Can I Inherit Debt After Someone’s Death in Canada?

Can I Inherit Debt After Someone’s Death? This is a common question asked by those who are appointed executors of a deceased person’s estate, those worried about dying in debt, and by curious minds. We will endeavour to answer this question in this article. While it may seem like a straightforward question, there are many considerations to be had.

Before we begin – If you are currently struggling with suicidal thoughts we urge you to contact the Canada Suicide Prevention Service by calling 1-833-456-4566 which is available 24/7/365.

Have you ever wondered if you can inherit debt in Canada? If you have, you’re not the only one. It can be difficult enough to manage your own debt without having to take on someone else’s debt after death. While the simple answer is no, you do not inherit debt, you may still be responsible for debt-related obligations.

Disclaimer: We are not lawyers and we always recommend seeking legal advice as it relates to a deceased individual’s estate. We will cover things at a very high level in this article but the contents herein should not be used as legal advice. We do not claim to be an expert in Wills and Estates.

The first thing you need to know: A deceased individual has an ‘estate’

When someone passes all of their possessions that do not have named beneficiaries or that are not subject to specific legislation or laws go into what is known as an ‘Estate’. This is simply a term that is used to describe the affairs of a deceased individual. When an individual passes, an executor is assigned to manage the estate in accordance with the deceased individual’s will and in accordance with the law. Without getting too complicated, the executor is usually a lawyer or someone else who has been appointed by the deceased to manage their estate and finalize their financial affairs.

An executor has many responsibilities which may include:

• Making funeral and burial arrangements;
• Locating the deceased’s final will;
• Paying estate fees;
• Locating and notifying all beneficiaries named in the will, or under the law if there is no will;
• Getting an appraisal for the value of the estate;
• Applying to have the will validated by a court (probate);
• Completing a final tax return for the deceased, as well as any returns required for the estate;
• Notifying creditors that the person has died;
• Paying all outstanding debt owing by the deceased, such as credit card debt, personal loans, etc.;
• Dividing the estate as outlined in the will (or legislation, if there is no will); and
• Providing financial information about the estate to the beneficiaries.

Source: Canada.ca

It is also important to note that an estate is a legal entity. What this means is that an estate can own property and even owe debts. In saying this, the estate of a deceased exists purely to distribute its assets in accordance with the Will of the deceased as well as the law.

For assets that exist within an estate, a legal process called Probate often occurs. Probate is a legal proceeding administered by a lawyer/the court which determines the validity of the Will and determines who will serve as an executor or administrator of the estate when there is no Will, or when someone declines to become an executor.

So is an estate obligated to pay a debt?

In short, yes. An estate is obligated to pay its debts. However, it is only obligated to pay its debts with the assets that may exist within the estate. While one may think that all property (whether physical, such as real estate, or intangible such as stocks/bonds) exists within the estate, this isn’t always the case.

Many assets, such as registered retirement accounts such as RRSPs & TFSAs, and life insurance contracts to name just a few, can be set up so they skip probate and the Will completely. This is done by naming a beneficiary within the specific accounts. Contact your financial institution that holds your account/policy to do this.

Joint assets, such as jointly held real estate (joint tenants), will usually pass directly to the joint owner as well when an individual passes.

Because most Canadians hold their wealth inside of registered investment accounts, real estate and life insurance contacts, it isn’t uncommon for those with large amounts of wealth to have very little funds and property enter into their estate when they pass.

Because of this, it is not uncommon for the amount of debt an individual possesses prior to death to exceed the funds and property that has entered the estate.

So Can You Inherit Debt In Canada?

So, Is debt inherited in Canada? Thankfully, in Canada, you do not inherit the debt of your parents, partner, children, etc. when they pass away. The only time this is not true is if you co-signed on a debt such as a joint credit card or have a personal loan with the deceased.

However, as an executor of an estate and as indicated above, you do have an obligation to pay any unpaid debts owing by the deceased individual. This does not mean that you are personally responsible for paying the bills, or experience any sort of debt inheritance, but rather that you are there to facilitate the payment of these debts via the funds available inside of the estate.

