When a parent transfers funds to an adult child, the presumption of resulting trust applies rather than assuming the funds were a gift. The presumption can be rebutted by evidence that the donor intended to make a gift. This is the key factor in assessing whether the funds were loaned or gifted. This determination takes on further significance where recipient spouses are separating, since a debt can impact the equalization payment owing between the spouses.

Parties Dispute if Funds Were a Loan or a Gift

In Massaar v. Moneck, the plaintiff, Marian, moved for repayment of a loan made jointly to her daughter, Lauren, and son-in-law, Anthony, when they were purchasing their first home. The marriage subsequently broke down, and Marian claimed $163,982.50 to be paid from the sale proceeds of the matrimonial home, while Anthony alleged that the funds provided by Marian were a gift rather than a loan. According to Marian, in 2017, she entered into an agreement with the couple to provide funds, and they would begin repaying the loan after three months in monthly installments of $900. However, in 2020, they began having marital problems, and Marian asked both to sign a promissory note agreeing to their remaining indebtedness. The couple continued to make payments until February 2021, after which Marian made several demands for repayment.

While Lauren agreed that the money provided was a loan, Anthony took the position that it was a gift. His position was that Lauren wished to repay the gift over time, but he did not agree to be personally responsible for the repayments and did not consent to turning the gift into a loan. He also suggested that if Marian owed money, she was collecting payments to benefit Lauren in their divorce litigation, thereby reducing her net family property.

Court Looks at the Intention of the Transferor

Justice Healey began by acknowledging that, when determining whether a transfer from a parent is a loan or a gift, the parent’s intention at the time of the transfer is the determining factor. Ultimately, the recipient’s intention is not relevant. In Prtenjaca et al. v. Well-Prtenjaca et al, the judge explained that in the case of a gratuitous transfer to an adult child, a presumption of resulting trust arises. And if a party alleges that the transfer was a gift, they have the burden of rebutting the presumption by showing the donor intended to make a gift. Additionally, Crepeau v. Crepeau et al., added that donors cannot retract gifts and cautioned about the reliability of evidence. Evidence showing a party’s intent that is contemporaneous with the transaction is particularly helpful. However, evidence of intention arising after the transaction has occurred can still be relevant, although the judge warned that courts must assess the reliability of such evidence and guard “against evidence that is self-serving or which tends to show a change in intention”.

Here, as Anthony claimed that the funds were gifted, he had the onus of disproving the presumption of a resulting trust. And to prove the existence of a gift, he had to establish three elements: (1) that Marian had a clear intention to make a gift, (2) the acceptance of the gift, and (3) delivery of the gift. Only the first element was at issue in this case.

In Chao v. Chao, the Ontario Court of Appeal recognized a number of factors that could be relevant to the issue of whether funds were provided as a loan or a gift:

1. Whether there are any contemporaneous documents evidencing a loan;
2. Whether the manner of repayment is specified;
3. Whether there is security held for the loan;
4. Whether there are advances to one child and not others, or advances of unequal amounts to various children;
5. Whether there has been any demand for payment before the separation of the parties;
6. Whether there has been any partial repayment, and
7. Whether there was any expectation or likelihood of repayment.

Debts Have a Financial Impact at Separation

One of the cases Anthony relied on was Klimm v. Klimm. In that instance, the issue was whether $150,000 from the husband’s father to the couple was a loan or a gift, with the wife claiming the funds were a gift. In that case, the court concluded the funds were not loaned, as $40,000 had been forgiven on loans made to all four of their children, no payments were made after the parties separated, and there were never any demands for repayment. Importantly, the judge cited a passage from Poole v. Poole discussing the impact of debts on family property statements. There, Justice Heeney emphasized that courts must consider the realities of the situation, since, for the purposes of equalization, a debt reduces the net family property of the spouse claiming it. And this may either reduce the amount the spouse must pay, or increase the amount received, if their net family property is lower. For the judge, fairness requires that a spouse “not receive a credit for a debt, with the financial benefits that flow from that credit” if they will not be called upon to pay the debt.

