Timothy Gronfors. Associate, Family Law.
As a playful means for highlighting millennials’ preference for spending on luxuries rather
than saving for essentials, a recent BBC article has developed the satirical ‘avocado toast index’.
Using statistics from across the globe, the index calculates how many years it will take to afford a down-payment on a house by merely forgoing a daily ‘smashed avocado-on-toast’ breakfast. And good news Mexico City millennials – your abstinence from avocado toasts will yield you a home in 9 short years!
Leaving aside whatever superfluous financial priorities millennials may (or may not) have, the article does highlight a chilling reality: prospective first-time home buyers are struggling to crack today’s market. For many young couples, this real estate crunch has necessitated a turn to family members for financial assistance.
But what happens to that financial contribution if the couple separates? Was it intended as a gift or a loan? Is the parent entitled to a repayment? How these questions are answered can have a massive impact on the resulting property distribution.
But let’s take a step back and narrow the parameters. As a starting point, let’s assume that our hypothetical couple, John and Jane, are common law partners (there are very distinct rules on matrimonial homes and property division for married couples). Let’s further assume that after losing out on a number of bidding wars that resulted in sales above listing price, John and Jane realize that they’ve been priced out of the market and that their pre-approval for a mortgage will not suffice. Thankfully, Jane’s father has come to the rescue; he’s willing to contribute $30,000 towards the down-payment, which will in turn allow the couple to qualify for a larger mortgage.
In an ideal world, Jane and John take their new financing, purchase their dream home, and live happily ever-after but, unfortunately, Jane and John end up separating five years down the road and are forced to sell the home. Jane subsequently contends that $30,000 from the net sale proceeds should be paid back to her father. John alleges that the $30,000 was a gift to them as a young couple with no strings attached.
The Supreme Court of Canada has established two possible ‘presumptions’ when dealing with such gratuitous transfers (i.e. where a transfer is made without consideration). Unless the transfer is specifically from a parent to their child, the presumption is that the transfer was a bargain rather than a gift, meaning that it must be repaid. In our circumstance, while it was Jane’s father that made the gratuitous payment, Jane was an adult when she received it meaning that the presumption will be that the $30,000 was a loan/bargain. Because presumptions are simply starting points, John will have the onus of proving otherwise and that the $30,000 was a gift.
To add a further wrinkle to our scenario, let’s assume that when John and Jane accepted the $30,000, their bank sent out a commitment letter outlining that as a condition for receiving the funds, all three parties must sign a ‘gift letter’ clearly stating that the $30,000 is not a loan. Later, in the subsequent court battle, John produces this letter as evidence that the $30,000 was intended to be a gift. While the outcome of any one case will depend on all the surrounding facts, in decisions such as Crepeau v Crepeau the courts have found that a bank ‘gift letter’ is insufficient evidence to rebut the presumption of a bargain/loan. As in Crepeau, the finding may well be that such a ‘gift letter’ was executed solely for the purpose of obtaining the mortgage approval with no true intention to gift.
A recent Globe and Mail article by Josh O’Kane pointed out that while slightly more than 1/3 of Canadian millennials now own a home, nearly two-fifths received financial assistance from their parents to do so. Whether it’s from a parent, relative, or friend, home buyers receiving gratuitous transfers can benefit immensely from the assistance of a qualified family lawyer. There are various mechanisms, such as a cohabitation agreement, which can give the parties peace of mind in knowing that their intentions are properly delineated and help avoid a costly court battle down the road.