Upon a person’s demise, a personal representative is appointed to administer their estate. The personal representative can be chosen by the deceased and appointed pursuant to the deceased’s last will and testament or appointed by the court.
Once appointed, the personal representative must ascertain and collect all of the assets and liabilities of the deceased’s estate and thereafter must distribute the estate in accordance with the terms of the will, or if applicable, the laws of intestacy.
The administration of the estate can take time and often the assets and liabilities will be known and the amount available for distribution can be estimated. Accordingly, personal representatives will oftentimes make an interim distribution from the estate to the beneficiaries leaving a holdback amount to cover any anticipated liabilities and expenses.
In some cases, the personal representative’s estimates can be incorrect or there’s a liability that the personal representative failed to take into account. Meaning, the personal representative may have mistakenly made an overpayment to the beneficiaries.
What are the personal representative’s rights in such circumstances? Can she or he recover the overpayment?
The principles regarding repayment of monies paid by mistake in fact are set out in the decision of Iddington J. in R. v. Bank of Montreal (1907), 38 S.C.R. 258 (S.C.C.), an appeal from Ontario to the Supreme Court of Canada. He said at p. 280:
The remaining ground taken on which to rest these claims is the right to recover money paid by mistake.
Let us bear in mind that the action for money had and received by means of which this right has usually been asserted, rests upon the principle that prima facie it is against equity and good conscience that the party who received it should retain it, and remember further that in many instances this prima facie case is answered by virtue of conditions existing at the time of payment, or subsequent events creating, so to speak, a countervailing equity that would make it against equity and good conscience to insist on the return of the money.1
So, where money has been paid to a beneficiary by mistake of fact, the monies ought to be repaid unless the recipient can show “a countervailing equity” making it unjust to order the return of the monies.2
The framework and principles governing overpayment to a beneficiary recognizes two competing interests. First, the beneficiary received money which s/he should not have received. There is no reason for the beneficiary to receive an unexpected windfall at the expense of the personal representative. Second, the beneficiary would have received the distribution innocently and may have relied on the distribution to his/her detriment. For example, the beneficiary may have spent the money on a vacation that she/he would otherwise not have.
In Central Trust Co. v. Flynn, the New Brunswick Court of Appeal described “countervailing equities” as something that would have altered the recipient’s position to his/her prejudice or having placed him/herself in a compromising situation.3
The New Brunswick Court of Appeal also found that the following factors were not “countervailing equities”:
- lack of knowledge of the beneficiaries of the size of the estate in that they received no inventory to disabuse them of the idea they would receive a large amount of money;
- that the executor was negligent in carrying out its duties in failing to avoid tax penalties;
- a delay in obtaining a death certificate of four months or more;
- failing to prepare statements and by making advances without reconciliation.
So how can a personal representative protect themselves from the beneficiary making the argument that the countervailing equities make it unjust to order the return of the monies?
Unless explicitly provided for, when a beneficiary receives a distribution from an estate, the beneficiary receives said funds unconditionally and the beneficiary is entitled to use the funds received as the beneficiary sees fit.
This notion is consistent with section 159(2)-(3) of the Income Tax Act, which provides that a personal representative is not permitted to make any distributions from the estate until after a clearance certificate is granted and that the personal representative is personally liable for any amounts owing to CRA if the personal representative makes a distribution prior to obtaining a clearance certificate.
In my opinion, the reason that a beneficiary can rely on the “countervailing equities” is that the beneficiary is entitled to assume that the beneficiary is receiving the distribution free and clear of any liabilities. The beneficiary is entitled to rely on the personal representative’s implicit representation that the beneficiary is entitled to the funds distributed.
In my view, a personal representative can protect themselves against such an argument by insisting that the beneficiary sign an indemnity before making an interim distribution.
An indemnity is a contract which requires the indemnifier to compensate for or to make up a loss which has been suffered by the person to be indemnified.
By signing an indemnity, the personal representative is putting the beneficiary on notice that should there be any additional liabilities or debts owing by the estate in excess of the amounts held back within the estate, the personal representative will be looking to the beneficiary to make up the loss. Arguably, putting the beneficiary on notice will make it more difficult for the beneficiary to rely on the countervailing equities argument. But having the beneficiary agree to and sign the indemnity would likely address the issue conclusively.