Gift or Loan: Can Money from My Parents Be Claimed in a Divorce?
Imagine receiving money from your parents to buy a house, and now you and your partner are splitting up. What happens to that money?
Is it considered a loan that must be repaid, or was it a gift meant just for you?
In this blog, we’ll delve into the complexities of family loans within the context of divorce, examining how family property is generally divided in Alberta. You’ll gain insights into the key differences between family loans and gifts and explore resolution options should a dispute arise. Whether you’re currently navigating a separation or planning for the future, understanding these nuances can help ensure your assets are protected and that you receive a fair outcome.
Is it considered a loan that must be repaid, or was it a gift meant just for you?
In this blog, we’ll delve into the complexities of family loans within the context of divorce, examining how family property is generally divided in Alberta. You’ll gain insights into the key differences between family loans and gifts and explore resolution options should a dispute arise. Whether you’re currently navigating a separation or planning for the future, understanding these nuances can help ensure your assets are protected and that you receive a fair outcome.
The Basics: Family Property Division in Alberta
In Alberta, all assets and debts acquired during a marriage are considered 'family property'. When a couple separates, the Family Property Act (the Act) outlines the rules for how that family property should be divided. Generally, there is a presumption that family property will be divided equally between the spouses. However, certain assets, like gifts or property owned before the marriage, may be classified as 'exempt property' and are not subject to division.
What is family property?
Family property includes anything acquired by either spouse during the marriage. This could be the family home, vehicles, investments, pensions, and even debts like credit card balances or loans taken out during the marriage.
What is exempt property
Exempt property includes items that do not have to be divided equally between the spouses. Examples from the Act include:
- Property one spouse owned before the marriage.
- Inheritances received by one spouse during the marriage.
- Gifts received by one spouse from a third-party during the marriage.
- An award or settlement for damages in tort to one spouse (e.g. if a spouse were to receive a settlement from a personal injury claim).
- Proceeds of an insurance policy to one spouse that is not insurance for property.
For these items to remain exempt, they must be kept separate from family property. For example, if an inheritance is used to buy a family home, and the title of that family home is jointly owned by the spouses, the inheritance may lose all or a portion of its exempt status unless there is clear documentation showing it should remain separate.
Family Loans: A Common but Tricky Situation
Going back to our original question, if a couple receives money from family to buy a home, what happens to that money if they were to divorce? The answer depends on whether it was a gift or a loan.
If the money was a loan, it must be paid back. This obligation can affect how much each person receives when the property is divided, as the repayment must be factored into the division of their assets and liabilities.
If the money was a gift, it does not need to be repaid, but it might not be divided like other property. Gifts are considered exempt property under the Act, which can affect how property is divided.
This distinction can significantly impact both the calculation of the property’s value and how the equity is ultimately shared between the spouses upon separation.
If the money was a loan, it must be paid back. This obligation can affect how much each person receives when the property is divided, as the repayment must be factored into the division of their assets and liabilities.
If the money was a gift, it does not need to be repaid, but it might not be divided like other property. Gifts are considered exempt property under the Act, which can affect how property is divided.
This distinction can significantly impact both the calculation of the property’s value and how the equity is ultimately shared between the spouses upon separation.
Evidence Needed to Prove Family Loans
To prove that financial assistance received from family was a loan, you might need:
A Written Agreement – Documents that outline the terms of the loan, including the amount, repayment schedule, and any interest.
Written Correspondence – Emails, letters or texts between the family members and couple can provide evidence of the intent behind the money transfer. For example, an email discussing the terms of repayment can support the claim that the money was a loan.
Statements from Family Members - Testimonies from the family members who provided the money can help clarify whether the money was intended as a loan or a gift.
A Written Agreement – Documents that outline the terms of the loan, including the amount, repayment schedule, and any interest.
Written Correspondence – Emails, letters or texts between the family members and couple can provide evidence of the intent behind the money transfer. For example, an email discussing the terms of repayment can support the claim that the money was a loan.
