Interim Distributions to Beneficiaries: Is It Safe in Ontario?

Beneficiaries often ask the executor for money early, and executors often want to help. An interim distribution is a partial payment made before the estate is fully wound up. It can be a kindness, but it can also leave you personally exposed.

This article explains the main risks in Ontario, what you should hold back, and how to reduce the chance of a problem. It describes how things generally work. Because the right amount to hold back depends on the facts, a lawyer or accountant can confirm it for your estate.

Why early payments carry risk

Ontario's official guidance says the estate is distributed once assets have been liquidated and the funeral and burial expenses and any debts have been paid. Paying beneficiaries before then is not automatically wrong, but you take on the risk that you will later need money you have already paid out.

The deceased's property vests in the personal representative as trustee, subject to payment of the deceased's debts. If you pay beneficiaries and the estate then falls short, you may have to deal with the shortfall. Where assets are insufficient, debts are paid proportionately without preference or priority, subject to existing liens. The court may relieve a personal representative who acted honestly and reasonably, but that is not something to count on.

Tax: the biggest reason to wait

As legal representative, you 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. A clearance certificate confirms that the estate has paid all amounts of income tax. If you distribute assets without one and tax is owing, you are personally liable for the unpaid amounts, up to the value of the assets distributed.

• The final T1 return is due April 30 of the following year for a death from January 1 to October 31, and six months after death for a death from November 1 to December 31.
• 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.
• The estate T3 return, if required, is due within 90 days of the trust's tax year-end, with any balance owing due in the same 90 days.
• A graduated rate estate may have a non-calendar tax year, and an estate can be a graduated rate estate for no more than 36 months after the death.

You request a clearance certificate on Form TX19 only after the required returns are filed and assessed and taxes are paid or secured, not 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, and for corporations being wound up or dissolved a clearance certificate is also required before distributing corporate property. Because of this timeline, many executors hold back a meaningful reserve until the certificate arrives.

Creditors and other claims

Unknown debts are another reason for caution. A personal representative who gives the notices the court would have directed may distribute the assets and is not liable for amounts distributed to any person 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.

Real property adds its own rules. A sale made only to distribute the estate needs the approval of the majority of the persons beneficially entitled. For minors, the Children's Lawyer gives approval, and for mentally incapable persons, the Public Guardian and Trustee does. A judge may dispense with the beneficiaries' concurrence. Real property not conveyed or distributed within three years of death vests in the beneficiaries unless the personal representative registers a caution, which delays vesting for three years from its registration.

How much should you hold back?

No statute sets a fixed holdback figure, so the answer is a judgment based on the estate. A prudent reserve generally covers the items below, and a lawyer or accountant can help you estimate each one.

• Income tax owing on the final return and any estate return
• Known debts, plus a cushion for ones that may still appear
• Funeral costs and ongoing carrying costs such as insurance and utilities on a vacant house, which you may pay from the estate or pay personally and recover, subject to the court later disallowing them
• Legal, accounting and appraisal costs
• Your own compensation, which is a fair and reasonable allowance for your care, pains and trouble and time spent, as allowed by a judge, unless the will fixes it
• An allowance for the cost of passing accounts if a beneficiary may object

If you do make an early payment, treat it as an advance on the share, keep it modest, and get a signed receipt from the beneficiary acknowledging that it is a partial payment and that they may need to return funds if the estate needs them. A receipt helps, but it does not guarantee repayment. Remember too that a beneficiary under 18 may be represented by the Office of the Children's Lawyer.

What to do next

Estate trustees must keep accurate records of the estate's assets and transactions, and accounts filed with the court must show all money received and all liabilities. If a beneficiary pushes for more information or objects, they may move for accounts and, on a passing, serve a Notice of Objection to Accounts at least 35 days before the hearing date.

• List all assets, debts and expected taxes before paying anyone
• Consider whether notices to creditors are appropriate for your estate
• File the final returns and plan the clearance certificate request
• Choose a reserve with your lawyer or accountant, and write down the reasoning
• Pay only modest advances, with signed receipts
• Keep records of every payment and every decision

Frequently asked questions