Securing Parents’ Money on Their Children’s Down Payment

By Ruth Kalnitsky Roth Partner, Head of Family Law Group, Brauti Thorning LLP

Are you helping your child buy real estate? Are your parents helping you out with a down payment? With housing prices hovering around unprecedented highs, parents are increasingly gifting or loaning their children funds to assist with their first down payment. But what happens to the money if your child separates from their live in partner or spouse? The short answer is, it’s complicated.

Generally, unmarried couples do not share in each other’s property when they separate. However, jointly held assets, such as a home, are presumptively divided according to how the parties hold title. For married couples, the presumption is that the parties equally share all property accumulated during the marriage. The matrimonial home receives special treatment: it doesn’t matter where the money came from to buy the property or how the title is held – both spouses are presumed to equally share the equity in the house.

As a result of property division rules in Ontario, without taking the appropriate precautions, any money that you give your child to use towards a home purchase is susceptible to being shared with their former partner in the event of a separation. Below are five precautions you can take to protect your or your parent’s investment.

1.    Paper Your Transaction.

The best way to protect money that is advanced for a down payment is to create a paper trail that clearly expresses whether the funds were meant to be a gift or a loan. Absent any evidence to the contrary, money advanced from a parent to a child for a down payment is presumed to be a gift.[1] The problem with a gift is that the money is less likely to be protected if your child separates from their partner since there is no corresponding debt that needs to be repaid by the parties enjoying the property.

A gift is defined by: (1) an intention to make a gift on the part of the donor parent, without expecting to be paid back and without requesting something of value in exchange for the money; (2) the child accepts the gift; and (3) the gift is delivered or transferred to the child.[2] The expectation to be paid back is key when determining whether a money transfer was a gift.[3]

The very definition of a gift means that the parent does not expect to be paid back by either their child or their child’s partner in the event of a separation. It will not matter whether your child separates from their spouse, there will be no obligation for either party to pay you back. Should you intend for the money to be a gift, we recommend that you execute a gift letter signed by the parent(s), the child, and their partner, or better yet, enter into a cohabitation agreement acknowledging that the gift will be the sole property of the child who received it in the event of a separation. We highly recommend consulting with an experienced family law lawyer before transferring large sums of money whether it is as a gift or a loan, so that all parties can be knowledgeable about the risks and potential consequences involved.

2.    Consider Making it a Loan

A loan often offers more financial protection to a parent’s money in the event of a separation because it creates a legally enforceable obligation between parties. When courts analyze whether a money transfer from a parent is a gift or a loan, the court considers the following factors:

1. Whether there are any documents evidencing a loan that are created or executed at the same time as money transfers hands. For example, is there a promissory note, or a loan document?
2. If so, there ought to be a repayment plan.
3. Extra helpful is if the recipient of the money has provided security for the loan if the child defaults on their loan repayments;
4. Whether there are advances to one child and not the parent’s other children or advances of unequal amounts to various children. Money advances to all the children for a down payment on a house may be evidence of a gift if the transaction is not documented otherwise.
5. Whether there has been a demand for repayment of the loan before the child separated from their partner. If the parents did not demand repayment (or partial repayment) before separation, this could be evidence that the money was a gift;
6. Whether there was a partial repayment of the money before the separation occurred.
7. Whether there was any expectation or likelihood that the child would actually repay the loan to their parents.[4]

The above factors are evidence used to determine whether a money transfer is a loan or a gift. No matter what, refer back to the importance of papering the agreement – a contract that clearly specifies each party’s role is vital in protecting large transfers of money. A loan or promissory note is most effective if it outlines a repayment plan, explicitly stating when repayment will begin and illustrates the terms of repayment. Ideally, the contract should be drafted and signed before the money is transferred to offer the best protection. We recommend that the parents, the child, and their partner all sign the contract to evidence that all parties were aware of the parents’ intention for the money. A skilled lawyer can draft the contract, but each independent party will benefit from receiving independent legal advice to understand their rights and obligations.

3.    Consider a Domestic Contract

In addition to either a gift letter or a loan document, a domestic contract can help minimize conflict surrounding finances in the event of a separation. A domestic contract can govern one issue (i.e. who the funds are going to in the event of a separation) or all of the financial issues in the event of a breakup. Domestic contracts can be prepared for both cohabiting and married couples and can outline the intention of the down payment at the time it is received.

For a cohabitation agreement to be presumptively enforceable, the contract should: (1) be in writing; (2) be signed by both parties; and

(3) witnessed.[5] Although independent legal advice is not a prerequisite to a legally enforceable cohabitation agreement, a contract is less likely to be overturned if both parties had their own counsel informing them of their legal rights before signing and ensuring that the appropriate financial disclosure is made. Independent legal advice will provide an added layer of protection over the contract being overturned in the future.

A domestic contract can be signed at any point during a relationship but ought to be executed before large transfers of money occur.

4.    Keep money separate and traceable.

If the help with the down payment is not intended to be shared in the event of a breakup, it would be prudent to make the funds as traceable as possible. Specifically, the person receiving the funds should be able to demonstrate that the money went directly from their parent to an account that is solely owned by the child. Co- mingling funds in a joint account held by the couple receiving the funds creates a presumption that the funds were meant for both of their uses.

Keeping the funds separate can be evidence of the intention that the money was meant to benefit one child only.

Further, it is important to save copies of all of the documentation evidencing financial transactions, such as bank statements, wire transfer receipts, etc, following the trail of the money being transferred. This helps track the down payment back to the parent providing it and demonstrates what the money was used for. Please note that banks do not keep your financial documents indefinitely – keep copies of the relevant statements just in case you need them in the future!

Keeping the money separate and ensuring that it is traceable is not going to protect a down payment on its own, rather it acts as evidence in support of the fact that the money was never meant to be shared.

5.    Lawyer Up

Last but not least, get legal advice. Every family’s situation is different and every financial transfer is going to be reviewed on its own particular facts and circumstances. Talk to a lawyer about the conditions of the transfer, the reasons for it and the various options to protect yourselves before transferring funds.

Contact Brauti Thorning LLP at 416-362-4567 or email us
at [email protected] to set up a consultation with one of our family lawyers to obtain individualized advice on your matter.

Please be aware that the information provided in this article is for general information purposes only and does not, and is not intended to, constitute legal advice.
 
Pecore v Pecore, 2007 SCC 17 at para 24.
McNamee v McNamee, 2011 ONCA 533 at para 24.
Peter v Beblow, 1993 CanLII 126 (SCC), [1993] 1 SCR 980.
Chao v Chao, 2017 ONCA 701 at para 54.
Family Law Act, R.S.O. 1990, c. F.3, s. 55(1).