Statements from Family Members - Testimonies from the family members who provided the money can help clarify whether the money was intended as a loan or a gift.
Without clear proof, disputes can arise, making the divorce process even more stressful. Courts often rely on the available evidence when making decisions on family property, which can be challenging if documentation is lacking or if the intent behind the money transfer is ambiguous.
What Happens with Family Loans and Gifts in Divorce?
If the money was indeed a loan, and loaned to the spouses while married, here are a few things that could happen during the divorce:
- Repayment Responsibility - The court will decide who has to pay back the loan. This decision depends on each person’s financial situation and the loan terms. The court might allocate the repayment responsibility to one spouse or both, depending on factors like each person's ability to pay and their respective contributions to the household finances.
- Impact on Property Division - The outstanding loan amount can be taken out of the house’s value before dividing the rest. This means the equity in the home is reduced by the loan amount, which affects how much each spouse receives.
Let’s look at an example to help further explain this concept:
Imagine Arman and Simran marry and buy a home worth $500,000. They make a $200,000 downpayment, using $100,000 of their own money and $100,000 from Simran’s parents. They then take out a $300,000 mortgage to cover the rest.
Upon separation, the first step in dividing their property is to deduct any liabilities to determine the remaining equity to be divided between the spouses. In this case, with a $300,000 mortgage, there would be $200,000 in equity to divide.
Imagine Arman and Simran marry and buy a home worth $500,000. They make a $200,000 downpayment, using $100,000 of their own money and $100,000 from Simran’s parents. They then take out a $300,000 mortgage to cover the rest.
Upon separation, the first step in dividing their property is to deduct any liabilities to determine the remaining equity to be divided between the spouses. In this case, with a $300,000 mortgage, there would be $200,000 in equity to divide.
If the $100,000 from Simran’s parents is considered a loan, it would be treated as a liability that must be repaid, leaving $100,000 to be divided between Arman and Simran.
However, if the money from Simran’s parents was a gift, the calculation might differ. Below is a non-exhaustive list of factors that would be considered under the Act in this case:
- The contributions each spouse made to the marriage, including any made immediately before the marriage, and to the welfare of the family, such as homemaking or parenting.
- Contributions, whether financial or otherwise, made directly or indirectly to the acquisition, conservation, improvement, operation, or management of a business, farm, enterprise or undertaking owned or operated by one or both spouses.
- The income, earning capacity, liabilities, obligations, property, and other financial resources available to the spouses.
- When the property was acquired.
- Whether the parties entered into any written or verbal agreements.
- Any other relevant facts or circumstances.
It’s important to note that even though a gift is considered “exempt property” you can lose some of that exemption. For example, if you place exempt property into joint names on the family home, or if you use a gift that was kept exempt to purchase a family home, a portion of the exempt amount may be surrendered.
The Importance of Legal Agreements
To avoid disputes, it’s a good idea to have a written agreement for family loans. Legal agreements provide clarity and protection for both the borrower and the lender, and it is the most straightforward way to prove the money was not intended as a gift. Sections 37 and 38 of the Act are a great starting point if you're looking to understand what should be included in any loan agreement. Generally, your agreement should include:
The Loan Amount - Clearly stating the amount borrowed.
Repayment Terms – Outlining how and when the loan will be paid back, including any interest if applicable.
Conditions for Repayment - Specifying any conditions that might trigger repayment, such as the sale of the home or a divorce.
Having a clear agreement can help prevent arguments later. Without one, misunderstandings can lead to significant disputes during the divorce process.
The Loan Amount - Clearly stating the amount borrowed.
Repayment Terms – Outlining how and when the loan will be paid back, including any interest if applicable.
Conditions for Repayment - Specifying any conditions that might trigger repayment, such as the sale of the home or a divorce.
Having a clear agreement can help prevent arguments later. Without one, misunderstandings can lead to significant disputes during the divorce process.
