When a Parent Advances Funds to an (Adult) Child – Gift v. Loan

Posted on by caselawcorner

When a parent advances funds to an (adult) child for purposes of financial support, is this advancement of funds deemed to be a gift or a loan?

This is not always immediately clear, especially if there is a lack of documented evidence that speaks to this issue. A parent does not always consider documenting the transfer of funds when the transfer is to their own (adult) child.

A lack of documented evidence in this situation can create a conflict between family members. Especially if years later, a parent seeks payment of what they believed to be a “loan” when the (adult) child was of the view that the advancement of funds was intended to be a “gift.”

A review of the law of whether an advancement of funds is deemed to be a gift or a loan in these instances will be explored.

This issue was analyzed in a decision Proznik and Smith v. Proznik, 2011 BCPC 300 (CanLII).

“The answer to this question will depend on what the parties intended and agreed to. In cases where the parties have set out their intention and agreement in writing, the answer will usually be clear. More typically, those family members will not set this out in writing at the time that the money is advanced. Sometimes they will rely on a spoken agreement. This can be problematic because months or years later, the parties may disagree about what was said or what was agreed upon. Sometimes nothing will be said at the time that the money is advanced. One party may assume the character of the transaction to be one thing (a gift or a loan) while the other party may assume it to be the opposite. In such a case no clear understanding will have been reached.

If money has transferred from one party to another without any consideration and without any clear evidence of a contrary intention, and the parties are unrelated, the law presumes this to be either a loan or a trust. This is because to presume otherwise would result in the unjust enrichment of the party who received the money. But if the parties in these circumstances are a parent and a minor or dependent child and the parent transfers money to the child, the law presumes this to be a gift, because it is usual for parents to provide economic support their dependent children.”

“The Supreme Court of Canada set this out in Pecore v. Pecore 2007 SCC 17 (CanLII), [2007] 1 S.C.R. 795, where Rothstein J. wrote:

24        The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers.  When a transfer is challenged, the presumption allocates the legal burden of proof.  Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended…  This is so because equity presumes bargains, not gifts. 

25        The presumption of resulting trust therefore alters the general practice that a plaintiff (who would be the party challenging the transfer in these cases) bears the legal burden in a civil case.  Rather, the onus is on the transferee to rebut the presumption of a resulting trust…

27        The presumption of resulting trust is the general rule for gratuitous transfers.  However, depending on the nature of the relationship between the transferor and transferee, the presumption of a resulting trust will not arise and there will be a presumption of advancement instead… If the presumption of advancement applies, it will fall on the party challenging the transfer to rebut the presumption of a gift.

28        Historically, the presumption of advancement has been applied in two situations.  The first is where the transferor is a husband and the transferee is his wife… The second is where the transferor is a father and the transferee is his child, which is at issue in this appeal.  (Emphasis added)

[25]      The court qualified this however by concluding that the presumption of advancement does not apply in the case of a transfer of money from a parent to an adult child. Rothstein J. came to this conclusion for two reasons:

36        …First, given that a principal justification for the presumption of advancement is parental obligation to support their dependent children, it seems to me that the presumption should not apply in respect of independent adult children.  As Heeney J. noted in McLear, at para. 36, parental support obligations under provincial and federal statutes normally end when the child is no longer considered by law to be a minor: see e.g. Family Law Act, s. 31.  Indeed, not only do child support obligations end when a child is no longer dependent, but often the reverse is true: an obligation may be imposed on independent adult children to support their parents in accordance with need and ability to pay: see e.g. Family Law Act, s. 32.  Second, I agree with Heeney J. that it is common nowadays for ageing parents to transfer their assets into joint accounts with their adult children in order to have that child assist them in managing their financial affairs.  There should therefore be a rebuttable presumption that the adult child is holding the property in trust for the ageing parent to facilitate the free and efficient management of that parent’s affairs. (Emphasis added.)

