Many estate litigation matters involve disputes between interested parties regarding the distribution and sale of estate assets. However, when an estate is insolvent, disputes may involve claims from creditors rather than beneficiaries. In these situations, creditors might find themselves in disagreement about who is entitled to be paid back, where they stand in priority, and how much each creditor should receive.

In a recent decision from the Court of King’s Bench of Alberta, the Personal Representative of the estate proposed one way in which the estate’s limited assets should be distributed, while one of its creditors, the Canada Revenue Agency, sought an alternative distribution.

Deceased leaves behind significant debts

In the case of Horvath Estate (Re), the deceased passed away on February 3, 2021. At the time of his death, he had been in the process of consolidating his debt and putting together a consumer proposal with the help of a financial institution with whom he had signed an agreement. However, this proposal was withdrawn on November 4, 2021, due to his declining death. After the deceased passed away, the applicant, who is the Personal Representative of the estate, collected $63,755 in assets. After accounting for expenses, funeral costs, legal fees, and accounting fees, the estate assets were reduced to $38,043, which was needed to pay creditors.

The deceased’s liabilities were fairly extensive. He owed $11,151.36 to the Canada Revenue Agency, $56,333.52 to the Bank of Montreal, $65,000 to TD Bank, as well as smaller sums for accrued arrears relating to his utilities and his mobile phone. The applicant sought permission from the Court to pay back each of the creditors on a pro rata basis. In other words, of the $38,043 available, a sum of money would be distributed to each creditor based on what percent of the deceased’s total debt they held. For example, the Canada Revenue Agency would collect just over $3,000 of the $11,151 it was owed.

Canada Revenue Agency opposes proposal for distribution of assets

Canada Revenue Agency took the position that the Crown’s debt took priority over any other creditors. It relied on section 159 of the Income Tax Act, which creates a priority for the Crown, as a clearance certificate is only granted if outstanding balances to the Canada Revenue Agency have been paid or secured. The Canada Revenue Agency also argued that the Estate Administration Act creates an obligation to pay outstanding taxes as a separate duty from other debts on the personal representative. Finally, the Canada Revenue Agency claimed that common law has also established a priority of their debts over other potential creditors.

The Court first looked at the issue of Crown prerogative, citing an 1885 decision from the Supreme Court of Canada which stated that:

“I do not think there can be a doubt that the Crown is entitled at common law to a preference in a case such as this, for when the rights of the Crown come in conflict with the right of a subject in respect to the payment of debts of equal degree, the right of the Crown must prevail, and the Queen’s prerogative in this respect, in this Dominion of Canada, is as exclusive as it is in England, the Queen’s rights and prerogatives extending to the colonies in like manner as they do to the mother country.”

More recently, the Court of Appeal for Alberta issued a decision which also found that a Canada Revenue Agency claim should be paid first, in full, before other creditors are paid. This led the Court to conclude that the Crown prerogative to be paid first is in effect in Alberta.

Court finds in favour of Canada Revenue Agency

The Court then asked whether the Estate Administration Act limited the Crown prerogative. The Estate Administration Act speaks to payment of claims when an estate is insolvent, providing that:

“27(1) Except as otherwise provided in an enactment, if there is a deficiency of assets necessary to satisfy the valid money claims against the estate, the claims must be paid proportionately and without any preference or priority.

(2)  Nothing in this section prejudices

(a) a mortgage existing during the lifetime of the deceased person on the deceased person’s property, or

(b) a common law priority given to the payment of funeral and estate administration expenses.

(3) If the personal representative pays more to a claimant than the amount to which the claimant is entitled under this section, the overpayment does not entitle any other claimant to recover more than the amount to which that claimant would have been entitled if the overpayment had not been made.”

In looking at the legislation, the Court found that nothing expressly limits or restricts the federal Crown. Even if there was a limitation, the Court noted that there is a legal principle that the provincial Crown cannot bind the federal Crown. The Court also found that several previous decisions supported the Canada Revenue Agency’s claims for full repayment priority from an estate that has multiple creditors.

The Court ruled that, since there is nothing in Alberta legislation that limits the Crown prerogative, the Canada Revenue Agency has priority over other unsecured creditors of the estate and should be paid in full first.

Contact DBH Law for Assistance With Estate Planning and Estate Administration

If you are involved in an estate dispute involving a will challenge, trust dispute or have questions about estate planning or administration, contact the experienced estate planning and litigation lawyers at DBH Law in Calgary. We help clients navigate complex issues while providing comprehensive, tailored legal advice in order to determine a cost-effective and efficient solution. To arrange a confidential consultation with one of our lawyers, contact us online or by phone at 403.252.9937.