Insolvent Estates in Ontario

 In wills and estates

This blog post is about insolvent estates. An estate is insolvent when now, and for the foreseeable future, its liabilities exceed its assets and thus has insufficient assets to cover all its liabilities. An insolvent estate is not automatically bankrupt; it must be formally declared bankrupt to be subject to the procedures under the Bankruptcy and Insolvency Act. If you are appointed estate trustee of an involvement estate, be very cautious and exact. Collect all the assets and, with some exceptions, distribute the proceeds to the creditors in the correct legal order. If this is not done, you could be personally liable for any unpaid debts. To avoid liability, consider petitioning the estate into formal bankruptcy proceedings.

Estate Trustee Realizing Assets

You, as estate trustee, are personally liable to collect all the assets of the insolvent estate. You may use inspectors to assist in realizing upon the assets and administering the estate. These inspectors can protect you from complaints by creditors who had an opportunity to participate in the process, but the inspectors must be compensated and can complicate the administration process.

Exempt Property

Not all estate assets must be used to satisfy creditors; certain personal items of the deceased can be exempt from seizure and sale.[i] The deceased can select which personal items to exempt before death. If he or she has failed to do so, a surviving spouse, dependent, or family member may decide: In Ontario, the following can be exempt assets (the maximum amounts are set out in a regulation, which are subject to change):

  • Necessary clothing of the deceased and the deceased’s dependants;
  • Tools and other personal property not exceeding the prescribed amount in value used to earn income;
  • One motor vehicle not exceeding $6,600;
  • Furniture, equipment, utensils, fuel, and food up to a collective total of $13,150;
  • Home equity of $10,000 or less;
  • Pensions plans;
  • Some types of life insurance; and
  • Registered retirement savings plans.

Priority of Debts

You must collect all the estate assets (note exceptions above) to distribute them to creditors by their legal order of priority and proportionally among the general creditors. You cannot give preferential treatment to estate creditors.[ii] If, for example, the estate only has enough assets to pay 50% of the general claims, you must pay each general creditor 50% of its claim. Although there is no priority among unsecured debts, there are a few exceptions.

Pay debts in the following order:

  • Reasonable and necessary funeral expenses;
  • Testamentary expenses and costs to administer the estate, including payments to you, the lawyers, and other professionals, such as accountants;
  • Certain statutory liens;
  • Secured debts, which are debts held against a specific asset or a class of assets (e.g., mortgages on a house);
  • Taxes (in Ontario, it appears that federal income taxes receive priority over other unsecured debts);
  • Debts with legislative priority, which may include child support, wages owed to employees, and employment insurance;
  • Unsecured debts are all other debts owed by the estate (as noted above, these are to be paid proportionately without any preference or priority).



It is essential to do things correctly as you can be personally liable for your mistakes. You could be personally liable for any unpaid debts if you fail to pay creditors in the correct legal order of priority or fail to pay the general creditors proportionally. You can also be held personally liable if you distribute any of the estate to beneficiaries without first ensuring that all creditors are paid in full. You may also be personally liable for all debts incurred after the deceased’s death. Thus, If you hire professionals to assist with the estate,  you are responsible for ensuring that those debts are paid (make sure to document expenses with receipts as otherwise, you may not be able to claim these costs ).

To avoid personal liability, advertising for estate creditors in the area where the deceased was known to reside or have business dealings. Providing enough notice can protect you if a creditor comes forward asserting a claim after the estate has already been administered.

When unsure about your obligations (or you have any questions respecting the management or administration of the estate’s assets), you can apply to the Court for its opinion, advice, or direction.[iii] Assuming you act upon the opinion, advice, or direction given, you will be deemed to have discharged your duty as an estate trustee in the subject matter of the application (subject to exceptions).[iv] Even without this preventive action, you may still seek relief from liability. In a situation where you pay more to a creditor or claimant than they were entitled to, the court may relieve you either wholly or partly from personal liability if satisfied that you acted honestly and reasonably and for the protection or conservation of the assets of the estate.[v]

Estate Bankruptcy

The only sure way to avoid the personal liability that may result in administering an insolvent estate is to renounce your position as estate trustee and petition the estate into formal bankruptcy proceedings (creditors may also do this). If served with an application for a bankruptcy order, you cannot pay money from the estate or transfer estate property until the application is concluded, except for required funeral and testamentary expenses.[vi] “Funeral and testamentary expenses” include the costs for legal and accounting services for the estate.

When the estate is assigned into bankruptcy, you relinquish the administration of the estate to the trustee in bankruptcy, a licensed professional with immunity from liability, and they will be responsible for paying the creditors. If the trustee in bankruptcy does not reimburse the creditors appropriately, you will not be personally liable.

For the most part, debts are treated similarly in an insolvent and bankrupt estate. Still, some debts are treated differently under the bankruptcy regime found in the Bankruptcy and Insolvency Act. For instance, in a bankrupt estate, the payment of support arrears takes priority over federal income taxes, but this is not the case in an insolvent estate. If you wish to make a spouse whole in an insolvent estate with unpaid taxes, you should consider formal bankruptcy proceedings.

Obtain Legal Advice
As this article outlines, administering an insolvent estate can be complicated and can lead to personal liability. Before you begin to administer an insolvent estate, discuss the matter with a solicitor.

[i] Execution Act, R.S.O. 1990, c. E.24 s 2 (1).
[ii] The Trustee Act, R.S.O. 1990, c. T. 23, s 50 and the Estate Administration Act, R.S.O. 1990, c. E.22. s. 5.
[iii] The Trustee Act, R.S.O. 1990, c. T.23, s 60 (1).
[iv] Ibid s 60 (2).
[v] Ibid s 50 (3).
[vi] Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) s 44 (2).

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