Legal Considerations When Helping Your Kids With A Down Payment
Many parents help their offspring purchase a home by providing funds for a down payment. If that home is the primary dwelling of a married couple, it will be considered a matrimonial home. Before writing the cheque, the parent should consider what s/he wants to occur if the marriage ends.
Generally speaking, all property held by a couple is divided equally between the two spouses after subtracting the value of property each spouse brought into the marriage. The matrimonial home is an exception to this general statement. In other words, if one spouse, or his or her parents, bring a significant down payment into the relationship, the other spouse gets a windfall when the marriage ends.
Parents can prevent this windfall from occurring by taking a few steps to demonstrate that they intend the down payment to be a loan rather than a gift. A recent case, Barber v Magee, demonstrates a failure to do so which resulted in one getting a windfall from the parent's gift.
Initially, the parents advanced just over $90,000 to the son for a down payment. Over time, they advanced an additional $67,000 to the son which was used primarily to make payments on the house. When the marriage ended, the spouses disputed the nature of the advances. The wife claimed that the monies were a gift, while the husband claimed that the money was a loan. If his argument had prevailed, the loan would have been a liability that would have reduced the amount of property accumulated during the marriage thereby reducing the wife's share.
In deciding the matter, the court looked for evidence to ascertain what the parents' intention was when they advanced the monies. It started with the premise that when parents advance money or property to children there is a presumption that the children are holding the money in trust for the parents. That presumption is rebuttable by showing evidence that a gift was intended.
The factors that the court considered were:
a. Whether there were any contemporaneous documents evidencing a loan;
b. Whether the manner for repayment is specified;
c. Whether there is security held for the loan;
d. Whether there are advances to one child and not others or advances on equal amounts to various children;
e. Where there has been any demand for payment before the separation of the parties;
f. Whether there has been any partial repayment; and,
g. Whether there was an expectation or likelihood of repayment.
In Barber v Magee, the judge ruled that the monies advanced were a gift and not a loan. There was no evidence of contemporaneous documents stating that the money was loaned, no schedule of payment and no demand for payment was made until after the couple separated. Additionally, the parents failed to secure the money as a loan by registering a mortgage on title. The lack of evidence that the funds were loaned rebutted the presumption that the monies were held by the children in trust for the parents.
The Lesson: The case provides a cautionary tale for advances from parents to children. If a parent wants to exclude the funds from the division of property should a divorce occur, the parent should document the funds as a loan and included a provision for interest rates, repayment (which could be "upon demand"). Both the parents and the children should have independent legal advice regarding the transaction. The loan can always be forgiven at a future point if the parent so wishes to change the down payment into a gift.
Barber v Magee, 2015 ONSC 8054 https://www.canlii.org/en/on/onsc/doc/2015/2015onsc8054/2015onsc8054.pdf
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