Undocumented Loans

An older adult will often advance money to an adult child for various purposes, such as buying a car, toward a down payment on a house, etc. This is often done with no documentation. The adult child may later deny this was a loan, claiming it was intended to be a gift. This webpage advises the person loaning the money, or those assisting them, about what can be done to recover the money that was loaned out.

Avoiding Insult?

Parents often loan money to their children, and because it is a family member, they do not insist on any of the usual precautions such as getting it in writing with a loan agreement, a Promissory Note, or even a simple I.O.U. (see example of a Promissory Note here: Promissory Note) There has been no interest or repayment schedule agreed on, and no security or collateral put forward to secure the loan.

While this is understandable in the circumstances, this can turn out to be a mistake. The child may later deny that this was a loan, insisting it was a gift instead. The child may feel they will inherit this money anyway, so they’ll just take it now. There is no documentation or other evidence to prove what was intended. The parent may not have wanted to insult their child by asking for the usual formalities, but now they are going to have to face the likely indignity of taking their own child to court. It would have been better to be a little more ‘business-like’ in dealing with their money in the first place.

Legal Presumptions

There are often times when the evidence in a matter is evenly balanced, so it would be hard to decide one way or the other. In the case of these family ‘loans, without hard evidence, and one side saying “loan” and the other saying “gift,” what is a judge to do? Certain situations in the law will automatically be decided one way, unless the other side can prove that the matter should be decided in their favour. These are known as “legal presumptions.” The law ‘presumes’ something to be the case, and the other side has to ‘rebut’ this presumption by proving with evidence that the presumption should not apply.

As an example, when someone hands over money to another, was it a loan or a gift? For the judge deciding this, the important question was what was the intention of the person handing over the money? Even assuming this person will say what their intention was, the other side will be saying the opposite. In these circumstances, the law assumes a ‘bargain.’ The money is considered to be held in trust (a ‘resulting trust’) and repayable.

Family Loans

Applying this to family loans, when an older parent gives money to an adult child, the law again presumes this is a loan rather than a gift, even without any loan document or written acknowledgement. The adult child claiming this was a gift will have to produce some evidence to demonstrate their parent intended that this money did not have to be repaid. One example[1] of evidence to rebut this presumption is if the adult child can show the money was sent by the parent on the adult child’s birthday, inside a birthday card.

When a parent gives money to an infant child, however, the law presumes the parent meant this as a gift that doesn’t have to be repaid. So if a parent wants to claim it was a repayable loan to a young child, they will have to show this with evidence such as a loan document or written acknowledgement (I.O.U. or Promissory Note), or testimony from a third party who heard an oral loan agreement, etc.

Why this distinction between adult and minor children? It is suggested that part of the justification is that parents have a legal obligation to support their dependent children, but no obligation to support independent adult children. A more general suggestion is that parents will love and support their children of tender age.

Rationales

You may wonder why your own child would turn against you and refuse to repay what they should. Did they really think this was a gift? Or are they rationalizing what is really theft? This is a lot more common than you might think. Here are some of the rationales we are aware of for keeping money belonging to a parent.

  1. She isn’t using the money anyway.
  2. It isn’t really her money – Dad earned it for me.
  3. I’m just going to inherit it anyway – it’s my money he’s spending.
  4. He’s kind of out of it, he’ll never even miss it.

Small Claims

If your adult child won’t repay a loan, you may have to file a claim in Small Claims Court (for loans of up to $25,000.00). Small Claims Court has less formal and less complicated rules and procedures than Supreme Court. Don’t worry if you don’t have hard evidence of your intention that this was a repayable loan. The presumption of a ‘bargain’ or ‘resulting trust’ means you will be successful, unless your child, in defending against the claim, can lead enough evidence to rebut the presumption.

Demand Letter

Before starting a small claims court lawsuit, you should write a ‘demand letter’ setting out the circumstances of the loan, your clear intention that it was a loan, and demanding repayment by a certain date. An example of a demand letter is available here: Example Of Demand Letter . Always keep a copy of this letter to include with your claim that you file in Small Claims Court.

Legal Precedents

It is helpful to provide a judge with examples of cases that guide the judge in how to apply the law. You can’t assume the judge knows every case. The leading case, referred to by the BC Court of Appeal in Beaverstock is the Supreme Court of Canada case of Pecore. In the Beaverstock case, the plaintiff loaned $50,000 to her son. After his death, his wife (from whom he had separated shortly before his death) inherited his estate and refused to repay the funds, saying that her husband thought the funds were an advance on his inheritance. However, the plaintiff adduced evidence from three witnesses to the effect that the son believed he had to repay the funds to his mother.

