Gift or loan: how your money is characterized matters

• by Ainsley Doell

Originally published in the OFLM 2023-12 edition

Overview

The categorization of an advance of funds during a parties’ marriage as a gift or a loan can have a considerable impact on their net family property, in some circumstances. In Darmantchev v. Darmantchev (2023 ONSC 5754), Justice Shore goes through the factors to be considered in determining whether an advance of funds is properly classified as a gift or as a loan, as well as the equitable presumption of resulting trust.

Introduction

Couples often receive financial assistance from their family when starting their new lives together. It may not always be clear whether this helping hand was gratuitous or requires repayment, and it is not uncommon for this to become a source of dispute upon separation.

Depending on the financial circumstances of the couple and the size of the advance, this characterization can have a considerable impact on their net family property.

This was the case in Darmantchev v. Darmantchev (2023 ONSC 5754), where Justice Shore was tasked with determining whether money advanced to a couple by the husband’s parents was properly characterized as a loan or as a gift.

Ultimately deciding that the money was loan, Justice Shore offers a succinct overview of the presumption of resulting trust and the onus that must be met to demonstrate that this sort of advance of money is gratuitous.

Darmantchev v. Darmantchev: Facts

In Darmantchev, through the course of the parties’ marriage, the Respondent father’s parents (“the grandparents”) advanced various sums of money to the couple to enable them to purchase various homes. The grandparents were not wealthy by any means and had to take out loans themselves in order to do so.

There was no formal loan agreement, but there was evidence that the parties had been paying the grandparents various sums at different points in time. It was the father’s position that these payments were repayments of the loan, and that there was always an expectation that the parties would repay the loan, along with any interest that the grandparents incurred as a result of having borrowed the money themselves.

It was the mother’s position that these funds were intended as a gift, and that there was no expectation or discussion of their repayment.

Following separation, the father repaid the grandparents in full from the proceeds of the sale of the matrimonial home. The mother insisted that the grandparents pay this amount back into trust pending a determination of whether the initial advances of money were in fact a gift rather than a loan, as she claimed.

The grandparents did so, but they had already used some of the funds to pay off their own debt. This meant that they had to borrow further money in order to return the full amount into trust.

The issue before Justice Shore was “whether the money advanced from the Grandparents was a gift or a loan”.

Equitable presumption of resulting trust

In arguing that the funds were a loan, the father relied on the law of the presumption of resulting trust. Per Pecore v. Pecore (2007 SCC 17), “where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended” (at para. 24).

This is the case because “equity presumes bargains, not gifts” (Pecore at para. 24; Foley (Re), 2015 ONSC 382 at para. 26).

In Darmantchev, this law operates to reverse the onus onto the Applicant mother: As the person alleging the gift, it fell to her to try to demonstrate that a gift was intended.

Justice Shore found that she was not successful in doing so.

When is an advance a loan?

Justice Shore sets out factors to consider in determining whether an advance was a loan at paragraph 42, as articulated in Chao v. Chao (2017 ONCS 701) and Locke v. Locke (2000 BCSC 1300):

  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 on equal amounts to various children;
  5. Where 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.

The following facts were accepted by Justice Shore in determining that the advance was in fact a loan:

  • While there was no written agreement, there were ongoing discussions between the parties and the grandparents regarding the need to repay the loan, as well as the interest incurred by the grandparents;
  • The intention of the grandparents at the time of the advance was that it would be repaid. Note that the mother tried to argue that their intention was gratuitous using as evidence texts between the parties following their separation. Justice Shore noted that these messages were irrelevant, as the relevant intention is as of the time that the gift or loan was made;
  • The financial position of the grandparents was such that they would not have been able to gift this sum of money to the parties: They had to incur debt in order to advance the funds;
  • There was a history of repayment: Justice Shore did not accept the mother’s evidence that these transfers were due to the family’s “structure and custom” to loan each other money back and forth as needed without any expectation of repayment;
  • The property that the parties were able to purchase with the advances acted as security for the money loaned;
  • The grandparents had not made similar advances to their other children; and
  • Repayment was expected or likely.

Outcome

Justice Shore found that the funds advanced by the grandparents were a loan that needed to be repaid. The parties were also required to pay the interest that the grandparents incurred on the loan that they themselves had to take out, as well as the further interest generated on the loans that were required in order to pay the money into trust pending a final determination of this issue.

Conclusion

While it is always preferable to paper any loan between parties, Darmantchev demonstrates that even absent documentation, intention of a loan can be very clear on the facts.

While this is a clearer case than many, Justice Shore helpfully goes through the factors to be considered in making this determination.

This issue can become important when determining the equalization that a spouse may be entitled to on separation. In this case, the facts suggest that neither the grandparents nor the parties were in a fantastic financial position. Separation often has a negative impact on a family’s finances, and even more so where litigation is involved. In situations like these, it may be helpful to review the considerations outlined by Justice Shore to assess whether it is worthwhile to pursue a claim that an advance of funds is a gift or a loan.