Heavy Lies The Crown

The opinions expressed in this blog are solely those of the author. This information is not intended to provide legal, accounting, investment, or tax advice and should not be relied upon in that regard.

Canadian executors can typically expect to engage in a precarious balancing act between their obligations under provincial law and their responsibilities under the federal Income Tax Act¹ (“ITA”), where unsecured creditor debt is involved. A recently released case out of the Alberta Court of King’s Bench, Horvath Estate (Re)², adds some increased clarity and caution for executors administering insolvent estates and how they may expect to deal with CRA.

Subsection 159(3) of the ITA states that a legal representative (which includes an executor) becomes personally liable up to the value of the deceased taxpayer’s property that is distributed if there is a tax liability. This personal liability can extend to both unpaid taxes and any accrued interest. However, an “allowance” may be granted to an executor for “reasonable funeral, testamentary and administration costs.”³ This allowance is consistent with court rulings in Alberta, which have held that “even with an insolvent estate, funeral, testamentary and administration expenses are paid in priority to other claims and bequests.”⁴

Conversely, most Canadian provinces contain provisions in their estate administration statutes addressing the ranking of debts and debtors. In Alberta, this provision is in ss. 27(1) of the Estate Administration Act⁵ (“EAA”), which states that all unsecured creditors rank equally and must be paid out on a pro-rata basis.

The concept of “Crown prerogative” was recognized by the Supreme Court of Canada in Canada v Bank of Nova Scotia (1885), 1885 CanLII 44 (SCC), 11 SCR 1, where it was determined that that the Crown has the right to be paid in full, in priority of the other creditors of a similar degree. This entitlement created by the common law has been echoed in many Court holdings in multiple Canadian jurisdictions since 1885.⁶

In Horvath, the estate’s Personal Representative collected $63,755.98 in Estate assets relative to $132,986.72 in unsecured debt.⁷ As the estate was insolvent, the executors sought a formal passing of accounts with the Court to proceed with a pro rata distribution.

The balance of funds available for distribution to creditors was approximately $38,043.20 after paying legal fees, administration costs, executor compensation, and holdback for reasonable expenses. While CRA did not oppose these holdbacks, how the remaining amount was to be distributed became the source of dispute.⁸

The deceased owed CRA $11,151.36 for terminal taxes and COVID-19 repayment. The estate sought to repay $3,190.05 of this amount, as CRA debts accounted for roughly 8% of the estate’s unsecured debt.⁹

CRA’s arguments may be summarized in the following three statements:

First, CRA argued that s. 159 of the ITA “created a priority of payment for the Crown because a clearance certificate is only granted if outstanding balances owing to the CRA have been paid or secured and there are no other outstanding adjustment requests, objections, taxpayer relief, or appeal requested.”¹⁰

Second, the CRA contended that under the EAA, “the obligation to pay outstanding taxes is a separate duty on the personal representative from the obligation to pay other claims, and that irrespective of where the obligation falls in the list of duties, it is apparent that paying taxes is an obligation and it is not on the same footing as payment of other debts and expenses of the estate.”¹¹

Third, the CRA argued the Crown’s debt “takes priority over other creditors of equal degree by virtue of the common law prerogative of the Crown to be paid first among claims of equal degree.”¹²

The Court held that upon review of the submissions that, “the prerogative of the Crown to be paid first among claims of equal degree is in effect in Alberta and that there is nothing in the EAA that limits the Crown prerogative. This finding is consistent with the conclusions reached in similar cases across Canada.”¹³ Accordingly, CRA was awarded the amount it sought, with the other creditors dividing the net amount remaining in the estate.

While it is certainly not the role of the author to engage in speculation as to why CRA expended legal resources to contest $7,961.31 in repayment to exert Crown prerogative in case law further, it does serve as a caution that CRA can and will assert Crown prerogative over unsecured creditors, no matter the amount in issue. Executors should exercise significant caution when accepting appointments, assessing debts and taxes, and making any payments when CRA could be a factor.

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¹ RSC 1985, c 1 (5th Supp)
² 2023 ABKB 643 (“Horvath”)
³ See for examples, CRA Views, Conference, 2011-0429101C6 and CRA Views 2010-0390311E5
⁴ Boje Estate, 2009 ABQB 749 at para 44
⁵ SA 2014, c E-12.5
⁶ See for instance, Liberty Mortgage Services Ltd v Canada (Minister of National Revenue), 2012 ABCA 225, Evans Estate (Re), 2018 NSSC 68 (CanLII), Household Realty Corporation Ltd. et al. v. Attorney General of Canada, 1979 CanLII 179 (SCC), [1980] 1 SCR 423, et al.
⁷ Horvath at paras 9-11
⁸ Horvath at para 10
⁹ Horvath at paras 9-11 10 Horvath at para 3
¹¹ Ibid
¹² Horvath at para 4
¹³ Horvath at para 29