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Financial Assistance from the parents, it is a loan or a gift?

With the rising cost of living, it is becoming increasingly common for young couples to receive financial assistance from a parent or loved one in order to get on their feet. This is a great start, but what happens if the young couple separates?

How the payments made by a loved one should be classified during property settlement can be a particular source of contention following an unfortunate breakdown of the relationship.

The first question that usually arises is, whether the payment from the parents should be regarded as a loan or a gift. The difference between a loan and a gift is that a loan is intended to be repaid whereas a gift is made by the giver without the intention for it to be repaid. The general approach taken by the Court is that the payment made by either party’s parents should be treated as a gift unless there is sufficient evidence to prove that it is intended to be a loan.

The next question follows is what evidence is required to prove the payment from the loved one is a loan in its nature and if the payment is categorised as a loan, whether the loan amount should be repaid in full to the parents from the joint property pool.

The Court adopts a four-step process when determining a party’s entitlement to an adjustment in the joint property pool and the first step is to determine the value of the net asset pool for division. The net asset pool is calculated by deducting the liabilities or debts of the parties from the value of their joint property pool. However, debts or liabilities that are vague, uncertain, unreasonably incurred, or unlikely to be enforced might not be recognised as liabilities or debts of the parties to be deducted from the value of the joint property pool.

With respect to a payment made by the parent, for it to be recognised as a loan, a written loan agreement should be entered between the party or parties and the parent(s) clearly specifying the key terms including but not limited to purpose of the loan, the loan amount, interest, the required repayment amount, loan term, default clause. Furthermore, it would be best if the loan is secured and registered on the title.

Nevertheless, a signed loan agreement with unequivocal key terms is merely the first step that goes to prove the existence of the obligations. As there is a general limitation period of six (6) years for enforcing a loan, the mere existence of a legally enforceable loan from the parent(s)is not sufficient to establish that the loan amount ought to be regarded as the debts of the parties and be paid out from the joint property pool. The Court held that it is a fairly common situation where a parent enters a loan agreement with the child which is in all respects legally enforceable, however, since signing of the loan agreement, the parent(s) has/have not made any attempts to enforce the loan in accordance with its terms– meaning that there is no record of repayments of the principal or interests, nor were there any notices of demand issued by the parent(s).

The trial judge in Winston first found that if the obligation is not likely to have to be met, it should not be taken into account and it should be disregarded as a whole in determining the overall divisible pool.

On appeal, the Court concluded that the trial judge has erred in concluding that if the obligation is not likely to have to be met by the party, the amount should be completely disregarded. The Court found that it is undisputed fact that there was a valid and enforceable loan made by the father to the son in that case. Nevertheless, taking into account the fact that the loan repayments to the father can be negotiated or delayed by the son, the Court held that the loan amount should be discounted before it is paid out from joint asset pool of the parties.

It could be seen from the Court’s decision in Winston that, merely entering a binding loan agreement is not conclusive evidence that the parent loan will be recognised as the debts or liabilities of the parties and therefore be repaid or deducted from the value of the joint property pool. Evidence of repayments or actions taken by the parent(s) to enforce the loan in accordance with the terms of the loan are also crucial in determining whether the said loan can be paid out or paid out in full from the joint property pool.

What is the best way to protect yourself when receiving financial assistance from your or your partner’s parents? What is the best way to protect yourself if you are considering rendering financial assistance to your son or daughter who are in a relationship? Please contact our team at Richardson Murray to book in for a free initial consultation to find out more.


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