What Is an Insolvent Estate in British Columbia?

Hearing that an estate is insolvent can be alarming, especially while you are grieving. In plain terms, it means the money and property left behind may not be enough to pay everything the person owed.

This article explains what the term means in British Columbia, how an executor goes about confirming it, and what generally follows. Every estate is different, so treat this as a map, not a verdict on your situation.

This article covers the law of British Columbia.

What an insolvent estate means

Under the Wills, Estates and Succession Act (WESA), the estate is the property of the deceased person. An estate is usually called insolvent when that property, once valued, is not enough to pay the debts, taxes and costs that must come out of it.

The personal representative, who is the executor if there is a will or the administrator if there is not, has the authority the deceased would have had. That authority must be used to administer and distribute the estate and to account to beneficiaries and creditors. Debts and taxes come before the beneficiaries receive what remains.

In general, the estate's assets are the source of payment. That is why an estate can be short even when the family feels it should have been enough.

How the law describes insolvency

The federal Bankruptcy and Insolvency Act (BIA) defines an insolvent person as someone who is not bankrupt, who lives, carries on business or has property in Canada, and whose provable liabilities amount to one thousand dollars. That person must also meet any one of three tests. The tests are:

• The person is unable to meet obligations as they generally become due.
• The person has ceased paying current obligations in the ordinary course.
• The person's property is not, at a fair valuation, enough to pay all obligations due and accruing due.

That definition is written about a living person. For an estate, the third test is the one families usually have in mind: do the assets, fairly valued, cover what is owed? A lawyer or accountant can confirm how the tests apply to a particular estate.

How an executor confirms it

Someone applying for a BC estate grant must make a diligent search for the deceased's property and liabilities and make the required disclosures. That search is the starting point for any solvency assessment.

• List every asset and get a realistic value for each.
• List every debt, including mortgages, loans, credit cards and taxes owed to the CRA.
• Note which assets pass outside the estate, such as plan benefits with a valid designated beneficiary.
• Estimate funeral costs and the costs of administering the estate.
• Compare the totals before any money is paid to beneficiaries.

Reasonable funeral and disposal expenses may be awarded in a proceeding by the personal representative. A benefit under a plan such as an RRSP generally does not form part of the estate when a valid beneficiary is named, but it does if the estate itself is the beneficiary or the designation does not take effect.

What follows if the estate is short

When an estate cannot satisfy all debts and gifts, WESA s. 50 applies, subject to any contrary intention in the will. Land and personal property are reduced together. Assets are then reduced in this order:

• Property specifically charged with a debt or left on trust to pay a debt.
• Property distributed as an intestate estate, and residue.
• General, demonstrative and pecuniary legacies.
• Specific legacies.
• Property over which the will-maker had a general power of appointment.

If the will-maker charged land with payment of debts or pecuniary gifts, that land is primarily liable for them.

An executor may also make an assignment of all the property for the general benefit of creditors, with the leave of the court. It takes effect when filed with the official receiver. How creditors are ranked and paid on that route depends on the facts of the estate, so it is worth confirming with a lawyer before relying on the rules that apply in a bankruptcy.

In a bankruptcy distribution, BIA s. 136(1) pays, subject to the rights of secured creditors, reasonable funeral and testamentary expenses of a deceased bankrupt first, followed by costs of administration. Whether bankruptcy or an assignment is the right step is a decision to make with professional advice.

Protecting the executor and what to do next

A personal representative is liable for the deceased's wrongful acts only to the extent of the assets belonging to the estate, subject to the exceptions in WESA s. 149. Personal liability usually arises from the representative's own acts, such as distributing improperly.

Paying beneficiaries too early is the biggest risk. A representative who distributes without a CRA clearance certificate while tax is owing is personally liable for the unpaid amounts, up to the value of what was distributed. The request is made on Form TX19. Distribution within 210 days after the grant is also not allowed without a court order, unless all beneficiaries and all persons who may bring a wills variation claim consent.

A notice to creditors published in the Gazette must give a claims period of at least 30 days. After it ends, the representative is not liable for claims not presented in time. A creditor who missed the deadline may still pursue those who received estate assets.

• Pause all distributions until the debts are known.
• Gather statements for every account, loan and tax year.
• Speak with a lawyer before paying any creditor or beneficiary.
• Ask about a CRA clearance certificate before distributing.

Frequently asked questions