Is it a Gift or a Loan?

As a family lawyer, one of my most critical priorities is discouraging clients from wasting precious funds on unnecessary litigation. Particularly when it comes to trial, the cost of which can quickly advance to six figures, it is imperative to ensure that your position is reasonable and systematically fleshed out, before making the decision to proceed. Unfortunately, given the complex interpersonal dynamics which generally accompany family matters, the motivation to litigate can often be emotional, rather than rational. 

A leading example of issues which may not be worth taking to court is the question of whether funds given to one or both of the parties constitute a loan or a gift. It is easy to imagine how this issue might arise. A parent of one of the parties may have generously agreed to assist them during their relationship, perhaps by way of a substantial down payment for the parties’ first family residence. At the time, they may not have felt the need to label the funds as a loan or a gift. However, in the aftermath of separation, it is often the case that the contributing parent alleges that the funds were not a gift, but rather a loan to be repaid.  

This issue was recently canvassed in the case of K.G. v. D.G., 2023 BCSC 1162 (“K.G.”). In that case, the mother of one of the parties claimed that she had provided a loan to the parties, in the sum of $400,000. Her son agreed, however, the former daughter-in-law disputed the position, claiming that the funds had been transferred to the parties as a gift. One of the arguments advanced by the mother was that the transfer created a resulting trust for her benefit, and a corresponding obligation by the parties to repay the funds.

The court considered the leading authority on the presumption of resulting trust, namely Pecore v. Pecore, 2007 SCC 17 (“Pecore”), where Justice Rothstein explained that a resulting trust arises when title to property is in one party’s name, but that party, because he or she is a fiduciary or gave no value for the property, is under an obligation to return it to the original title owner (Pecore, para. 20, cited by K.G. at para. 88). Justice Rothstein also clarified the converse presumption of advancement, defining “advancement” as a “gift during the transferor’s lifetime to a transferee who, by marriage or parent-child relationship, is financially dependent on the transferor” (Pecore, para. 21).

In certain cases, the court may rely on a presumption of resulting trust or presumption of advancement, each of which are rebuttable, to establish a transferor’s intent in disputes over gratuitous transfers, meaning transfers of funds without any payment from the recipient (Pecore, paras. 22 and 23).

Notably, the presumption of advancement has historically applied to transfers from a husband to a wife and to transfers from a parent to a child, but not to transfers between a parent and an adult child (Pecore, paras. 33 to 36). In cases where a gratuitous transfer is made by a parent to an adult child, a presumption of resulting trust is applicable, however, it may be rebutted by the other party, if they can produce clear evidence establishing that the intention behind the transfer was to make a gift.

In determining the transferor’s intention, the court must consider all of the relevant circumstances surrounding the transfer. Some of the factors to be taken into account are set out in Locke v. Locke, 2000 BCSC 1300, including, inter alia, whether there were any contemporaneous documents evidencing a loan, whether the manner for repayment is satisfied, and whether there has been any demand for payment before the separation of the parties (Locke, para. 20, as cited in K.G., para 95).

To establish that a presumption of resulting trust is applicable, the mother in K.G. only needed to prove that she made a gratuitous transfer to her adult child – once that is proven, the onus would then shift to the parties to prove, on a balance of probabilities, that the transfer was a gift (K.G. para. 106). The court found that the transfer of $400,000 was gratuitous, thus the sole remaining question for the court was whether the transfer was intended as a gift.

In this case, due to the highly conflicting nature of the parties’ evidence with respect to the intention behind the transfer, the court’s “assessment of the credibility and reliability of the parties and witnesses is particularly crucial” (K.G., para. 117). The Honourable Justice Giaschi expressed concerns about the credibility and reliability of all of the testifying individuals, particularly in light of the fact that all of the witnesses either had an interest in the outcome, or a “potential motive to exaggerate, misrepresent or, even lie” (K.G., para. 119). Generally, Justice Giaschi preferred the evidence of the former daughter-in-law over the evidence of the other parties (K.G., para. 157).

In consideration of all the relevant factors in this case, the court found that the funds were intended as a gift. Among the most pivotal findings in the court’s decision was the fact that there was no documentary evidence supporting the existence of a loan, no written demands for repayment were ever made prior to the parties’ separation, and there was a letter evidencing that a gift was intended (although the court did note the latter was not a determinative factor, in and of itself) (K.G., paras. 172 and 194).

This case should serve as a cautionary tale to the many litigants making claims that funds extended to their children constituted loans, particularly if the claims are made following their child’s separation. There may very well be cases where a transfer of funds was truly intended to be a loan to the parties, and not a gift. If that is indeed the case, it would be prudent for the transferring parent to formalize the arrangement in a written contract confirming the details of the loan, including clear and specific terms of repayment. Although it may not always seem tasteful or convenient to prepare these documents while the parties are together, it will likely help to preserve the parents’ contributions, and avoid substantial legal fees, in the future.

In the absence of clear evidence confirming the transferor’s intention, the court may find that the claim of resulting trust is self-interested, made in the aftermath of the parties’ separation to ensure the former child-in-law does not benefit from the contribution made by the parents during the relationship. The court eschews parties’ attempts to mislead or abuse the court system in this manner, and it may be a very costly waste of litigants’ resources, financially and emotionally, to embark on persuading the court of their intention retroactively, without compelling evidence in support of their position.