Given the current trajectory of Ontario’s housing prices in 2024, it is not uncommon for parents to financially assist their adult children in the purchase of a home.
In fact, it has now become the norm for parents to be financially involved in the purchase of their child’s home. A 2022 survey from the Ontario Real Estate Association identified that around 40% of young home purchasers received financial assistance from their parents.
Such financial assistance most commonly exists in the form of either a large advancement of money, averaging $73,605, or, as a co-signature on a loan for a down payment averaging $40,878. These loans often come in the form of lines of credit opened in the name of the parents.
This practice, although significantly helpful for the adult child, is often not as simple as transfer of funds from the parent’s account to the child. In fact, there are several issues which may arise from a parent financially assisting their adult children.
For example, if the assistance was initially by way of gratuitous transfer, but the parents later declare that they expect repayment, what criteria must be examined to determine whether the advancement was a gift or a loan?
Additionally, suppose a line of credit was opened in the name of the parents, in order for the adult child to procure a down payment. In this scenario who would ultimately be responsible for the monthly interest payments? What should be the nature and terms of the agreement between the parents and the child? How could the parents ensure that the child was responsible for paying the principle of the loan?
Finally, what are the parent’s rights with respect to the property? Should the parents be granted an equitable interest in the house? If the home, which was purchased with the assistance of the parents, was the matrimonial home of the child and their spouse, how should the loan be dealt with, if the child and the spouse get a divorce? Who would be responsible for ensuring that the loan was repaid?
Unfortunately, these questions and considerations are often only raised when an issue arises; often years after, when the gratuitous transfer was initially made.
In order to prevent these issues from arising, many banks now require the parents to sign documents explicitly stating that the financial assistance is by way of gift and not by loan. However, these documents often cannot overcome a meeting of the minds between the parents and the child.
These issues often result in strained and broken family relationships, and a litany of court cases centered squarely around the contractual rights and obligations which come with the purchase of the home.
The Case Law
Many of these concerns were addressed in the 2007 Supreme Court Case of Pecore v. Pecore. A brief overview of the facts are as follows:
A husband and wife were going through divorce proceedings. Prior to their divorce, the wife’s father had transferred to her account many assets (cash and other) for tax purposes. The father continued to control the assets after putting them in her name. The wife was allowed to make some withdrawals from the account for personal use with the permission of her father. The father argued that these transfers ought to be considered loans. On the contrary, the husband argued that these transfers ought to be considered gifts.
Upon divorce, the issue at trial was whether the husband was entitled to a portion of these assets in the equalization process.
At trial, the Superior Court held that the evidence failed to rebut the presumption of advancement and held that the money in the accounts belonged to the wife. The judge held that the evidence clearly indicated that the father intended to gift the money to his daughter while only maintaining control of it for her benefit. As such, the husband would be entitled to a portion of these assets in equalization.
On appeal, the Court of Appeal agreed that there was ample evidence to show the father intended to gift the assets to the wife. This decision was subsequently appealed to the Supreme Court of Canada.
At the Supreme Court, the Court refined the general test to be as follows:
Step 1: General Presumption (No Special Relationship Between Transferor and Transferee)
In general, the law presumes bargains, not gifts. Therefore, if the transfer is between two parties with no special relationship, the presumption is that it is a loan and not a gift.
The onus is then on the person alleging a gift to establish that the transfer was intended on being a gift.
Step 2: Presumption of Resulting Trust (Relationship of Parent to Child (inclusive of children in-law))
Where the relationship is that of parents to children, the presumption is that of a resulting trust and that the children hold the property for the benefit of the parent.
Step 3: Presumption of Advancement (Where Parent has Financial Obligations)
The court may replace the presumption of resulting trust with a presumption of advancement, or gift, if the parent was obligated to provide for the child
For example, where the child is not an adult, or is a dependent adult.
If there is no financial obligation, then this presumption does not apply, and the analysis proceeds with the presumption of resulting trust.
Step 4: Rebutting the Presumption
Once a presumption is established, it can be rebutted by the transferee if they can present clear and cogent evidence that the transfer was intended to be a gift.
They must show the following:
- The transfer was intended to be a gift.
- The child accepted the gift.
- A sufficient act of delivery or transfer of the property occurred to complete the transaction.
Protecting the Bank of Mom and Dad
In the end, the important take away is that parents must be careful when agreeing to financially assist their adult children in the purchase of their home. The Bank of Mom and Dad ought to take the proper precautions to ensure not only that the legal arrangement is clearly defined, but also that their life interests are sufficiently protected. It is highly recommended that the Bank of Mom and Dad consult a lawyer prior to entering into any such agreements with their children.
If you are a parent or relative who wants to financially assist your adult child with the purchase of their home or you anticipate receiving funds from family to purchase a home, please contact our knowledgeable lawyers at Mills & Mills LLP to assist you.
At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, real estate law, estate law, employment law, health law, and tax law. For over 140 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125. The material provided through the Mills & Mills LLP website is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.
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