For about one-third of first-time home buyers in Canada, the secret to scrounging up funds for a down payment isn’t found in their savings, wage rates, or by penny-pinching. Instead, the answer lies with another resource: the bank of Mom and Dad.
The impact of a parent’s contribution to home financing is significant in the Canadian home market. For example, a recent data poll commissioned by the Ontario Real Estate Association found that 41 percent of the parents of children aged 18 to 38 who own homes helped finance the purchase. In the greater Vancouver area, parents have reported providing between $180,000 to $340,000 to their home-owning children. While the generosity of parents to help finance their kid’s purchase is undeniable, so are the potential complications that come with it.
Gift or a Loan? The Law Assumes It’s a Loan.
Most importantly, parents need to be clear about whether the money they’re providing is a gift or loan. The primary difference between a gift and a loan is that a gift has no expectation of repayment. A loan, on the other hand, has the expectation of being repaid either within a certain timeframe, when a certain event occurs or on demand. It’s also important to recognize that parents cannot provide funds as a gift and later decide the transfer was actually a loan. The intentions at the time of the transfer will determine whether the funds were truly gifted or loaned to the recipient.
In the recent B.C. Supreme Court case Zucker v. Zucker, 2022 BCSC 2025, the parents transferred approximately $500,000 to their son and his wife, so that they could purchase and build a family home. The court had to decide was a gift or a loan. There was no evidence in writing that the funds were a gift, a loan, or whether there were agreed-upon terms of repayment.
In coming to its decision, the court explained that the law presumes a transfer made, with no benefit received in return, is not a gift. It is up to the recipient to prove that the parties intended for the funds to be a gift at the time they were transferred.
The court ultimately decided that the funds were a loan and not a gift by determining that the parents and their son and their daughter-in-law all understood that the funds would need to be repaid when they entered into the agreement. The court considered the fact that the parents had made transfers multiple times, as opposed to one lump sum, that the son and his wife had already partially repaid the parents, and looked to the parties’ conversations and conduct before, during and after the funds were transferred.
The court ordered repayment of the outstanding balance owing to the parents against the son and daughter-in-law, plus interest and compensation for their legal fees, also known as “costs”.
How Can Parents and Their Adult Children Protect Themselves?
The best way to ensure parents and their kids don’t wrongly assume the funds are a gift, or a loan, is to put the terms of their arrangement into writing. This written agreement, signed by all parties, should contain important terms including the amount loaned or gifted, whether the parents will have an interest in the home purchased with the funds, how and when the funds will be repaid, and what will happen if the kids don’t pay back the loan by a certain deadline. In all cases, it is best to seek out a legal professional to assist you with drafting your agreement and prevent costly future arguments between members of your family – both inside and outside of the courtroom.
If you have any questions about this topic or need legal advice in relation to this or any other issue, please contract us to set up a consultation. We can be reached at 604-705-0022 or by email at info@sorensensmith.com.
Ashley Heisler, Lawyer
Sorensen Smith LLP