When is an Estate Trustee Obligated to Make an Interim Distribution?

Under what circumstances should a court order the Estate Trustees to make an interim distribution of substantially the whole of the Estate?  Let’s review the law.

Upon someone’s demise a personal representative is appointed. That appointment may come about through a testamentary document or by court order if there is an intestacy. The personal representative has two roles. He or she is responsible for collecting all the assets and paying the liabilities of the deceased.  Thereafter, he/she must distribute the estate in accordance with the terms of the will, or if applicable, the laws of intestacy, or, if elected by the surviving spouse, under the entitlement provisions found in section 5 of the Family Law Act.¹

The issue we want to address in this blog is what obligations, if any, are there on the executor and estate trustee to make interim distributions?  What personal exposure does the executor and estate trustee risk if an interim distribution is made and the estate does not have sufficient assets to satisfy a creditor and/or the CRA seeks payment of unpaid debts of the deceased?  Does it make a difference if the beneficiaries ask for an interim distribution and claim that they are in dire need of the money?

Personal Liability for Unpaid Taxes and Liabilities

One might ask – why would an executor or estate trustee hesitate to make a partial or interim distribution?  One reason is that the responsibility to file tax returns for the deceased and his or her estate falls on the shoulders of the estate trustee or administrator.² This responsibility includes paying the necessary taxes and achieving the most advantageous tax results for the beneficiaries.³ The concern is that if there is an interim distribution prior to figuring out if the deceased’s taxes have been paid, there could be a shortfall.  If the CRA comes looking for that money, the estate trustee might have to pay it out of his own pocket.

Any estate trustee is therefore well advised to obtain a clearance certificate from the Canada Revenue Agency before distributing the estate.⁴ Under subsections 159(2) and (3) of the Income Tax Act,⁵ the legal representative is personally liable for any taxes owing to the extent of the value of the property distributed. The purpose of a clearance certificate is to certify that all taxes for which the taxpayer is, or can be expected to become, liable under the Income Tax Act have been paid, or that the Minister of National Revenue has accepted security for payment.⁶

Leibel v. Leibel, 2014 CarswellOnt 11102 (ONSC), Justice Greer states at paragraph 64 that the fact that estate trustees made interim distributions before receiving a clearance certificate put the estate trustees in a “precarious position” (see para 64). This was also deemed to be a factor in estopping a beneficiary from challenging the deceased’s will.] This practice is acknowledged in the Canada Revenue Agency Information Circular regarding clearance certificates.⁷

Discretion to Make Interim Distribution

How wide is the discretion of an executor and estate trustee to make or not make an interim distribution?  In Parson v McGovern,⁸ Justice R. Smith engages in a comprehensive discussion of when a court should encroach on the discretion of a trustee and make an order for an interim distribution.

In McGovern, the judge summarized the moving party’s request as follows:

“The respondent seeks an order compelling the Estate Trustees to make an interim distribution of almost all of the remaining assets of the Estate to both beneficiaries before they pass their accounts. He argues that the Estate Trustees have no right to refuse to make the substantial interim distribution to him at this time and submits that the Court should order to make the interim distribution to him in the amount demanded.”⁹

The trustees argued that they have the right to exercise their discretion to refuse to make any further interim distribution until their accounts are approved by the Court, by way of passing of accounts. The estate trustees had also proposed to the moving party beforehand to make the interim distribution requested to each beneficiary, on the condition that a waiver of passing of accounts and a release of the trustees was signed.

In response, the beneficiary suggested that the trustee has to be reasonable.  Arguably the trustee cannot hold funds hostage that should be distributed just to get approval of his accounts, a release and approval of executor’s fees.¹⁰ OJ No 3144; O’Connor v. Jonasson, 2012 CarswellOnt 13137.]

The court sided with the Trustees and declined to order that an interim distribution be made.  Following a review of the available case law on the intervention by the court in the trustee’s exercise of discretion to make an interim distribution,¹¹ R. Smith J. set out the following factors that should be considered in deciding whether to order estate trustees to make an interim distribution:¹²

1. are the Estate Trustees deadlocked¹³
2. have the Estate Trustees acted with mala fides (bad faith)?¹⁴
3. have the Estate Trustees failed to exercise their discretion?¹⁵
4. have the Estate Trustees behaved unreasonably or breached their fiduciary duty and duty of good faith and fairness to the beneficiary?¹⁶
5. would a beneficiary suffer undue prejudice if an interim distribution was not made?¹⁷

It was held that the Estate Trustees’ request for a release and waiver of passing of accounts before making a final distribution was a reasonable step, provided that the Estate Trustees also advised that they would ask a court to review and approve their accounts if there is any disagreement from a beneficiary. The motion for an interim distribution was therefore dismissed.

The decision in McGovern tells us that an estate trustee would be well advised to consider the five factors laid out above before refusing to make an interim distribution. An estate trustee should also be particularly cautious of refusing such a distribution when a beneficiary is experiencing financial difficulty. In McGovern, the court did not weigh in on whether the failure to obtain a clearance certificate can be considered a reasonable basis to refuse an interim distribution to a beneficiary.  A caution to the reader.  This five-part test may not be exhaustive.  For example, I refer the reader to Leibel v. Leibel, referenced in endnote 7, as to how distributions prior to receiving the clearance certificate put the estate trustee in a precarious position.  Arguably, an estate trustee should not be compelled to put himself/herself at risk for declining to make an interim distribution without a clearance certificate.  Clearly, each situation is fact specific.