I came across a very interesting article in Phil Epstein’s weekly family law bulletin this morning. The case is Barber v. Magee, 2015 CarswellOnt 19620 2015 ONSC 8054 (Ont. S.C.J.). This case deals with a common situation that can cause endless headaches in a family split up – the loan vs. gift question regarding funds advanced by parents to one of the warring spouses.
This was a case where the father of the husband had advanced him $90.413.49 for downpayment for the purchase of the family home, and gave him $67,000.00 during the marriage. The issue was whether or not these funds were advanced by way of gift or loan. If they were by way of loans, the husband would be entitled to deduct them from his net family property.
This is an important case, in that it highlights the difference between a loan and a gift, and seems to run contrary to the presumption that an advance by a parent to a child is presumptively a loan and not a gift.
As the Justice noted:
38 The Supreme Court of Canada in Pecore v. Pecore, 2007 SCC 17,  1 S.C.R. 795 (S.C.C.), at paras. 24-26, explained the doctrine of the presumption of resulting trust as follows:
24 The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers. When a transfer is challenged, the presumption allocates the legal burden of proof. Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended: see Waters’ Law of Trusts, at p. 375, and E. E. Gillese and M. Milczynski, The Law of Trusts (2nd ed. 2005), at p. 110. This is so because equity presumes bargains, not gifts.
25 The presumption of resulting trust therefore alters the general practice that a plaintiff (who would be the party challenging the transfer in these cases) bears the legal burden in a civil case. Rather, the onus is on the transferee to rebut the presumption of a resulting trust.
39 In Kerr, at para. 18, the Supreme Court of Canada explained how trial courts should consider the presumption of resulting trust:
18 The Court’s most recent decision in relation to resulting trusts is consistent with the view that, in these gratuitous transfer situations, the actual intention of the grantor is the governing consideration: Pecore v. Pecore, 2007 SCC 17,  1 S.C.R. 795, at paras. 43-44. As Rothstein J. noted at para. 44 of Pecore, where a gratuitous transfer is being challenged, “[t]he trial judge will commence his or her inquiry with the applicable presumption and will weigh all of the evidence in an attempt to ascertain, on a balance of probabilities, the transferor’s actual intention” [emphasis added].
40 The presumption of resulting trust applies when a parent makes a gratuitous transfer to an adult child: see Pecore, at para. 36. The presumption is that the adult child is holding the property in trust for the aging parent. In other words, the parent holds an interest in the subject asset whether it is real property, money loaned or some other item. The parent is presumed not to have intended a gift. However, this presumption can be rebutted by the evidence.
The law would therefor be that a loan is presumed but that presumption can be set aside by looking at the evidence in any one case. In this case the Justice looked at the law relating to evidence necessary to rebut the presumption of loan, as stated by a number of provincial courts of appeal and cited the following cases:
41 Clearly, the evidence necessary to rebut the presumption depends on the facts of the case: see Pecore, at para. 55. Evidence of the parent’s post-transfer conduct is admissible, so long as it is relevant to the parent’s intention at the time of the transfer: see Pecore, at para. 59.
42 The courts in British Columbia have been helpful in suggesting factors to look to when determining a resulting trust claim. The British Columbia Supreme Court recently reviewed the caselaw in Byrne v. Byrne, 2015 BCSC 318, 57 R.F.L. (7th) 215 (B.C. S.C.). The Court in Byrne referenced the factors adopted by their Court of Appeal that ought to be reviewed when determining whether a gift or loan was intended: see Kuo v. Chu, 2009 BCCA 405, 180 A.C.W.S. (2d) 903 (B.C. C.A.), citing Locke v. Locke, 2000 BCSC 1300,  B.C.J. No. 1850 (B.C. S.C.). Those factors are as follows:
- Whether there were any contemporaneous documents evidencing a loan;
- Whether the manner for repayment is specified;
- Whether there is security held for the loan;
- Whether there are advances to one child and not others or advances on equal amounts to various children;
- Where there has been any demand for payment before the separation of the parties;
- Whether there has been any partial repayment; and,
- Whether there was an expectation or likelihood of repayment.
43 The above factors are consistent with the approach taken by the Ontario Courts. Justice Mulligan provided a helpful review of our caselaw in Klimm v. Klimm, 2010 ONSC 1479,  O.J. No. 968 (Ont. S.C.J.), where he noted the following factors, considered by Wood J. in Cade v. Rotstein,  O.J. No. 4460 (Ont. S.C.J.), in determining the existence of a gift or loan:
- That joint debts are old, no demand has been made save one motivated by the separation of the parties;
- The monies were advanced to the parties to help them out;
iii. Dr. Rotstein testified that he would not have looked for the money, or would have taken action against his son. This leads to the clear conclusion that the demand was made as a result of the separation and to benefit their son in a subsequent litigation;
- Dr. and Mrs. Rotstein are elderly and Mrs. Rotstein is in poor health;
- Dr. Rotstein testified that he did not expect the money until the parties were able to afford to pay it back. The separation in this litigation has made that an improbability just as in the Poole case (referenced below); and,
- The Rotsteins Senior do not need the money.
44 Justice Mulligan in Klimm, at para. 29, also considered the following words of Heeney J. in Poole v. Poole,  O.J. No. 2154, 16 R.F.L. (5th) 397 (Ont. S.C.J.), where he considered the role of fairness in the trust determination:
There is a compelling reason for taking this good hard look at the reality of the situation. A debt constitutes a credit in the equalization calculation, and reduces the net family property of the spouse claiming the debt. This has a direct impact on the equalization payment due, by either reducing the amount that the party has to pay to the other (if he has the higher net family property), or increasing the amount that he will receive (if his net family property is lower). Fairness dictates that he should not receive a credit for debt, with the financial benefits that flow from that credit, if he will never be called upon to pay the debt.
The case law is clear. If a spouse wishes to rely on a “loan” from a parent to reduce his or her net family property, he better have clear proof that a loan was intended.
That evidence should include:
- a promissory note or other proof of loan
- a clear manner for repayment
- provision of some security for the loan
- proof that this was not a gift as part of a gifting scheme to all of the lender’s children – ie an advance on an inheritance
- demands for repayment during the marriage
- partial payment on the loan during the marriage
- that there was an expectation of repayment
Loans to married children by parents should be properly documented at the time that the loan was made. If this is not done, the parent who is expecting repayment may not get it, after his child’s separation.
The moral of the story for parents of married children are if you are advancing money to your child, you are giving to his spouse as well, even if things go bad later on, unless clear steps are taken to prove that this was a loan.
What has to be done for parents loaning money to married children is that it has to be a loan, and treated as one, just as if you were loaning money to a stranger.
This is not a simple matter for any parent, and he or she should get some legal advice before loaning or gifting money to a married child.
As always, this is my opinion, and is general legal advice only.
March 9, 2015