Horvath Estate – Alberta Court of King’s Bench confirms Crown Prerogative for CRA to be Paid in Priority to other Estate Creditors

Hot off the press! We acted as counsel in Horvath Estate (Re), 2023 ABKB 643 (“Horvath”). Horvath is a new decision from the Court of King’s Bench, and which significantly alters the landscape in Alberta as to how estate debts are handled. Previously, and according to s.27(1) of the Estate Administration Act, SA 2014, c E-12.5, all unsecured creditors rank equally and must be paid, out of the net estate, on a pro-rata basis. This meant that for insolvent estates, where there were not enough estate assets to satisfy all creditors, all types of unsecured creditors received an equal payout based on the size of their debt in proportion to the total debt. Most types of tax debt did not have any preferential treatment and ranked along with other unsecured creditors. For example, unsecured creditors in an estate will typically include utility payments, rent owing, credit card debt, unsecured lines of credit, etc. Funeral costs and estate administration costs receive preferential treatment prior to other creditors, and this preference remains unchanged.

However, in Horvath, we acted for the personal representative of an estate and brought an application to pass their accounts in Court to obtain approval to complete a pro-rata distribution of the net insolvent estate amongst all the creditors, which included some of the major banks and Canada Revenue Agency (the “CRA”) for the deceased’s final taxes, a CERB benefit repayment, and estate taxes. The Department of Justice on behalf of the CRA objected to the proposed distribution and argued that Crown prerogative allowed them to stand in line before other unsecured creditors, meaning they had the right to be fully repaid before any other unsecured creditors could be paid. No creditors attended to object to the Department of Justice’s position, and the Estate had a duty to remain neutral and therefore could not take a position. The Court accepted the Department of Justice’s position and ordered them to be paid in priority to everyone else.   

Going forward, this calls into question the distribution of all estates. Typically, it is normal for personal representatives (often called an “executor”) to pay off debts long before they file the deceased’s terminal tax return and the estate return. Now, personal representatives need to be additionally cautious before paying any debts, to ensure there will be sufficient funds left to fully satisfy the CRA. In the case where the estate is small and the figure owing to the CRA is not yet determined, a prudent personal representative should consider delaying the payment of any debts whatsoever.  

If a personal representative incorrectly pays out an unsecured creditor to the detriment of the CRA, as an example, then the personal representative is exposing themselves to liability and risks that they will be held personally liable for that outstanding tax debt. All personal representatives should seek legal advice regarding how to administer and handle an estate, to ensure that they protect themselves and the estate.