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Financial Planning   ->   Wills and Estates -> What happens to the debts of a deceased person?

What Happens to Debts of the Deceased?

Debts are normally paid out of the assets of the estate of the deceased, before distributions are made to heirs.  If the estate is insolvent (the assets of the estate are not sufficient to pay the debts), then the order of payment is prescribed by provincial legislation.

If any unpaid loans to the deceased were cosigned by another person, that person will likely be liable for any balance unpaid after repayments are made from the estate.

If the deceased has a tax liability and has transferred property to:

bullet their spouse or common-law partner,
bullet a person under the age of 18, or
bullet a person with whom they were not dealing at arm's length,

then as per s. 160 of the Income Tax Act, the recipient of the property transfer can be held liable for the tax liability, to the extent that the market value of the property transferred exceeds the amount of consideration given by the recipient for the property.

The above applies if assets of the deceased have named beneficiaries, such as a registered retirement savings plan or other registered plans, and the deceased owes money to Canada Revenue Agency (CRA).  CRA  can recover the money owed by the deceased, up to the amount that the beneficiary received from the deceased.  For an example of this see Tax Court Case Dreger v. The Queen, 2020 TCC 25.  The same does not apply when the beneficiary of the RRSP is a former spouse, because they do not fit the above criteria of s. 160.  For an example of this see Tax Court Case Kiperchuk v. The Queen, 2013 TCC 60.

Some debts may be extinguished upon the death of the debtor - for instance, in the case of insured loans or mortgages.

See the MNP Ltd. article Dealing With Debts Of A Deceased Bankrupt.

The Canada Student Financial Assistance Act provides for some student loans to be repaid by the federal government in the event of the student's death or permanent disability.

For information regarding what happens in each province, see What to do when someone dies, which has links to wills and estate information on provincial/territorial websites.

Revised: October 26, 2023


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