Is it a gift or a loan?

A consideration of the parent’s contribution toward their adult child’s downpayment.

By Slonee Malhotra

As the costs associated with homeownership increase, more parents are assisting their adult children with a contribution toward the downpayment.

Where the adult child is the sole property owner, it is common for parents to structure the contribution as a gift or advance distribution of their estate. It can get tricky where the adult child is purchasing with a partner. Although parents might intend for the contribution to be a gift, the funds may be advanced on the condition that it is a gift while the partners are together and switches to a loan in the event of a separation.

Where funds are provided contingent on the title owners remaining together, our office will recommend additional securities and safeguards to protect the title owners as well as the parents advancing the funds. As real estate lawyers, we always ensure that the funds are documented through a loan agreement which cites repayment terms. We will also recommend that the funds are secured against the property being purchased. In the event this is not done, upon separation, the funds could be seen as a gift and each of the partners could be entitled to half of such gift.

The Family Law Act empowers the court to include debts in the calculation of net family property, but it also empowers them to characterize a loan as a gift. Courts, however, are not permitted to amend debts as these form private contracts with lenders who are not parties to a separation.

Importantly, Courts will look behind the veil to ensure that a loan is a bona fide loan. Some of the factors[1] to consider are:

1. whether there are any documents evidencing a loan;
2. whether the manner for 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.

While the loan agreement is a good start, all parties actions (or lack thereof) are just as much if not more important. And of course, the best protection for all would be for the adult child and his/her partner to enter into a marriage contract or cohabitation agreement which also confirms the loan.

Contact our real estate lawyers today.

[1] Chao v. Chao, 2017 ONCA 701