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Loan or Gift? What the Court thinks when Parents Transfer Funds to Children

Updated: Feb 15

Many parents are willing to provide some measure of assistance to their children when the child has encountered financial difficulties. These types of fund transfers are generally made without too much hassle, as the parents may be making the transfer out of love for their child. But what happens when something happens later, and the parties begin arguing about whether the money was meant to be returned? This is what the Supreme Court of Canada (SCC) decided on in the case Pecore v Pecore, 2007 SCC 17 (Pecore).


The Facts

Pecore involved a deceased father, his daughter, and the daughter’s husband. The daughter was not financially secure, so the father opened a joint account shared between him and the daughter. The father was the only one who placed money into that account. When the father passed, the money in the joint account passed to the daughter through survivorship, while the rest of his estate was to be divided equally between the daughter and her husband as per his will. The father’s will did not mention the joint account.


Later, the daughter and her husband divorced. The husband argued that the funds in the joint account were loans from the father to the daughter and should be returned to the father’s estate and divided equally between the husband and the daughter as per the father’s will. The daughter argued that the funds were a gift from her father, and she should keep the entire amount.


The Law

The SCC then examined the law on transfer of funds without anything given in return. The common law showed that there are two presumptions that can apply: The Presumption of Advancement, that the transfer was a gift to be kept, or the Presumption of Resulting Trust, that the transfer was a loan to be repaid.


The SCC then concluded in most cases the Presumption of Resulting Trust would apply. The law generally will not presume that a person intended to give a gift. The presumption of Advancement would only apply in a single situation: When the transfer was from a parent to a child who is not yet an adult.


The SCC explained that the Presumption of Advancement applied to non-adult children because a parent has a legal duty to financially support their children until adulthood. Once the child becomes an adult, the Presumption of Advancement no longer applies.

The SCC then discussed whether the Presumption of Advancement can apply to transfers from parents to adult children who are financially dependent. They concluded that while in those scenarios it can be seen as a gift, it should not be a presumption, but rather proven on a case-by-case basis.


Giving a Gift or Loan to a Family

Rebutting the Presumption

Applying the law to the facts in Pecore, the SCC found that the Presumption of Resulting Trust applied and the funds in the joint account were presumed to be a loan given by the father to the daughter.


However, just because a presumption applied doesn’t mean it can’t be proven wrong.

The SCC then listed the factors considered when trying to prove a presumption wrong:

  • whether there were 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.

If these factors prove that it is more likely than not that a presumption is false, then the presumption would be proven wrong in the eyes of the court.


In the case of Pecore, the SCC found there was a clear intention from the father that the money in the joint account is to be gifted to the daughter upon his death. With this finding of fact, the Presumption of Resulting Trust is rebutted, and the funds are deemed a gift to the daughter, who may keep the entire amount.


Conclusion

Many people may find that it is only natural that parents financially assist their adult children. However, once family disputes occur, the nature of the transfer might become a significant point of dispute. It is important to know what the courts think about funds that are transferred to children without anything given in return, and plan accordingly. It is often a good idea to keep clear written records of what the parties intended when the transferred happened in case there might be any disputes years later.


Depending on the situation, whether the transferred funds are gifts or loans may have a significant effect on family law disputes. If you find yourself in such a dispute, you should seek out independent legal advice. The lawyers of Henderson & Lee frequently handle Family law disputes and can advise you on your options. Please feel free to contact our office at (604) 558-2258 to book an initial consultation.


Chris Wong is an articled student at Henderson & Lee who has assisted in Family law disputes.


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