[26]      The Supreme Court in Pecore went on to hold (at paragraph 43) that the standard of proof for the party seeking to rebut the presumption of resulting trust is on a balance of probabilities. Mr. Justice Rothstein stated (at paragraph 55) that “where a gratuitous transfer is being challenged, the trial judge must begin his or her inquiry by determining the proper presumption to apply and then weigh all the evidence relating to the actual intention of the transferor to determine whether the presumption has been rebutted.” Without intending an exhaustive list of what kind of evidence was best considered, he set out the following principles which I now summarize:

  1. The acts and declarations of the parties before or at the time of the transfer are admissible in evidence either for or against the party who did the act or made the declaration.
  2. Evidence of the intention of one or both of the parties that arises after the transfer should not automatically be excluded.  Such evidence, however, must be relevant to the intention of the transferor at the time of the transfer.  The trial judge must assess the reliability of this evidence and determine what weight it should be given, guarding against evidence that is self-serving or that tends to reflect a change in intention.
  3. If there is anything in the bank documents that specifically suggests the transferor’s intent, the court may consider it.  The clearer the evidence in the bank documents in question, the more weight that evidence should carry.

[27]      In Locke v. Locke 2000 BCSC 1300 (CanLII), Mr. Justice Wilson summarized the factors to be considered in determining whether money advanced from a parent to a child is a gift or a loan. Those factors are:

  1. Whether there were 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.

[28]      In Hawley v. Paradis 2008 BCSC 1255 (CanLII), Madam Justice Brown concludes at paragraph [30] that the presumption of advancement no longer applies between adult children and their parents and that in such transactions, there is a presumption of resulting trust when parents make gratuitous transfers of money to their children. She also concluded that the factors set out in Locke v. Locke will assist the court in determining whether such transfer was a gift or a loan.

[29]      From the foregoing, I will summarize the law which I must apply in this case as follows:

  1. Where money is transferred gratuitously, the general rule is that it is presumed that the recipient holds the money in a resulting trust for the donor. This is a rebuttable presumption of law.
  2. This presumption may not apply in certain cases involving family members such as in the case of a transfer between spouses or a transfer from a parent to a child who is a minor. In those cases the presumption is one of gift (also known as the presumption of advancement.)
  3. The presumption of advancement does not apply in the case of a transfer of money from a parent to an adult child. In such case, the presumption is one of resulting trust, i.e. that the adult child is obliged to repay the money to the parent.
  4. Such presumption may be rebutted by proof to the contrary. The burden of proof rests with the party seeking to rebut the presumption.
  5. The standard of proof for the party seeking to rebut the presumption of resulting trust is on a balance of probabilities.
  6. The trial judge must begin his or her inquiry by determining the proper presumption to apply and must then weigh all the evidence relating to the actual intention of the transferor to determine whether the presumption has been rebutted. 
  7. The acts and declarations of the parties before or at the time of the transfer are admissible in evidence either for or against the party who did the act or made the declaration.
  8. Evidence of the intention of one or both of the parties that arises after the transfer may be admissible against the interests of that party. 
  9. Evidence of intention subsequent to the transaction may be admissible for or against either party, provided that such evidence is relevant to the intention of the transferor at the time of the transfer.  The trial judge must assess the reliability of this evidence and determine what weight it should be given, guarding against evidence that is self-serving or that tends to reflect a change in intention.
  10. If there is anything in the bank documents that specifically suggests the transferor’s intent, the court may consider those document.  The clearer the evidence in the bank documents in question, the more weight that evidence should carry.
  11. In determining whether money advanced from a parent to a child is a gift or a loan, some relevant factors for a court to consider are whether:
    1. there were any contemporaneous documents evidencing a loan;
    2. the manner for repayment is specified;
    3. there is security held for the loan;
    4. there are advances to one child and not others, or advances of unequal amounts to various children;
    5. there has been any demand for payment before the separation of the parties;
    6. there has been any partial repayment;
    7. there was any expectation, or likelihood, of repayment.”

 

See Disclaimer in “About” Page