Parents Helped With the Down Payment? Gift or Loan When You Separate

In Metro Vancouver it is common for parents to help with a down payment. Few families write down what that help was meant to be, and the question usually comes up only when the couple separates.

This article looks at the three ways that money can be treated under BC's Family Law Act, how courts decide between them, and what parents and couples can do now to avoid a dispute later.

Why the label matters

As an example, the same $200,000 can lead to very different results depending on what it was:

• A gift to your own child. Under section 85(1)(b.1) of the Family Law Act, gifts to a spouse from a third party are excluded property. Property derived from excluded property is also excluded, so a gift traced into the home can be kept out of the division. Any increase in the value of excluded property during the relationship is family property under section 84(2)(g) and is shared.
• A gift to both of you. The exclusion in section 85(1)(b.1) is for gifts to a spouse. Where the evidence shows the parents intended to give the money to the couple together, it may simply become part of the shared home.
• A loan. If the money was a genuine loan, it is generally a debt. Under section 86, family debt includes financial obligations incurred by a spouse during the relationship, and spouses are equally responsible for family debt under section 81. Section 82 confirms the property-division rules do not affect a creditor's own rights.

Our article on gifts and inheritances on separation explains the exclusion rules more generally. This article focuses on the down payment and on the gift-or-loan question.

How a court decides: intention and evidence

The central question is what the parents intended when they handed over the money. The spouse who says the money is excluded carries the burden: under section 85(2), a spouse claiming that property is excluded is responsible for demonstrating it.

Between parents and their adult child, the common law presumptions can matter. In Pecore v. Pecore, 2007 SCC 17, the Supreme Court of Canada confirmed that the general presumption for a transfer made without payment is a resulting trust, so the person receiving the money must show it was meant as a gift. The Court also said these presumptions guide the decision only where evidence of intention is unavailable or unpersuasive, and that bank documents and other evidence of intention can carry real weight.

Between spouses, the Family Law Act has removed those presumptions. Section 81.1 says the presumptions of advancement and of resulting trust must not be applied in questions about ownership of property as between spouses. Section 85(3) also provides that an exclusion continues despite a transfer of ownership from one spouse to the other, which is relevant where a home bought with one spouse's family money was later put into joint names.

The evidence that usually decides it

• Documents signed at the time. A loan agreement or promissory note, with an amount, interest (if any) and repayment terms, points toward a loan. A letter describing the money as a gift points the other way.
• The mortgage lender's gift letter. Many lenders ask parents to sign a letter confirming that down payment money is a gift and does not have to be repaid. A family that later says the money was a loan may have to explain that letter.
• What happened afterwards. Regular repayments, a mortgage registered on title in the parents' favour, or a record of the loan in the parents' financial papers support a loan. No payments and no demand for years point toward a gift.
• Who received it. Money paid to one spouse's own account, or directly to the lawyer handling the purchase on that spouse's behalf, may tell a different story from money paid to both.

If you are the parents: protect the help now

Decide what you intend and record it at the time. If it is a loan, a written agreement, actual repayments, and possibly a mortgage registered against the property make it much easier to prove. If it is a gift to your own child only, say so in writing, and say it is not a gift to your child's spouse. Remember that a gift letter given to a lender will be read later.

Your own will matters too. A will can forgive a loan, or treat an earlier loan or gift as an advance on your child's inheritance. The couple may also want a marriage or cohabitation agreement; our article on prenups in BC explains how those work.

If you are separating now

Collect the bank records showing where the money came from and where it went, the purchase documents, any gift letter or loan agreement, and any messages from the time. If you rely on an exclusion, you will need to trace the money into the home. Our article on the family home after separation covers the options for the house itself.

Watch the deadline. Under section 198 of the Family Law Act, a claim to divide property must generally be started within two years after a divorce order for married spouses, or within two years after separation for unmarried spouses.

Family money in the house? Sort out what it was before you negotiate

Our family lawyers can review the records of how the down payment was made, advise on whether it is likely to be treated as a gift or a loan, and negotiate or document the outcome.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.