Protecting Parents Who Lend Money to Their Children and Spouses in Ontario

The Risk: Gifts vs. Loans in Family Law

From a family law perspective, whether money given by a parent is treated as a gift or a loan makes a significant difference. A gift is included in the receiving child’s net family property and may be subject to equalization. A loan, if properly documented, is a debt that reduces the net family property of the debtor, potentially protecting its value from equalization.

What Happens Without a Loan Agreement?

If parents provide money without documentation, it is often treated as a gift in the event of a separation. The in-law spouse may then benefit from a share of those funds through equalization, which is rarely what the parents intended. Courts generally require clear evidence to treat parental contributions as loans rather than gifts.

How to Protect Parental Loans

Written Loan Agreement

The most important step is to document the loan in writing. A loan agreement should specify the amount lent, the date of the loan, the interest rate (if any), the repayment terms, and the consequences of default. Both parties should sign the agreement, ideally with independent legal advice.

Promissory Note

A promissory note is a simpler written promise to repay a specified amount. While less comprehensive than a full loan agreement, a signed promissory note provides important documentation of the intention to create a debt rather than a gift.

Mortgage or Charge on Property

In some cases, parents may wish to register a mortgage or charge against the property purchased with their funds. This provides formal security for the loan and makes it very difficult for the loan to be characterized as a gift.

Marriage Contracts and Parental Loans

A marriage contract or cohabitation agreement between the couple can also address parental contributions. It can explicitly identify money received from parents as a loan, not a gift, and exclude it from the equalization calculation. This approach requires the cooperation of both spouses but provides a high level of protection.

Acting Consistently With a Loan

Documentation alone may not be sufficient if the parties have not acted consistently with a loan relationship. If no repayments have ever been made and the ‘lender’ never sought repayment, a court may still characterize the funds as a gift. Regular (even nominal) repayments, consistent with loan terms, strengthen the loan characterization.