Money from Parents: A Gift or a Loan?

My parents helped us by our house.  Can I deduct what they gave us from my net property as a debt?

When a young couple decides to purchase what will become their matrimonial home, it is very common for the parents of one or both spouses to assist in paying the down payment. Upon separation, the question of whether the money transferred was a gift or a loan is often a source of conflict.

If it was a loan, the spouse who received the transfer would be entitled to list it on their Net Family Property calculation as a debt, and subtract it from their NFP. This has a direct impact on the equalization payment due, by increasing the difference between the parties' NFPs and increasing the payment needed to equalize them.  The parent would also be entitled to repayment of the loan before the family property is divided.

If it was a gift, the spouse who received it cannot deduct it from their net family property because the gift is traceable into the matrimonial home or other property the couple jointly benefited from.

The difference between gifts and loans can be very important in equalization, as parents may not want their child's former spouse to get to "keep" the money they gave to their child.

Gifts vs. Loans: What's the Difference?

The concept of gifts vs. loans is generally quite simple: one comes with an obligation to repay, while the other does not. But family law, the question of whether money transferred is a gift or loan is slightly more complicated.

In family law, a gift or loan will be characterized based on the circumstances in each case, and according to the conduct and intention of the parties. Courts will specifically look to a number of factors which assist them in determining the nature of a loan or gift. The factors they will look at are:

  • Whether there were any documents prepared at the time the money was given evidencing a loan (e.g. promissory notes, statements showing amount of interest to be paid, etc.);
  • 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 on equal amounts to various children;
  • Where there has been any demand for payment before the separation of the parties (if a demand for repayment is made only after separation, it is likely that the transfer would be deemed a gift);
  • Whether there has been any partial repayment; and
  • Whether there was an expectation or likelihood of repayment.

How do I make sure a transfer is a loan?

  1. Have documents drafted at the time of the transfer that specify that it was intended to be a loan. In these documents,  make sure that the manner of repayment is specified.
  2. When drafting the loan documents, consider including interest payments at an agreed upon rate. When determining whether a transfer is a loan or not, the courts may look to whether interest is being paid.
  3. Ensure that both you and your child are aware of the importance of repayment. If they fall behind on their payments for any reason, make sure to be proactive about requesting payment.
  4. Document any requests for repayment in writing, as well as any changes that are made to the amount or frequency of repayment.
  5. Do not wait to request repayment until after your child has separated from their spouse. Demands that start being made after separation may be found to be gifts, due to the impact loans can have on calculating net family properties and equalization payments.
  6. Inform the bank, or mortgage broker that the money advanced is a loan, and register your interest against the house with the bank. In some cases, courts have found that money transferred was a gift instead of a loan, as the parent's interest in the house was never registered.

Regardless of whether you want your transfer to be a gift or a loan, always keep in mind that documentary evidence and conduct are the best ways to show your intent. While it may seem desirable to keep loans between parents and children informal, the more formality you have, the stronger your claim for a loan.