‘A cautionary tale for inter-family advances’

The scenario of affluent older parents providing financial help to their adult children is increasingly common — and now, so are disputes over who gets what when those children divorce.

The December Ontario Superior Court judgment in Barber v. Magee, by Justice Dale Fitzpatrick, highlights the issue and offers some practical advice on how to avoid the fallout of clashing expectations when marriages dissolve. In that case, parents had transferred significant sums to an adult child for the purchase and maintenance of a matrimonial home. Following separation, the husband claimed the sums were a loan owing to the husband’s parents. Without these funds, there was no home equity to be shared between the divorcing spouses. Litigation followed.

“This is happening all the time,” notes Julie Hannaford, a family lawyer in Toronto who says the issue is coming up more often. “Adult children are increasingly reliant on their parents to get along,” she observes. Such help, she says, is “going to become epidemic [in the future].” And too often, she adds, parents whose children are married are taking the view that the financial boost is conditional on the marriage continuing. “This is a gift — as long as the marriage stays together” as Hannaford puts it. “But,  of course, that’s not what the law says.”

In Barber, the husband’s parents had advanced more than $140,000 to their son, to assist the son and his wife, both of whom worked in the father’s pub, in the purchase of a home. There was one child of the marriage, born two months after the home was purchased. Part of the funds were advanced on an ongoing basis, after the home was acquired, to help the couple meet the costs of both the mortgage and home maintenance. The home was placed in the husband’s name alone, which the wife testified she was not aware of until she brought her application for equalization. Following separation, the home was sold and all proceeds were retained by the husband, who then transferred them to his father.

At trial, the husband, who was self-represented, claimed the funds were a loan and should be treated as a liability in the calculation of net family property. Alternatively, he claimed his father retained a resulting trust in the funds. As Fitzpatrick noted: “the fundamental issue before me is whether the monies advanced by the Respondent’s father were advanced as loans or gifts.”

That issue required the judge to review the law of resulting trust, which, as he noted, presumes bargains, not gifts. To rebut the presumption, the recipient must establish that a gift was intended by the transferor, not a loan. But showing intention in the context of family litigation is seldom easy. In noting the factors to be considered, Fitzpatrick referred to a 2015 British Columbia Supreme Court decision, Byrne v. Byrne, which lists, among other evidence, contemporaneous loan documents, a repayment schedule, security, interest rates, partial repayment, or demands for repayment.

As a result of the focus on intention, much of the trial turned on the lack of contemporaneous loan documentation, says the wife’s lawyer, Michael Stangarone, a partner at MacDonald & Partners LLP in Toronto. “That was the whole crux of the case,” says Stangarone. “At no time did they ever show her a promissory note, at no time did they ever tell her that these were loans.” Attempts by the husband and his parents to bridge the gap at trial were unsuccessful; while the husband’s father testified that a promissory note had been executed by his son, he claimed that it had been inadvertently destroyed by his wife in an apparent house de-cluttering.

It also appeared the husband’s family was at some pains to ensure the husband ultimately retained the funds. The wife’s demand that the husband and his family members produce bank statements for periods following the sale of the matrimonial home in 2009 yielded trial gold. The statements, which were only obtained after much resistance from the husband and his family, and which were heavily redacted, eventually revealed that sums totalling more than $200,000 were transferred back to the son in 2010 by his parents. “This appears to be the return of the monies repaid to the Respondent although this was denied . . .” says the decision.

As in much family litigation, e-mails sent at the time of separation were an issue. In Barber, the wife had sent a message shortly after separation suggesting the funds used to buy the home should be returned to the parents. However, the wife testified that when she sent the e-mails, she was not aware of the amounts in question, or even that the house was in her husband’s name alone. She also said her e-mails were an attempt to calm a high-conflict situation. “The important point is that there needs to be contemporaneous evidence [of a loan],” says Stangarone. Her statements were made when the wife did not know what the home had sold for and had no idea of the amounts that had been advanced. “The judge said that this wasn’t proof of a loan, it’s just someone trying to get out of a really difficult situation,” says Stangarone.

While a presumption of resulting trust must be rebutted by evidence that a gift was intended, such evidence tends to be lacking in the context of family transactions, the decision notes. As a result, the case law has endorsed an analysis that relies on lack of evidence of a trust to rebut the presumption, an approach that Fitzpatrick termed “perplexing” but understandable. Fitzpatrick notes: “Requiring the applicant to rebut the presumption with affirmative evidence would be untenable, and would result in many gifts being unjustly characterized as loans after the parties separate.”

Scott Booth, a partner at Jenkins Marzban Logan in Vancouver, says the decision takes a “fresh” approach to resolving the problems that arise when a resulting trust is claimed in a family law context. While it may be possible for parents and their adult child to review the evidence of what took place between them should a dispute arise, it can be much more difficult for third-party spouses to establish the transferor’s intent. “So, it could be that the courts have watered down the strength of the presumption [of resulting trust] by testing it against intent in the way it was done in Barber v. Magee,” says Booth. “And the same thing was done in Byrne v. Byrne. In a family law context, the presumption operates fairly weakly.”

And while the general direction of family law reform may be to enhance certainty and reduce conflict, Booth says he’s not sure legislative change in this area is called for. It could be difficult to change rules that govern the division of property between spouses, he notes, without also affecting the rights of third parties, namely, the parents who are making these transfers.

The lesson is such transfers, if truly intended as loans, should be accompanied by full documentation.
“This is a cautionary tale for inter-family advances,” says the decision. “Spouses and their families can easily avoid disputes by exercising common sense. The simple solution is to document any advances as loans in a manner similar to what any lender would do, especially where, as here, the advances are significant.” Indeed, Fitzpatrick writes it was a “mystery” to him why families would not “undertake the modest efforts” to do so.

Education is likely the most effective route to avoid such conflicts. “I don’t think the legislature will ever intervene in matters involving parents and children, more than they do now,” says Hannaford. “But I think there is an enormous service that could be done; say to these parents who are transferring money, stop having such disdain for lawyers and the legal system.” Instead, seek legal advice when such transactions are in play, she advises. “The expenditure of $500 can save [clients] $500,000 down the road.”

Brian Burke, a partner at Epstein Cole LLP, notes the special considerations that arise under Ontario law when the matrimonial home is the asset in dispute. While some gifts can be excluded from family property, usually by ensuring they are not mixed with shared property, using such gifts to purchase a home means they must be shared. While that may be unfair in some circumstances, he says, it’s possible to avoid this result by putting a mortgage on the family home in favour of the parent advancing the funds, as per Barber.

Burke agrees that efforts to avoid this type of litigation should remain focused on education, even though it remains a significant challenge to interest couples on the brink of marriage, or the acquisition of a home using funds from family members, in the potential consequences of marriage breakdown. Social values also come into play when it comes to Ontario’s statutory scheme relating to the matrimonial home.
Burke says the reality is that, for most families, the home is their main asset. If inter-family gifts are deducted from a home’s value on disposition, many spouses would be “wiped out.” And the effects on children can be lasting, with some left travelling between one parent in a large home and another living in a basement. “Quite rightly, non-legal matters come into play,” he notes.

Indeed, in Barber, the husband subsequently purchased another home, which was fully mortgaged in favour of his parents shortly after the case conference that preceded the trial. Prior to the most recent litigation, the wife had received “nothing” as a result of the marriage breakdown, says Stangarone.

But, equipped with this new “road map,” as Stangarone calls the decision, perhaps other dissolving marriages will avoid the costs and ill will that plagued this family. However, the husband has now filed a notice of appeal, so that outcome too may change.