GIFT? LOAN? INVESTMENT?

Does the purchase money advanced come with strings attached?

BY RAY BASI, J.D., LL.B., DIRECTOR OF EDUCATION FOR CMBA-BC AND MBIBC

Ayoung couple is purchasing their first home. The husband’s parents are advancing $250,000 and you, as their mortgage broker, have arranged a loan for the $750,000 balance. The lender required – and the parents signed – a gift letter regarding the $250,000. You heard the parents and the couple discussing that the gift letter will satisfy the lender’s requirement but that they will sort out the $250,000 among themselves later. The purchase closes.

Fast forward three years and the couple is in the midst of a divorce. They are arguing about how their matrimonial property is to be divided. The wife says the parents gifted the $250,000 to them and so there is no debt that needs to be addressed as part of the property division. The husband says the advance was a loan that needs to be addressed as part of the property division. The parents say the advance was an investment in the property and they are entitled to a quarter interest in the value of the property. Each of the three characterizations of the $250,000 advance of course would net the parties different amounts.

Unfortunately, once the purchase had closed, the topic of the $250,000 was never raised. The parents had advanced the money from their line of credit and since then had made all of the required monthly payments. They never asked for nor received any acknowledgement of the debt or any payment toward it from the couple.

Scenarios such as this have become common as more young couples need financial assistance from the ‘bank of Mom and Dad’ to make their first real estate purchase. Unfortunately, families often fail to confirm the nature of the assistance provided. Was the assistance a gift, loan or investment? Some of the later disputes as to the correct categorization arise due to true misunderstandings, failing memories or matters of convenience following marriage breakups or family feuds, but all could be assisted with some appropriate discussion, notes and agreements. Understanding the approach courts have taken can help a mortgage broker assist their clients to avoid such disputes.

determines whether it is or is not a gift. This approach takes into account that people might later state their intention differently if circumstances change (such as the pending divorce of the couple to whom they advanced the money). They might then state their intention according to what benefits them or their favoured people in the new reality.

To determine the intention of the person making the advance, the court starts with the applicable presumption and then considers all of the evidence to see if it needs to be set aside. Among the evidence that is often relevant are oral statements made by the parties, written statements made by the parties (such as emails, texts, notes, correspondence and agreements), and the conduct of the parties before and after the money is advanced. How a party conducts themselves after the advance is made can be very telling about their intentions when they made the advance.

Some examples of factors courts have reviewed in determining the transferor's intention include: n Whether there were any contemporaneous documents evidencing a loan; n Whether the manner for repayment is specified; n Whether there is security held for the loan;

WHAT IS THE DIFFERENCE BETWEEN A GIFT, LOAN AND INVESTMENT?

A gift is a transfer of funds/property in which there is no expectation of the person who advanced the funds/property being repaid. (For the sake of simplicity, we will refer to the funds/ property as “money.”)

A loan involves the person who received the money being obligated to repay the principal amount (or any part of it, as agreed), repay any interest agreed upon, and abiding by any other terms of the agreement (such as keeping the property taxes paid, the property insured and the property reasonably maintained).

An investment involves the person who advanced the money taking an ownership interest in the property, either proportionate to the amount of the advance or some other agreed proportion. This can be done by being directly registered on title or having the person registered on title hold the proportionate share on their behalf.

PRESUMPTION – AN ADVANCE IS NOT A GIFT

The Supreme Court of Canada in Pecore v. Pecore, 2007 SCC 17, (2007) 1 S.C.R. 795 2007 established presumptions in determining whether an advance of money is a gift.

Courts presume that where the advance was made for nothing in return, the person who made the advance did not intend it to be a gift. This presumption can be set aside by sufficient evidence indicating the advance was intended as a gift.

However, where the person receiving the advance is a dependent, minor child of the person who made the advance, the advance is presumed to be a gift. This presumption can be set aside by sufficient evidence indicating the advance was not intended as a gift.

Intention Of Transferor Determines

It is the intention of the person making the advance, at the time the advance was made, that n Whether there are advances to one child and not others or advances on equal amounts to various children; n Where there has been any demand for payment before the separation of the parties; n Whether there has been any partial repayment, and n Whether there was an expectation or likelihood or repayment.

(Source: Kuo v. Chu, 2009 BCCA 405; Locke v. Locke, 2000 BCSC 1300)

The list is not exhaustive, and no factors alone determine the decision. The court looks at the entire picture to determine the person’s intention in advancing the money.

As indicated by the Supreme Court of Canada in the Pecore case, the party who wants to set aside the presumption does not need absolute proof of the intention of the advance. They need to prove it on the balance of probabilities; that is to say they need to persuade the court that it was more likely than not that the party had the intention the party claims.