Madchen V.J. Funk, associate
In a recent family law case of the Ontario Superior Court of Justice, the Court contended with an intergenerational loan. In Testani v Haughton (2019 ONSC 174), the wife’s mother had transferred a piece of property to the husband and wife; in exchange, the husband and wife paid the costs associated with the transfer and took on the outstanding mortgage. After the transfer of the property, the wife executed a note which indicated that she would pay her mother $125,000.00 upon the mother’s request. The registered land transfer documents made no mention of the loan or note.
At trial, the wife claimed the loan to her mother as a debt which would be taken into account for equalization (i.e. the ordinary post-separation process by which assets and liabilities accumulated during a marriage are divided equally between the spouses). The husband challenged the validity of this debt, claiming that it was concocted after separation to provide a financial benefit to the wife during the family law proceeding.
The Court determined that the $125,000.00 debt would be discounted to $12,500.00 for the purposes of the equalization process, as it was unlikely that the wife would ever be required to repay the loan. The discount was applied, in part, because no demand for repayment was ever made until after the parties separated and because the wife did not tell anyone (including her bank, the real estate lawyer, or her husband!) about the note until after they separated.
This issue of the characterization of money advanced from parents to their children arises frequently in family law disputes at the time of the separation. The parents and their own child characterize the advances as loans to be repaid, while the son-in-law or daughter-in-law characterize the advances as gifts. Courts are often suspicious of transactions such as loans between family members which would credit one spouse during equalization, and will require proof of the nature of the dealing to allow such a credit.
The case outlined here suggests that such proof might include ensuring the loan is properly documented; disclosed consistently (to banks, real estate lawyers, family members, etc.); and likely to be called upon for repayment by the parent. These are important considerations to have in mind when gifting or loaning funds to your children.
The lawyers at Giesbrecht, Griffin, Funk & Irvine LLP would be pleased to discuss intergenerational loans with you, and encourage you to contact their office in New Hamburg (519-662-2000) or Kitchener (519-579-4300). This advice is offered for information purposes only and may not cover all circumstances; please consult the lawyers at Giesbrecht, Griffin, Funk & Irvine LLP for advice tailored to your needs.