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Monetary gifts can't become loans just because the marriage is over

A recent Ontario Court of Appeal decision highlights the importance of detailing on paper any significant financial transactions with family members, Toronto family lawyer Jennifer Samara Shuber tells AdvocateDaily.com.

"It's vital to be very clear on the nature of what that payment is at the time it is made because you're not going to be able to redefine it at a later date,” says Shuber, a lawyer with Beard Winter LLP.

In the appeal court matter, following the dissolution of the marriage, the wife and her parents tried to have monies advanced by the parents to pay off the mortgage on the couple’s home determined a loan.

The couple purchased the marital home in 2000 but ran into financial difficulties in 2004 when the husband’s job changed. The wife's parents stepped in to relieve them, agreeing to pay off the existing mortgage, which was discharged in February 2005.

However, in July 2005, the parents registered their own mortgage on the home, an action which shocked the husband, according to the decision. He testified he only agreed to sign the mortgage documents in order to keep his wife and in-laws happy but claimed he was relying on his spouse's assurances that the house would always be theirs.

A judge hearing a summary judgment motion sided with the husband, rejecting the parents’ evidence that the transfers were loans, and the appeal court backed his ruling.

"This is not such an unusual case," says Shuber, who was not involved in the matter and comments generally. She notes that during the marriage, the parties were content to have it treated as a gift because there were no repayment terms and "it's a generous offering from the wife's parents."

However, at the date of separation some 10 years later, Shuber says it became an issue as to whether it was a debt "because if it is, it reduces net family property and has to be repaid."

In this case, the money was never formally acknowledged as a gift but was treated as such. She says part of the evidence the court looked at was the fact the couple and her parents went out to supper together to celebrate their mortgage-free status.

Shuber says, after a separation, parties can't use hindsight to signify the money as a debt, particularly since no payments were ever requested or made for previous monetary gifts.

She said the funds helped the couple out of a tight financial situation, "but then, when they separate, it becomes a challenge."

Situations like this are easily preventable, says Shuber.

“It just makes sense to have an agreement drawn up by a lawyer based on independent legal advice,” she says. "The parties need to understand whether it is a loan or a gift. It can just be a short contract."

Shuber likened the document to a prenuptial agreement. "You hope you never need it, but it's absolutely always better to clarify at the time, rather than to try to identify or qualify something at a later date.

"It's always better to detail it on paper first and put it away, and hopefully you'll never have to look at it again."

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