In Massaar, the judge noted that the only issue was whether the funds were advanced as a loan or a gift. The judge acknowledged that the parties exchanged and filed ample evidence and that the court was able to fully consider the totality of the evidence. Justice Healey felt that the record was sufficient to be able to make credibility findings, which were key to being able to resolve the issue in dispute. The judge noted that Anthony had failed to produce evidence that Marian intended to make a gift. His evidence was that he understood the money was intended as a gift, but this was irrelevant to the determination of the issue. Instead, he needed to produce evidence that Marian intended to provide a gift when she advanced the funds, but he was unable to do so. Overall, the evidence did not support his version of events.

Judges Examine the Reliability of the Evidence

The factors set out in Chao also needed to be considered. The first required the court to consider whether any contemporaneous documents evidenced a loan. The best evidence of this was communications from Anthony demonstrating he was aware that he and Lauren were to repay funds loaned by Marian. He specifically acknowledged a debt to repay, which led Justice Healey to reject the claim that Anthony did not know the money had been loaned. The process the parties went through negotiating the terms before the funds were advanced also clearly established Marian’s intention to make a loan. Moreover, evidence from Marian’s financial consultant corroborated that Marian provided the funds to enable the bank to approve mortgage financing for Anthony and Lauren.

A second factor considers whether the manner of repayment is specified. Marian alleged that the repayment terms were $900 per month, and this was corroborated by her bank statements, which showed that amount being transferred by either Lauren or Anthony from their joint account. There was also a repayment schedule. The evidence clearly established that the parties had reached an understanding regarding the quantity and frequency of repayment, and that payments were being made regularly even after separation. The judge believed this conduct was consistent with the repayment of a loan.

The Intent at the Time of the Transfer is Determinative

As for the third factor, it appeared the loan was unsecured. However, considering the timing of the loan, it was advanced one month after Anthony and Lauren’s marriage and in the context of financing the purchase of the property. The judge determined that Marian signed a gift letter confirming that she was providing funds to the couple to satisfy the bank’s financing requirements rather than documenting the existence of a gift, and that any other conclusion would be inconsistent with the evidence of Marian’s intention and the parties’ understanding of the loan agreement. There was also evidence of loans made to Lauren’s sisters and their husbands to assist them in purchasing their first homes. Anthony argued that there was no evidence from the spouses to confirm that loans were made jointly to each couple. However, the judge indicated there was no reason to reject the evidence from Marian and her daughters about the nature of those loans.

A further factor is whether there was any demand for repayment before the parties’ separation. In this case, the judge cited an exchange between Marian and Anthony that occurred following a missed payment, which demonstrated that Marian expected repayment in monthly installments and that Anthony understood that obligation. There was also a promissory note corroborating that all the parties were operating under the same understanding that the money would be repaid to Marian. Although Anthony denied signing the document, the judge believed it bore his electronic signature. There was his own written acknowledgement that he would sign the document, and then five days later, it was delivered to Marian. Justice Healey found that Anthony’s positions in the case were unsupported by the evidence and concluded that he was not credible, and did not rely on his claim that he did not sign the promissory note. Overall, the issue of whether the funds were a loan or a gift did not require a trial to decide.

Parents Should Consider How They Can Protect Their Financial Interests

Courts assess the parent’s intention at the time of a transfer to determine whether funds provided to an adult child were loaned or gifted. Judges will also weigh evidence that may be self-serving or that may suggest the donor later changed their intention.

Are Parent Financial Transfers Impacting Your Property Division? Contact The Experienced Family Lawyers at NULaw

Whether you need to properly document financial arrangements with adult children or ensure family loan claims are handled fairly during property division, navigating the presumption of resulting trust and net family property equalization requires experienced legal guidance. Contact NULaw in Toronto online or call 416-481-5604 to schedule a consultation with family lawyer Lex Arbesman and protect your financial future.