Loan vs Gift

McGrath v Franz, 2017 CanLII 21771 (ON SCSM)

1. This case poses the question: did the plaintiff make a loan or a gift to the defendant?

33. In order to determine whether the transaction is one of loan or gift, the issue requires a resulting trust analysis.

34. The leading case in this area is Pecore v. Pecore. The Supreme Court of Canada in Pecore v. Pecore, 2007 SCC 17, (2007) 1 S.C.R. 795, at paras. 24-26, explained the doctrine of the presumption of resulting trust as follows:

The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers. When a transfer is challenged, the presumption allocates the legal burden of proof. Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended: see Waters' Law of Trusts, at p. 375, and E.E. Gillese and M. Milczynski, The Law of Trusts (2nd ed. 2005), at p. 110. This is so because equity presumes bargains, not gifts.

The presumption of resulting trust therefore alters the general practice that a plaintiff (who would be the party challenging the transfer in these cases) bears the legal burden in a civil case. Rather, the onus is on the transferee to rebut the presumption of a resulting trust.

In Kerr, at para. 18, the Supreme Court of Canada explained how trial courts should consider the presumption of resulting trust:

The Court's most recent decision in relation to resulting trusts is consistent with the view that, in these gratuitous transfer situations, the actual intention of the grantor is the governing consideration: Pecore v. Pecore, 2007 SCC 17, (2007) 1 S.C.R. 795, at paras. 43-44. As Rothstein J. noted at para. 44 of Pecore, where a gratuitous transfer is being challenged, "[t]he trial judge will commence his or her inquiry with the applicable presumption and will weigh all of the evidence in an attempt to ascertain, on a balance of probabilities, the transferor's actual intention" [emphasis added].

The presumption of resulting trust applies when a parent makes a gratuitous transfer to an adult child: see Pecore, at para. 36. The presumption is that the adult child is holding the property in trust for the aging parent. In other words, the parent holds an interest in the subject asset whether it is real property, money loaned or some other item. The parent is presumed not to have intended a gift. However, this presumption can be rebutted by the evidence.

Clearly, the evidence necessary to rebut the presumption depends on the facts of the case: see Pecore, at para. 55. Evidence of the parent's post-transfer conduct is admissible, so long as it is relevant to the parent's intention at the time of the transfer: see Pecore, at para. 59.

35. The aforesaid statement comes from the Barber v. Magee at 2015 O.J. No. 6818, a decision of Fitzpatrick, J. Ontario Superior Court of Justice.

36. The principles derived from the Pecore case are that there is a presumption of loan [resulting trust] which is rebuttable and the onus of proof falls on the transferee to establish a gift especially where there is no consideration. An analysis must take place to determine the actual intention of the grantor, both pre-and post the transaction. The presumption is that an adult child holds an interest in the asset whether it is property or money loaned in favour of the parent. A loan is presumed but can be rebutted by the evidence.

37. Each case is to be decided on its own set of facts, and there are factors that the court can look to assist in characterizing the transaction. The courts in British Columbia have been helpful in suggesting factors to look to when determining a resulting trust claim. The British Columbia Supreme Court recently reviewed the caselaw in Byrne v. Byrne, 2015 BCSC 318, 57 R.F.L. (7th) 215. The Court in Byrne referenced the factors adopted by their Court of Appeal that ought to be reviewed when determining whether a gift or loan was intended: see Kuo v. Chu, 2009 BCCA 405, 180 A.C.W.S. (2d) 903, citing Locke v. Locke, 2000 BCSC 1300, (2000) B.C.J. No. 1850. Those factors are as follows:

• Whether there were any contemporaneous documents evidencing a loan;
• Whether the manner for repayment is specified;
• Whether is security held for the loan;
• Whether there are advances to one child and not others or advances on equal amounts to various children;
• Where there has been any demand for payment before the separation of the parties;
• Whether there has been any partial repayment; and
• Whether there was an expectation or likelihood or repayment.

(from the Barber case)

38. The above factors are consistent with the approach taken by the Ontario Courts. Justice Mulligan provided a helpful review of our caselaw in Klimm v. Klimm, 2010 ONSC 1479, (2010) O.J. No. 968, where he noted the following factors, considered by Wood J. in Cade v. Rotstein, [2002] O.J. No. 4460 (S.C.), in determining the existence of a gift or loan:

• That joint debts are old; no demand has been made save one motivated by the separation of the parties;
• The monies were advanced to the parties to help them out;
• Dr. Rotstein testified that he would not have looked for the money, or would have taken action against his son. This leads to the clear conclusion that the demand was made as a result of the separation and to benefit their son in a subsequent litigation;
• Dr. and Mrs. Rotstein are elderly and Mrs. Rotstein is in poor health;
• Dr. Rotstein testified that he did not expect the money until the parties were able to afford to pay it back. The separation in this litigation has made that an improbability just as in the Poole case (referenced below); and,
• The Rotsteins Senior do not need the money.

(from the Barber case)