Is This A Gift Or A Loan?
In British Columbia, the Land Title Act, RSBC 1996, c 250 presumes that owners appearing on title to a property are, in fact, the owners of that property.
However, when a property is purchased with funds contributed by a third party for no consideration (i.e., the third party gets nothing in return), it is presumed that the owner on title holds that property in trust for the contributing party. This presumption can be rebutted if the contribution is proven to be a gift. It is therefore critical to clearly document the transaction in writing at the time it takes place, whether it is a gift or a loan/investment.
When you covered your child’s down payment for the new condo, it was to help them get ahead in the exorbitant Vancouver real estate market. However, did you intend the contribution to be a gift, or did you expect repayment or part ownership of the property? Misunderstandings and incongruent expectations of these transactions can result in disputes over repayment and ownership, often in family scenarios. For example, many parents contribute funds towards an adult child’s purchase of a property and the parents subsequently divorce, prompting the parents to seek a return of those funds or the property itself. Those seeking repayment argue that the contribution was a loan or investment, while the other party argues it was a gift.
As stated by the Supreme Court of Canada in Pecore v. Pecore, 2007 SCC 17, the presumption of a resulting trust is rebuttable if the advancement is proven to be a gift. Whether the advancement was a loan or a gift depends on the actual intention of the contributing party. In the event that the contribution is not a gift, a court will consider it to be an investment or loan. If it is a loan, it must be repaid. If it is an investment, the third party may maintain ownership interest of all or a part of the property, despite the fact that its name does not appear on title. It is important to note that advancements made to an infant child are presumed to be gifts.
The factors established in the seminal case of Locke v. Locke, 2000 BCSC 1300, which were adopted in Pecore, will determine whether a contribution is considered a gift or a loan/investment. In Locke, a divorcing husband sought a division of family assets and the husband’s parents and grandparents sought repayment of a $30,000 loan made to the husband for the purpose of purchasing the matrimonial home. The parents relied upon a note signed by the husband and wife acknowledging the payment. The wife, however, argued that the funds were a gift in the form of an advancement on the husband’s inheritance from the grandparents. She relied upon the fact that the husband’s siblings received the same consideration and repayment was never discussed or demanded.
Borrowing from a number of previous British Columbia cases, the Court established seven factors for considering whether an advancement is a gift or a loan/investment:
- whether there are any contemporaneous documents evidencing a loan;
- whether the manner for repayment is specified;
- whether there is security held for the loan;
- whether there are advances to one child and not others or advances of unequal amounts to various children;
- whether there has been any demand for payment before the separation of the parties;
- whether there has been any partial repayment; and
- whether there was any expectation or likelihood of repayment.
In Locke, the Court found that the advancements were gifts. First, there was no documentation contemporaneous with the advances made. While there was a note evidencing a loan, it was made sometime after all of the funds had been advanced. Second, there was no provision in the note for the manner in which repayment was to be made. Third, there were equal advances to each of the grandparents’ children. Fourth, there was no demand for repayment until after separation. Fifth, there was no partial repayment made by the husband or wife at any time despite the fact that they subsequently sold the residence and had net proceeds from that sale.
Whether you are advancing funds or receiving them, it is crucial to clearly document the transaction at the time it takes place. This will not only help to avoid disputes down the road, but will also help the parties understand the nature of the transaction at the time of its occurrence. We recommend that the documents include the following details;
- identification of the parties, the date and the subject property;
- specification on whether the transfer is intended to be a gift or a loan/investment;
- the interest rate and payments, if applicable; and
- rights and remedies in the event of a default, if applicable.