Insolvent estate's debt to federal Crown should be prioritized: Alberta court

Court of King's Bench upholds Crown's common law prerogative to be paid first among equal claims

Insolvent estate's debt to federal Crown should be prioritized: Alberta court

In a recent case involving a deceased debtor’s insolvent estate, the Alberta Court of King’s Bench ruled that the Crown prerogative to be paid first among equally-ranked creditors was in effect in the province.

The debtor signed a consolidation agreement with a financial institution. He was in the process of consolidating his debt and putting together a consumer proposal when he passed away in February 2021. The consumer proposal was withdrawn due to his death.

The estate’s personal representative collected $63,755.98 in estate assets and spent expenses, funeral costs, legal fees, and accounting fees amounting to $18,712.78. He requested compensation of $2,000 and proposed a hold-back of $5,000 to deal with final estate expenses.

The balance of funds available for distribution to creditors was $38,043.20. The representative filed an application to formally pass accounts and made a proposal to reimburse the estate’s creditors at 29 percent on a pro rata basis.

The Canada Revenue Agency (CRA) did not oppose the personal representative’s recovery of expenses incurred. However, it opposed the pro rata distribution and requested repayment of its debt before all other unsecured creditors.

The Crown’s claim took priority over the claims of other equally-ranked creditors based on the Crown’s common law prerogative to be paid first among claims of equal degree, the CRA alleged.

The CRA also argued that s. 159 of the Income Tax Act, 1985 created a priority in the Crown’s favour because a clearance certificate would only be granted after the payment or securing of outstanding balances owed to it and after there were no other outstanding adjustment requests, objections, taxpayer relief, or appeal requests.

Crown debt prioritized

In Horvath Estate (Re), 2023 ABKB 643, the Alberta Court of King’s Bench released a decision concluding that the CRA should be paid first, given its priority over the estate’s other unsecured creditors by virtue of the Crown prerogative. Jurisprudence of the Supreme Court of Canada has recognized this prerogative.

Alberta’s Estate Administration Act, 2014 did not limit the prerogative, the court said. None of its provisions – including s. 27, which provided for the payment of claims relating to an insolvent estate – expressly bound the federal Crown, the court added.

Section 22(c) defined a “valid money claim” as a debt owed by a deceased person, including a debt to the Crown in right of Alberta or any other claim by the provincial Crown potentially resulting in a money judgment against the deceased. The legislation had no similar mention relating to the federal Crown, the court noted.

After the payment of the federal Crown’s debt, the other unsecured creditors would be paid on a pro rata basis from the remaining funds, the court added.

Another issue in the case was whether s. 159 of the Income Tax Act created a priority in favour of the CRA. To answer this question, the court had to address the doctrine of paramountcy and had to determine whether this provision would override the provincial legislation and the provisions on the payment of unsecured debts.

The court decided that it could not consider this issue because the parties failed to give notice of a constitutional question to the Alberta province, as required by Alberta’s Judicature Act, 2000.

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