What happens to the gifts or loans given to a child by a parent in case of a divorce in Ontario? This question is of great concern both to parents and the separating spouses who were recipients of such gifts.
Children’s reliance on their parents for assistance in their new married lives goes back to ancient traditions of parents of the bride providing the bride with a dowry or the father of the groom providing the bride with a mahr. These traditions, although sometimes taking different forms, still run through the fabric of the modern family.
Many parents feel a significant responsibility to assist their children who are about to wed either monetarily or through valuable advice. The ancient traditions of providing the bride with a dowry, where the parents of the bride give her presents to take with her to her new home is an example of the parents’ monetary contribution to improve the young couple’s chances of surviving their married life together. Today, in modern society, the traditional form of the dowry is rare; however, many parents often assist their children financially, whether it is through contributing to their wedding expenses, giving a monetary gift, providing a loan, or assisting them financially in purchasing a home.
Of course, one cannot ignore the current trends of divorce rates and that many marriages end in a divorce. The parents who worked hard for the money they “invested” in their children may be significantly disappointed if the money they invested has to be divided with the son-in-law or daughter-in-law and that the money would no longer stay within the “family”.
In some ancient traditions, parents dealt with such scenarios through marriage contracts, such as the Jewish ketubah. The Ketubah provides that in divorce, the groom is obliged to return to the bride the value of the dowry and, as a result, the bride’s parents’ investment is not lost and the daughter “preserves” the investment.
So what can happen to these gifts or loans in case of a divorce in Ontario?
The assumption in Canadian law is that if parents advance funds or transfer real estate property to their adult children, the asset is considered to be the asset of the parents unless there is proof that there was a gift. In accordance with the law in Ontario, in case of divorce or separation, there is a calculation to determine how much money the person whose net asset value had increased most during the marriage (with some exceptions) should pay to the other so that the increase in the value of the parties’ property is shared equally among the parties.
This payment is called the equalization payment. Gifts that are not traceable into a matrimonial home, including gifts from parents to one of the spouses, are a category of exclusions meaning that if a parent gives his or her child a gift during the marriage, the value of the gift and the income derived from this gift will not be included in the spouse’s net increase in asset value accrued during the marriage.
However, if the gift is put into the equity of the married child’s matrimonial home, the value of the gift will be included in the equalization payment. If the gift was given prior to the marriage, the increase in the value of the gift and in some cases the entire gift would be included in the equalization payment calculation.
Can the parents prevent their monetary gifts from being included in their child’s net family property equalization payment (and as a result potentially lose some of their “investment” to their child’s spouse)?
There are a number of ways that parents in Ontario attempt to avoid the “loss” of their investment:
Loans or Gift: During the marriage, a parent would advance a loan either as a promissory note or as a mortgage security and the child and his or her spouse would make payments on the loan or only pay the accumulated interest in installments. If the intention is that there is a loan, it is important to set out terms of the loan and to collect the monthly payments.
Marriage contract or cohabitation agreement: This is considered to be the best solution for protection of parents’ monetary contributions in case of a divorce. However, it is important that the agreement will meet all the legal requirements to be valid in case of a separation. If the marriage contract is found to be invalid, it will be much more difficult for the parents to recover their contribution. Also, the son-in-law or daughter-in-law may refuse to sign a pre-nuptial agreement.
Ownership: There are parents who choose to buy a home and allow their children to live in it while maintaining the ownership documents in their own names or jointly with the adult child. Such a route can be problematic if the spouse of the child invests his or her own monies into the home and significantly contributes to its maintenance. Another route is to transfer the home into a trust. This route too must be approached in a careful manner as the trust must meet specific conditions and even this route may enable the son/daughter to recover only some but not all of the value of the parents’ contribution.
When looking at ways of potentially protecting such an “investment”, the children’s future lives should be carefully considered. Some couples never reach their wedding day when parents pressure their children and their soon to be sons-in-law or daughters-in-law into signing prenuptial agreements or going through complex financial structuring to protect family money. It is important that the lawyer chosen to negotiate a marriage contract or draft a trust deed or a loan instrument is aware of the myriad of interests and potential conflicts to be able to advise the client on the best course of action.