If you find yourself as an executor, you should consult a lawyer to answer questions and concerns you may have. Probate and deceased individual’s estates can be incredibly complex.

The two possible exceptions

Of course, as with everything in life there are always exceptions to the rules.

Mortgages / Other Secured Debts

In the event that an individual passes and leaves, as part of their Will, a property to their child that has a mortgage on it, the beneficiary of the property will be required to ensure the mortgage is satisfied or else the mortgage company may look at repossessing the property and selling it to recoup the loan balance.

This is usually done in two ways:

• The beneficiary would obtain their own mortgage to pay off the old mortgage; or
• In certain situations, the existing mortgage company will assign the old mortgage to the new owner of the property.

This can also be true of a car loan or any other debt that is secured against an asset.

Taxes of the deceased person

When someone dies, they are deemed to have disposed of all of their assets. This often results in capital gains. In the event you receive property on which taxes were payable and the taxes were not paid CRA could come after you for the amount of taxes that should have been paid.

If you suspect you are subject to this or want to learn more information, we recommend you contact a lawyer specializing in Wills and Estates.

Can A Deceased Person File A Bankruptcy

Without getting too complicated; yes. A deceased person can file a bankruptcy if they are an insolvent estate. There are many reasons why an Executor may want to pursue bankruptcy for the deceased person’s estate.

These include, but are not limited to:

• Stress Reduction – Creditors may continue to call the surviving spouse, despite their objection. We have seen this most often with supplementary credit cards given by the deceased to the surviving spouse. Unless the surviving spouse co-signed a debt, they do not likely have any real obligation to pay a creditor (with exception to the above-mentioned items, if they are the Executor). Despite this, creditors will often try to extract funds from the surviving spouse. Bankruptcy provides formal protection against these calls to the estate and often creditors stop calling other parties as well.
• Re-prioritization of debts – Some debts are treated differently under the Bankruptcy and Insolvency Act. Spousal and child support arrears, for example, are given higher priority in bankruptcy than they are normally in a deceased estate. Source: nelliganlaw.ca
• The complexity of the administration – The estate may have many claims against it which could increase the complexity relative to the potential benefit received from the estate.

Conclusion: So Does Debt Get Passed Down In Canada

While we have attempted to answer the over-arching question of what happens to debt after death and do you inherit debt – I hope it is clear that the topic is incredibly complex and professional legal advice is needed. We recommend, as mentioned several times throughout this article, that you contact a lawyer specializing in wills and estates.

Should you require debt relief solutions for a family member, or otherwise, who has passed away, do not hesitate to reach out to us.

Frequently Asked Questions

What happens to credit card debt after death?

In theory, the credit card debt upon death (and other debts owed) does not stop being owed simply because an individual has passed. However, practically speaking, unless there is enough money to pay the credit card debt within the estate, the credit card debt ‘dies’ along with the individual. This means it is uncollectible by debt collectors.

Often times the credit card companies will request the death certificate of the deceased to confirm they have truly passed.

Will credit card companies try and make my children pay for my debt?

If you have unpaid debt and you pass, it is possible a credit card company may try and make your children pay for the remaining debt from their own pockets. This is why it is critical for your children to seek legal advice when you pass to ensure they understand their rights.

It is possible, if you had credit card insurance, that the insurance company will pay off the outstanding debts when you die. Always review the insurance coverage you have.

Do creditors have a right to use my life insurance policy to pay my debts when I die?

Unless your life insurance policy is missing a beneficiary which would make any insurance payments payable to your estate, your life insurance policy would bypass your estate entirely and the proceeds would be paid to the beneficiary.

This is why it is highly recommended to name a beneficiary on your life insurance contracts. The last thing anyone wants is money that is intended for a loved one to inadvertently be lost due to a simple error and be used to pay debts of the estate vs to go to the intended recipient.

This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.