Money advanced to a married person by a family member often becomes the subject of controversy in family law litigation.   For example, it is not uncommon for parents to advance money to their adult child in order to help fund the down payment of a home for the adult child and his or her spouse.   Invariably in these situations where the parties later separate, the recipient of the money takes the position the advance was a loan, while the other spouse takes the position it was a gift.   The characterization of the money advanced has important implications with respect to the calculation of the recipient’s net family property calculation and equalization payment.

Fortunately, the recent decision of Barber v. Magee, 2015 ONSC 8054 (Ont. S.C.J.) by Fitzpatrick J. of the Ontario Superior Court of Justice provides a fulsome overview of leading authorities on this issue and sets out a concise list of the factors to be considered in determining whether the funds advanced are to be considered a gift or a loan, including the following:

  • 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 equal amounts to various children;
  • Whether there has been any demand for re-payment before the separation of the parties;
  • Whether there has been any partial repayment; and
  • Whether there was an expectation or likelihood of repayment.

The Barber v. Magee decision offers the following advice to spouses and their families seeking to avoid future litigation:

72      This is a cautionary tale for inter family advances. This is an issue that arises frequently in family law cases. Spouses and their families can easily avoid disputes by exercising common sense. The simple solution is to document any advances as loans in a manner similar to what any lender would do, especially where, as here, the advances are significant.

73      If at all possible, the lender should retain counsel to prepare documentation confirming the loan amounts, the applicable interest rates and the repayment schedule or a stipulation that the loan is repayable on demand, along with any other material details. If the loan repayment is held in abeyance then that too should be documented. The borrowers should have their own counsel and if the loan is to one spouse alone then each spouse should have independent counsel.

74      In summary, the closer the advance is structured to an arm’s length transfer for consideration, the more likely it is to be recognized as a loan.

This decision underlines the importance of retaining legal counsel and taking appropriate precautions when contemplating an advance of money to a family member who is married.  Barber v. Magee is recommended reading for anyone seeking a clear and concise statement of the current law in Ontario with respect to this common family law issue.

 

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