Written on behalf of Feigenbaum Consulting
Generally, one way to differentiate between a loan and a gift is that there is a legal obligation to repay a loan, while there is no obligation to repay a gift. However, in a family law context, these lines may become blurred. For instance, where a parent transfers money to an adult child to help them out financially, is there an obligation to repay the money? The Ontario Court of Appeal recently had to answer this question.
The case involved an adult daughter, her husband and her parents. The family dispute centred on the mortgage of a home originally owned by the daughter and her husband.
The daughter and husband married in 1993 and have five children together. The daughteris a homemaker and is unemployed, while the husband works as an information technology engineer.
The couple purchased the home at issue in the year 2000, with a conventional mortgage given as part of the purchase. In 2004, the husband changed employment, which resulted in a reduction in his income. As a result, the couple was faced with a difficult financial situation and the daughter approached her parents about their financial difficulties. The parents offered some initial financial assistance and eventually offered to pay off the couple’s existing mortgage as further assistance. The initial discussions about paying off the mortgage began in 2004; the mortgage was paid off in February 2005 by the parents and, in July 2005, the mortgage in question was registered on title.
Subsequently, the wife and husband separated in 2015. The wife claimed that the sum of $530,780 in respect of the mortgage was owed to her parents, while the husband submitted that the monies given by the parents prior to the registration of the mortgage were gifts rather than loans. As a part of the family law dispute, the parents brought a motion for summary judgment pursuant to Rule 16 of the Family Law Rules for an order declaring the validity of the mortgage in their favour.
At trial, the judge granted summary judgment in favour of the husband, finding that the monies given by the parents were in fact gifts at the time of the transfers.
The parents appealed the trial decision. The issue on appeal was whether the mortgage secures loans made by the parents to the daughter and husband or whether the monies advanced by the parents were, in fact, gifts.
The Appeal Decision
The appeal court began by stating that the motion judge correctly set out a basic legal principle that where there is a transfer of property from a parent to an adult child, there is a presumption that it is not a gift, but is rather held in trust by the child. This presumption, however, can be rebutted.
The appeal court also found that the trial judge did not make an error in his determination of the facts when he stated:
“I do not accept [the father’s] evidence that the many transfers of money were loans. He stated that each of the transfers constituted a loan however, as noted earlier, there was no evidence that the parents at the very least told [the daughter and husband] that those transfers were loans or that he communicated the loan terms of each transfer to [the daughter and husband]. I accept the husband’s evidence that the parents never suggested to him until June or July 2005 that the transfers made from 2000 to 2005 were loans.”
The court of appeal agreed with the trial judge that the history of the dealings between the parties, prior to the mortgage, strongly suggested that all of the financial assistance provided by the appellants was intended to be by way of gifts and not loans. In addition, the appeal court stated that there was never a request for any form of security documentation with respect to this financial assistance. Additionally, the court placed some importance on the fact that, after the mortgage was paid off, the parties all went out for a celebration of the fact that the daughter and the husband were “mortgage free”.
As a result, the appeal was dismissed.
When money or property is transferred between family members, documentation should be prepared where the transfer is intended to be a loan. The documentation should set out the amount of money or type of property being transferred, the method and timeline for repayment, as well as any other salient information, such as interest rates or recourses in the event of default. A court will consider all documentation and surrounding events when making the determination between a loan and a gift.
At Feigenbaum Law, our goal is to help you move forward following the breakdown of a relationship while retaining as much financial stability as possible. Mark Feigenbaum is able to counsel his clients on all potential risks that may result from a family law dispute. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.