, or the administrator if there was no will, is in charge of collecting the assets, paying what is owed and only then handing anything to beneficiaries. Beneficiaries are paid after the debts, so in an insolvent estate there is usually nothing left for them.

Not everything the person owned is necessarily part of the estate. Some assets pass outside it, by joint ownership with survivorship or to a designated beneficiary. A person can name a beneficiary for a plan such as an RRSP, RRIF or pension, either by a signed instrument or by will. Whether those assets are out of reach of creditors in your situation is a question to confirm with a lawyer.

How debts are paid when there is not enough

Where an estate does not have enough assets to pay its debts, the debts are paid proportionately, and no debt is ranked ahead of another. Debts owed to the Crown and to the personal representative rank alongside other debts. In plain terms, creditors generally share what is available in proportion to what they are owed, rather than the first to call being paid in full.

There is an exception. Liens that existed during the person's lifetime are not affected by this rule. A lender who held security, for example, may be in a different position from an unsecured creditor, so check the paperwork on each debt.

Protecting the estate trustee

A personal representative who has given the required notices to creditors may distribute the estate and is not liable to a creditor whose claim they had no notice of at the time of distribution. That protection depends on the notices having been given, so do not skip them.

A creditor still keeps the right to follow estate assets into the hands of the people who received them. This is one reason beneficiaries should not rush to spend an early distribution.

Tax needs separate care. A legal representative who distributes estate assets without a CRA clearance certificate, requested on Form TX19, while tax is owing is personally liable for the unpaid amounts, up to the value of the assets distributed.

Tax, claims and other pressure points

• Capital property is deemed to be disposed of immediately before death at fair market value, and any resulting gain is reported on the final return.
• Property that passes to a spouse, common-law partner or qualifying spousal trust can roll over at cost, subject to conditions, including vesting within 36 months of death.
• The final return is due April 30 of the following year for a death between January 1 and October 31, or six months after the death for a death between November 1 and December 31.
• A dependant who says the deceased did not make adequate provision for them may ask the court for support from the estate, generally within six months after the grant of probate or administration.
• For that kind of support claim only, assets such as joint accounts, joint tenancy property, life insurance owned by the deceased and beneficiary designations are treated as part of the estate.

What to do next

• Pause distributions to beneficiaries until you know the full picture.
• List every asset and every debt, and note which assets may pass outside the estate.
• Give the required notices to creditors and keep copies.
• Request a CRA clearance certificate before distributing anything.
• Keep careful records of every payment you make from the estate.
• Speak with an Ontario estate lawyer before paying any one creditor in full.

Frequently asked questions