The plaintiff’s claim was dismissed at trial on the basis that:

  • there were no contemporaneous documents evidencing the loan;
  • there was no manner for repayment specified at any time;
  • there was no security held for the loan;
  • there had been no demand for payment before the son’s death;
  • there had been no partial repayment, and,
  • there was no reasonable expectation on the plaintiff’s part of repayment.

The trial judge did not consider the issue of resulting trust and made no finding of fact regarding the plaintiff’s intention when she advanced the $50,000 to her son.

The BC Court of Appeal overturned this decision, stating

The correct approach to the resolution of this dispute is not in dispute. It is set out in Pecore v. Pecore, 2007 SCC 17, [2007] 1 S.C.R. 795. Whether the transfer was a loan or a gift depends on the actual intention of the appellant when she made the advance, which is a question of fact. As the advance was gratuitous, the onus was on the respondent to demonstrate that the appellant intended a gift, since equity presumes bargains, not gifts (para. 24).

This equitable principle gives rise to a presumption the son received the money on a resulting trust, which is a rebuttable presumption of law. The trial judge was therefore required to presume the advance was not a gift and to determine whether the respondent had satisfied the burden of rebutting the presumption of resulting trust on a balance of probabilities (para. 44).

The factors referred to by the trial judge were simply items of circumstantial evidence relevant to the plaintiff’s actual intention. The Court granted judgment in favour of the plaintiff as the defendant led no evidence that would rebut the presumption of resulting trust and the other evidence regarding the plaintiff’s intention outweighed the items of circumstantial evidence relied upon by the trial judge.

Filing Assistant – Small Claims Court

To start a claim in small claims court, you can use the online Filing Assistant. The various forms for small claims court can be filled out, printed out, and submitted in person or by mail. The cost of filing is $100 for claims up to $3000, and $156 for claims above $3000.00.

It is found here: https://eservice.ag.gov.bc.ca/FilingAssistant/index.do

Time Limits

As you may know, there are limitation periods for bringing claims (sometimes called ‘statute of limitations’).  For most matters, the ‘basic’ limitation period is 2 years from the time the person found out about the claim (‘discovered’ the claim) and so is presumed to know a claim should be brought.  Note that there are special rules in the Limitation Act of BC  for people under a disability.

There are special ‘discovery’ rules about personal loans. The first step in determining the deadline to commence a claim relating to a loan is to determine whether the loan agreement has created a ‘demand obligation’ or a ‘contingency obligation.’

Examples of a contingency obligation include when the loan is due at a particular date in the future, or there is a set repayment schedule or when some other future event  happens (e.g. – property is sold,, repaid on someone’s death etc.).  For these ‘contingency obligations,’  one can argue the limitation period doesn’t run until the contingency occurs – e.g. person missed a repayment date, the property is sold, the person has died, etc. If and when the contingency happens, the lender is considered to have ‘discovered’ that is time for the loan to be paid back and it isn’t being paid back, and so the claim should be filed.  The two year clock starts to run.

If the loan had no fixed conditions or contingency, it is a ‘demand obligation.’  These are loans which are either:

(a) expressly payable on demand or

(b) in which no time for payment has been expressed.

Many family loans are like (b) – no mention is made about how or when they should be paid back.  In the case of demand loans, ‘discovery’ is on the first day of default after a demand for repayment has been made and no payment is made. [section 14 of the Limitation Act].  Note that there are two parts to this ‘discovery’ – you make a demand, and the person who borrowed the money does not comply.  From the date the payment was demanded and not paid, the clock starts to run for the two year limitation period.  So this can be quite a while after the loan was made.

The law recognizes for a lot of people who aren’t used to lending and collecting on loans, a two year period from the date an undocumented  loan was first made is too short a time to be fair.

Additional Resources

Guides

  1. What Is small claims court?
  2. Making A Claim
  3. Replying to a Claim
  4. Serving Documents
  5. Getting Ready for Court
  6. Getting Results
  7. Mediation Program for Claims Up to $10,000
  8. Mediation for Claims Between $10,000 and $25,000

Pilot Project

If you are filing a claim for up to $5000.00 in Robson Square or in Richmond, you are entitled to a simplified trial – a one-hour streamlined trial before an experienced lawyer who is a justice of the peace, and also is called an adjudicator. Each party must file a trial statement (form 33) at the registry at least 14 days before the simplified trial and serve it on each of the other parties at least seven (7) days before the simplified trial. The trial statement must include a statement of facts in date order (the order in which the events occurred), a calculation of the amount claimed, copies of the relevant documents, and a list of witnesses with a brief summary of what each witness will say.

 


[1] From Stan Rule’s Rule of Law blog.