Resolving Family Property Disputes
Judges in Alberta have some discretion when deciding how to divide property and family loans. Their goal is to be fair, considering factors like each person’s contributions, the length of the marriage, and each spouse’s needs after divorce. However, going to court can be expensive, time-consuming, and often more adversarial.
To avoid this, spouses can consider alternate dispute resolutions method, such as:
Mediation – A voluntary and collaborative process where a neutral third-party (the mediator) facilitates negotiations between the spouses, helping them work towards a mutually acceptable agreement.
Arbitration – A voluntary process where a neutral third-party (the arbitrator) acts as a private judge, making decisions based on the information and evidence presented by the spouses. Arbitration can be binding, providing a definitive resolution, or non-binding, where the decision serves as a recommendation.
Collaborative Law – Also known as collaborative divorce or collaborative family law, this process is less adversarial than court and involves both parties and their collaboratively trained lawyers working together in a series of four-way meetings to negotiate a mutually acceptable agreement.
These methods are often more cost-effective, allow for greater flexibility, and are generally less stressful, allowing spouses to tailor solutions to their specific needs.
To avoid this, spouses can consider alternate dispute resolutions method, such as:
Mediation – A voluntary and collaborative process where a neutral third-party (the mediator) facilitates negotiations between the spouses, helping them work towards a mutually acceptable agreement.
Arbitration – A voluntary process where a neutral third-party (the arbitrator) acts as a private judge, making decisions based on the information and evidence presented by the spouses. Arbitration can be binding, providing a definitive resolution, or non-binding, where the decision serves as a recommendation.
Collaborative Law – Also known as collaborative divorce or collaborative family law, this process is less adversarial than court and involves both parties and their collaboratively trained lawyers working together in a series of four-way meetings to negotiate a mutually acceptable agreement.
These methods are often more cost-effective, allow for greater flexibility, and are generally less stressful, allowing spouses to tailor solutions to their specific needs.
Practical Steps for Couples and Families
In navigating family loans or gift during a divorce, consider these steps:
- Document the Transaction - Always have a written agreement for loans. This provides clear evidence of the terms and can prevent disputes.
- Keep Clear Records - Maintain records of all transactions related to the loan. This includes payment receipts, correspondence, and any other relevant documents.
- Seek Legal Advice - Talk to a family lawyer to understand your rights and obligations.
- Consider Alternative Dispute Resolution Methods – Consider options like mediation, arbitration, or collaborative divorce when resolving family property disputes. These processes can save time, money, and stress when compared to traditional litigation.
- Regularly Review and Update Agreements - If circumstances change, make sure your loan agreements are updated to reflect new terms or conditions.
- Communicate Openly with Family Members - Keeping the lines of communication open can help prevent misunderstandings and keep relationships strong.
- Consider the Emotional Impact - Money issues can be emotionally charged, especially when family is involved. Be mindful of the emotional impact on all parties and seek support if needed.
- Prepare for Negotiation - Be ready to negotiate and compromise. Flexibility can lead to solutions that work for everyone involved.
- Understand the Tax Implications - Loans and gifts can have different tax implications. Consulting a tax professional can help you understand these differences and plan accordingly.
Ultimately, the goal in any family property division is to reach a fair resolution, considering the contributions and needs of both people. By taking proactive steps and seeking out legal advice, couples can navigate the challenges of divorce more effectively and with less conflict.
Borrowing money from family can strain relationships, especially during a divorce. Clear communication and formal agreements can help avoid misunderstandings and keep family relationships intact. By being prepared and proactive, you can navigate the complexities of family loans and divorce more smoothly. If you’re currently going through a separation and you own property that was purchased with borrowed money, you can contact Crossroads Law for a free, no-obligation consultation with our experienced lawyers. Alternatively, if you are considering using money you received as a gift or loan to purchase property for you and your partner, our experienced lawyers can assist you in drafting an agreement, so you can make your purchase with peace of mind.
The information contained in this blog is not legal advice and should not be construed as legal advice on any subject. The information provided in this blog is for informational purposes only.
