If you think “the dog ate my homework” is a lame excuse, you should check out a recent Ontario case where the judge had to decide a not-uncommon divorce question: was the money that the parents put toward’s their son’s matrimonial home a “loan” or a “gift”? The son maintained that it was a loan, because that way he wouldn’t have to share it with his soon-to-be ex-wife. Sure, it might have seemed like a gift at the time, but once the divorce proceedings started — well, by golly it was a loan.
The law applies a common-sense test to the “gift-or-loan” issue, and the first question is whether there is contemporaneous documentation — not back-dated, but created at the time — showing the money was a loan. Normally when you lend someone money, you put something on paper: a promissory note, a repayment schedule, etc. If you don’t have any of that stuff — and again, it has to be contemporaneous — then the court will get awfully suspicious.
In this case, the parents claimed there was contemporaneous documentation in the form of promissory notes, but — tragically — they had been thrown away by mom in a “document purge.” This raises a key question: if you’re doing a document purge, presumably you’re throwing away useless old papers you don’t need. Wouldn’t promissory notes for $90,000.00 be something you might want to save?
The judge didn’t buy it. Mom was not called as a witness at the trial — big surprise — and the judge ruled, politely, that “it remains a mystery to me why parties would fail to undertake the modest efforts required to document and thereby secure monies advanced if they are truly meant to be in the form of a loan, especially where the amounts advanced are significant.”
Apart from the question of whether there are contemporaneous documents evidencing a loan, courts also ask whether the manner for repayment is specified; whether there is security held for the loan; whether there are advances to one child and not others, or advances of equal amounts to various children; whether 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 of repayment.
“This is a cautionary tale for inter-family advances,” concluded the judge. “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.”
Otherwise, you’re left with “the dog ate my promissory note,” and you can bet that the teacher (aka the judge) won’t believe you.
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Bill Rogers is a Toronto-based lawyer, journalist, and family law mediator