When Is A Gift Not A Gift? When The Kids Are In Court Fighting Over Whether It Was A Loan
In Canada, the cost of living is higher than ever. Many aging baby boomers have accumulated significant wealth, while the millennial generation battles student loans and a red-hot housing market. In this climate, it’s not surprising that parents who are able often want to offer their children financial assistance in the form of gifts made during the parents’ lifetime.
In addition to the benefit of being able to alleviate financial pressure on their children, parents who are also savvy tax planners may think of these gifts as one way to increase what they ultimately leave their children in their estate, since an inter vivos gift will not be subject to tax.
However, even the best-laid plans for maximizing the wealth transferred to their children will have been made in vain if the children ultimately deplete the estate (and potentially their own savings) by fighting over whether the “gifts” that parents innocently left one or more of them were, in fact, gifts and not loans.
Was the $100,000 down payment on the youngest son’s first home a gift or was it a loan that mom and dad intended to be equalized during the estate administration? Many parents cannot fathom their children engaging in costly litigation over this type of issue, but it’s unfortunately common to see disputes arise among adult children whose parents neglected to properly document the intention behind the financial support they offered. It might surprise an elderly parent to learn that one of their children could, in fact, challenge the intention behind a gift made decades earlier.
This post will explain why it is important for both parents and children to properly document their generous intentions.
The Law Will Assume It’s A Loan
Equity presumes bargains, not gifts. That means there is an automatic presumption that when money is transferred, it’s a loan, not a gift. The onus is on the recipient to prove otherwise on a balance of probabilities. It is not enough for the recipient to say that his intention was to receive the advance as a gift – he must prove that both he and the person giving the money knew and intended the advance to be a gift rather than a loan. 1
Decades’ Old Gifts May Be Subject to Repayment
What about when the advance in question dates back years, or even decades? The Limitations Act, 2002 deals specifically and separately with the commencement of the limitation period for what are called “demand obligations.” Again, the law will presume that the advance from parent to child was a loan. A loan that has no terms and no date for repayment is a demand obligation, which can extend to promissory notes, demand mortgages, and demand guarantees.2
For demand obligations created on or after January 1, 2004, 3 the limitation period begins to run only when a demand for repayment is made.4 The courts have indicated that it is not always necessary for an actual demand to be made before a demand obligation is enforceable; rather, it depends on the nature of the obligation and the construction of the document.5
Unsurprisingly, the fact that the limitation clock does not start running on a demand obligation until there is a demand for payment and a failure to pay can lead to contentious disputes years after money exchanges hands.
A Case in Point
In Greco v Frano, the Ontario Superior Court considered first whether a $90,000 cheque made by the applicants to their son-in-law and daughter was a gift or a loan, and second whether the claim was statute-barred.
The applicants advanced the sum in May 2003, and issued their claim in June 2011, two years after their daughter died. There was no evidence in writing as to whether it was a gift or a loan or, if a loan, as to its terms or when it would be repayable. Neither the daughter nor son-in-law ever acknowledged the advance, paid any interest or repaid any portion of the principal amount.6 The cheque itself had been destroyed, so was not tendered in evidence, despite inquiries having been made with the bank.7
The applicants acknowledged that between when the cheque was advanced in May 2003 and when the daughter died in June 2009, they never spoke about the money with their son-in-law or demanded repayment.8
The Court ultimately held that the advance was a loan, not a gift, noting that “recipients of advances such as this, if they want to ensure that they do not have to repay the advance, should put it in writing or have some other evidence to support it being a gift rather than a presumed loan.”9
Despite that finding, the advance had been made in May 2003 and the claim was not commenced until June 2011. The previous six-year Limitations Act period applied, and the claim was statute-barred.
Paper Your Gift Trail
The result in Greco would have been very different had the previous six-year limitation period not resulted in the claim being barred. The take-away is that parents who intend to gift an advance to their child during their lifetime should properly document their intent if they wish to save their estate – and by extension, their children – a good deal of money, confusion, and emotional turmoil in relation to what was likely intended to be something positive.
Similarly, a child accepting such an advance from a parent would be well advised to ask their parent to document their intention that it be a gift. Failure to do so could very well lead to expensive and needless litigation over something that dates back decades.
1 Greco v Frano, 2015 ONSC 7217 [Greco] at para 28, citing Colangelo v Amore, 2010 ONSC 5657.
2 Skuy, 2012 ONSC 6998, 2012 CarswellONt 1633, at paras 30-31; Greco; Azman v Viola, 2010 ONSC 6455 at para 39.
3 For demand obligations made prior to January 1, 2004, the prior Limitations Act c. L. 15 governs, meaning that s.45 (1)(g), which allowed for a six-year limitation period from the date of advancement, would apply.
4 Skuy at para 35.
5 Skuy at para 42.
6 Greco at para 15.
7 Ibid at para 12.
8 Ibid at para 19.
9 Ibid at para 31.