When is a Down Payment Loan a Gift? Why Does This Matter?

Note:  This situation does NOT apply to married couples.  The law is different when it comes to the matrimonial home. 

As the real estate market continues to soar in Canada, young adults are struggling to afford their first home. It has become increasingly common for parents to provide financial assistance to their children when making this first purchase. According to a new CIBC report, roughly 30 percent of first-time homebuyers have received money from the Bank of Mom and Dad.

More often than not, this money from Mom and Dad is not classified or it is classified informally without the documentation needed.  It leads to confusion and expensive legal fees and trial costs if the kids break up.

Let’s take a look at this recent case which highlights the problem:

In Macintyre, a common-law couple purchased a home with title registered as joint tenants.   They were joint on the mortgage.

Alex was gifted $100,000 from his mother as a down payment on a home that he purchased.

Alex met and moved in with Ron.  They were not married but common law.  They purchased an expensive home together and Alex used the proceeds from the first home to put towards the purchase of his home with Ron.

Unfortunately, things did not work out with Ron and they broke up.    They disagreed as to how the house proceeds would be divided.  Ron wanted the proceeds divided equally because he was joint on the title and he was joint on the mortgage.  Alex wanted to be repaid the $480,248.82 he put down on the home and the remaining proceeds divided equally.

Ron said the amount Alex contributed was not a loan but was a gift.  Alex said he never intended to gift this money to Ron.  The legal test is what was the couples’ intention at the time of transfer.

There was no cohabitation agreement. There was no documentation or evidence as to how the $480,248.82 was going to be characterized in the event of a break up.

Without credible evidence, the default position of the law is that there is no gift.

Ultimately, the Court of Appeal found there was no evidence as to what Alex and Ron had discussed about this amount.  Without any documentation or evidence, this was treated as a loan despite there being no loan documentation.   The amount was returned to Alex and the remaining proceeds shared.

This is a cautionary tale.   If Alex and Ron had a properly drafted cohabitation agreement, this situation could have been avoided.  The failure to have a cohabitation agreement cost Ron $240,000 in sale proceeds.  Not to mention the stress of being in litigation for years and the cost of lawyer’s fees for both a trial and appeal, which probably by this stage was at least six figures.

For about 1% of the amount in dispute, Ron and Alex could have gotten a cohabitation agreement to clarify and protect $480,000.   The agreement did not have to be an all-or-nothing agreement.  They could have agreed Alex gets a portion back of $480,000 and the remaining amount shared.  They could have created an agreement that was fair based on their circumstances had they simply had the discussion and taken a few simple steps.

Modern Cohabitation Agreements in Toronto are a simple, affordable way to provide clarity, protect net worth and avoid expensive lawyers and litigation down the road.

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