By Rebecca Winninger, Senior Associate Research Lawyer, Lam Family Law*

As research lawyers, one property issue we deal with frequently is whether a transfer of funds from a parent to an adult child was a gift or a loan. The classic scenario is that of a spouse who received funds from their parents and used the money to purchase a matrimonial home. The spouse claims that the funds were a loan, as opposed to a gift (because a gift traceable to a matrimonial home is not “excluded property”). The issue also comes up in the support context, where gifts of money may be imputed as income in some circumstances, whereas a loan would not.

To review the basics, a gift is “a voluntary transfer of property to another without consideration”. The essential ingredients of a legally valid gift are: (1) an intention to make a gift on the part of the donor, without consideration or expectation of remuneration; (2) an acceptance of the gift by the donee; and (3) a sufficient act of delivery or transfer of the property to complete the transaction: McNamee v. McNamee, 2011 ONCA 533 (CanLII), at paras 23-24. A contribution to the purchase price of property without any intention to impose conditions or requirements is a legal gift: Nishi v. Rascal Trucking Ltd., 2013 SCC 33 (CanLII), at para 31.

The Court of Appeal for Ontario (“ONCA”) has provided guidance on how to distinguish between gifts and loans in the context of an advance from a parent to an adult child. In Chao v. Chao (2017), the ONCA suggested that the following considerations are relevant [paraphrased]:

  • 1. whether there are any contemporaneous 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: Chao v. Chao, 2017 ONCA 701 (CanLII), at para 54.

In Barber v. Magee (2017), the ONCA stated that a gift is a transfer in which the absence of an expectation of repayment tends to be reflected in the absence of security, recording, payments, or efforts to collect payments. A loan often involves a formal, recorded transfer in which terms are set out and in which repayment is made or sought. Generally, there are objective indicators to help determine if an advancement is a gift or a loan: Barber v. Magee, 2017 ONCA 558 (CanLII), at para 4.

As for who bears the onus, there is some uncertainty on this point in equalization cases. The onus of proving a loan is generally on the person claiming it, under s. 4(3) of the Family Law Act, RSO 1990, c F.3. In Milutinovic v. Milutinovic (2018), Justice McDermot held that this is “especially so in respect of interfamily loans where there may very well be an incentive to gift the funds to children or close family members”: Milutinovic v. Milutinovic, 2018 ONSC 4310 (CanLII), at paras 84 & 87. See also Vaccaro v. Vaccaro, 2005 CanLII 4270 (ON CA), at para 2; Marrello v. Marrello, 2016 ONSC 835 (CanLII), at paras 144-147; and Dasilva v. Dasilva, 2004 CanLII 5043 (ON SC), at para 50.

However, in Chao v. Chao (2017), the ONCA held that the trial judge properly applied the presumption of resulting trust in assessing whether an advance was a loan or a gift: Chao v. Chao, 2017 ONCA 701 (CanLII), at para 53. The presumption of resulting trust places the onus on the spouse who argues the funds were a gift.

In income cases, the onus is on the party who seeks to impute the gifts as income, because that is generally the case under s. 19 of the Child Support Guidelines: Homsi v. Zaya, 2009 ONCA 322 (CanLII), at para 28, and because of the presumption of resulting trust, as discussed above.

While documentary evidence is an important factor in the analysis, as recognized in Chao, it is not always determinative. For example, the court is not always satisfied with the authenticity of promissory notes or other loan documents: see, e.g., Vaccaro v. Vaccaro, 2004 CarswellOnt 5922 (ON SC) (WL), at paras 8-13, 25, & 27-28, aff’d 2005 CanLII 4270 (ON CA), and Abu-Shaban v. Abu-Shaaban, 2022 ONSC 65 (CanLII), at para 133.

Conversely, the court may find that an advance was a loan, even if the terms of the loan were not documented. For example, in Wardlaw v. Wardlaw (2019), which was an income imputation case, the court was satisfied that the husband’s parents paid his bills as a loan so that the husband would not have to cash in his investments while awaiting a large tax refund: Wardlaw v. Wardlaw, 2019 ONSC 5829 (CanLII), at para 109.

If the court finds that money advanced from a party’s parent was a loan, the court must then decide whether to discount the amount of the loan for net family property purposes, to reflect the probability that the loan will actually be repaid. Although a debt “may have a specified face value, if the evidence indicates that it is unlikely that the promissor will ever be called upon to pay the debt, the value of the debt should be discounted to reflect that reality”: Poole v. Poole, 2001 CanLII 28196 (ON SC), at para 35. See also Khaira v. Ghumman, 2022 ONSC 7165 (CanLII), at para 211. The question is not whether the lender will go “through the motions of receiving payment from the [debtor]”, and then give the money back. The issue is the probability that the debtor will “actually remain out-of-pocket in the amount paid”: Poole v. Poole, 2001 CanLII 28196 (ON SC), at para 38.

The same principles apply whether the issue is about a debt at the end of the marriage, or a debt brought to the marriage: Zavarella v. Zavarella, 2013 ONCA 720 (CanLII), at paras 39-40.

These are fact-specific cases which often turn on the credibility of multiple witnesses, and outcomes are difficult to predict. When a large transfer of funds is contemplated, it is best for the parties to have a cohabitation agreement that clearly confirms their mutual understanding of the transfer.

*with thanks to Maria Golarz for her suggestions and edits.