Imagine this common scenario: a young couple gets married. The parents of one of them (whether bride or groom) gives money to the newlyweds to get them started on their new life together. Not surprisingly, there is little if any documentation on the transaction because – well, it’s a gift from the proud parents to mark an auspicious and happy occasion.
Now imagine this rather equally-common, but less pleasant scenario: it is now years later and the once-happy couple has decided to divorce. Suddenly there is stark disagreement as to whether the parents’ well-intentioned advance of funds was ever intended to be repaid, and whether it was intended to go to one or both of them. Memories of the circumstances at the time are hazy and – heightened by the acrimony of the split – tend towards the self-serving.
It’s a very important distinction because Ontario Family Law treats gifts and loans very differently upon separation and divorce. Assuming the amount given by the parents is truly a gift to both spouses during marriage, then it shows up on the former couple’s list of matrimonial assets, to be divided in the usual course. But if the amount was intended to be a loan to both of them (which must be repaid), then it will counted as a debt in the context of determining each spouse’s Net Family Property for division.The question becomes even more complicated if it was a gift or loan made prior to marriage, in which case it is subject to specific legislated rules.
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So how do these kinds of disputes actually get resolved during divorce proceedings? Various courts have contemplated and itemized the key factors to be considered in cases like these. In determining whether money advanced by a parent to an adult child is a loan or a gift, the court will look at whether:
1) there are any documents created at the time of the advance that show it was intended to be a loan;
2) the manner of repayment is specified;
3) there is any security held by the parents in connection with the loan;
4) there are advances made to one adult child and not to others, or advances of unequal amounts to various children;
5) there has been any demand by the parents for payment before the couple separated;
6) there is any expectation or likelihood of repayment.
Needless to say, the outcome of any given scenario will depend on the circumstances. It’s always best to consult a lawyer when contemplating these kinds of parent-child gifts and loans, especially ones that are made in times of happiness and optimism, since things can (and frequently do) change.