There is no doubt that carrying debt is stressful. However, carrying debt and the angst that accompanies it are very common in Canada. A recent Ipsos poll revealed that most Canadians are in debt of some kind, whether it be a mortgage or credit card debt, and that most of those who are in debt feel burdened and stressed out by the thought of repaying it. 1
One way to combat the anxiety of owing money is to educate yourself about the treatment of debt at various stages. In this blog, we provide the legal perspective on how Canadians' debt gets paid off after death.
Does My Debt Get Passed Down?
Fortunately for debtors or the beneficiaries of a debtor's estate, debt itself cannot be inherited. Instead, after a Canadian dies, their estate becomes responsible for paying back the debt belonging to the deceased. When the debtor dies, the executor of the estate must repay all outstanding debts before transferring assets of the estate to its beneficiaries.2
To reiterate, debt itself cannot be passed down. That means that any debt solely in the name of the deceased is to be paid off solely by the estate. For example, if you have credit card debt, and the credit card is solely in your name, the balance owing on the credit card is not passed down to anyone you have pre-deceased, but is instead paid off by the executor of the estate.3
Some kinds of debt, however, can be passed down. Specifically, any debt associated with property that you have left for someone to inherit will be assigned to the beneficiary. For example, your children inherit a cottage from you, and that cottage has a mortgage. Since ownership of the cottage has been transferred to your children, so, too, will the mortgage debt. The same goes for a car, or any other property, that was financed and was not yet owned outright at the time of death.
Additionally, if you carry debt jointly with another individual, like a joint credit card or mortgage, the co-debtor will assume your debt on that account after your death.4
What If I Have Various Kinds of Debt?
In general, there are three broad types of debt: secured debt, unsecured debt, and outstanding taxes owing. If you have multiple types of debt upon your death, creditors cannot freely withdraw assets or funds from your estate. Rather, creditors must abide by the following order of debt repayment after death:
- Federal taxes;
- Provincial or territorial taxes;
- Secured debts; and
- Unsecured debts.5
Below is an example to help you understand how this operates.
John Doe had the following debts when he passed away: a mortgage on his home with X Bank carrying a balance of $100,000, and a credit card balance of $5,000, also with X Bank. John Doe passed away after he filed his tax return for 2024; his Notice of Assessment revealed that he owed the CRA $10,000 in income taxes. So, John Doe died with a federal tax debt, a secured debt (i.e., the mortgage), and an unsecured debt (i.e., the credit card). This means that the executor or estate administrator must pay back the deceased's debts in the following order:
- $10,000 income tax bill to CRA;
- $100,000 mortgage balance to X Bank; and
- $5,000 credit card balance to X Bank.
What If My Estate Cannot Afford to Repay All My Debt?
Debts must be repaid before gifts can be distributed under a will (or, if the debtor died intestate, before their next of kin receive their entitlements). This means that the property or funds a beneficiary has been gifted or is otherwise entitled to may be reduced by the amount of debt owed by the estate. This process of reductions in gifts or inheritances is known as "abatement".
If your estate has more debt than assets, like a living person, the estate may be considered insolvent. The administrator of an estate can make a proposal in bankruptcy or declare bankruptcy on behalf of the estate, and an estate can be the subject of a bankruptcy application filed against the estate.6
Conclusion
Debt management can be highly complicated, especially when putting the pieces together after the death of someone with debt. That's why it is crucial to understand the legal status and treatment of debt and the practical effects it can have on those close to the deceased debtor.
Footnotes
1. Ipsos, Around Half of Canadians with Non-Mortgage Related Debt Find Paying Their Debts Stressful (n.d.), online: Ipsos https://www.ipsos.com/en-ca/around-half-of-canadians-with-non-mortgage-related-debt-find-paying-their-debts-stressful#:~:text=Perhaps%20most%20concerningly%2C%20as%20many,to%20a%20household%20budget%2C%20themselves.
2. Consolidated Credit Canada, Debt After Death: How Debt Is Handled by an Estate (n.d.), online: Consolidated Credit Canada https://www.consolidatedcreditcanada.ca/financial-news/debt-after-death-how-debt-is-handled-by-an-estate/.
3. RBC Royal Bank, Debt and Death: Managing Financial Obligations After the Death of a Loved One (n.d.), online: RBC Royal Bank https://www.rbcroyalbank.com/en-ca/my-money-matters/life-events/finances-and-relationships/death-of-a-family-member/debt-and-death-managing-financial-obligations-after-the-death-of-a-loved-one/.
4. Ibid.
5. Consolidated Credit Canada, supra, note 2; Bankruptcy and Insolvency Act, RSC 1985, c B-3, s 136(1).
6. BIA, supra note 5, ss. 44, 49, 50.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
