A whopping 35% of Canadians use the “bank of Mom and Dad” to fund their down payment for their first home purchase. This means that around 13 million Canadians are borrowing money from their parents in order to fund their down payment and purchase a house. That’s a lot of people! And what happens if a couple borrows from the bank of Mom and Dad and then gets a divorce without a prenup? Spoiler alert: It’s not looking good for those parents who forked over the cash. Let’s talk about how getting a prenup can protect you and your parents.
What is the bank of Mom and Dad?
First, let’s talk about the dilemma here. Fewer and fewer Canadians are able to fund their own home purchase, thanks to rising cost of living, rising home prices, and a decrease in housing supply. So, what do people do? Turn to Mom and Dad, of course! Let’s use an example to demonstrate: Let’s say John and Sarah are engaged and hoping to buy their first house together. They each contribute $10,000 to the downpayment, and Sarah’s parents contribute $180,000, with the intent that the couple will eventually pay them back.
What happens when you get a divorce without a prenup after using the bank of Mom and Dad?
Now, let’s talk about what happens under Canadian divorce law when you split. According to Part 1, Section 5 of the Family Law Act, an equalization payment will be required upon divorce, which means any increase in value of assets will need to be divided equally between a couple. Let’s use an example to demonstrate.
- Michael and Ashley each put $10,000 down for a downpayment on a $500,000 home.
- Ashley’s parents contribute $80,000 to the down payment, and then they have a mortgage of $400,000.
- By the time they divorce, the home is worth $700,000, and the mortgage balance is $300,000.
- They sell the home, and the proceeds first go to the mortgage.
- They are left with $400,000 in proceeds, which is split equally between Michael and Ashley–both receive $200,000.
- Ashley just received $200,000 for a return on her $10,000, whereas Michael received $200,000, and he and his parents contributed $90,000, which may be unfair!
As you can see, in most cases, the law doesn’t take into account the bank of Mom and Dad, so the parents don’t see their return, and the other spouses heavily benefit! But with a prenup, you can ensure this doesn’t happen.
Is it a loan or a gift?
If you are receiving a lump sum of money from your parents to contribute to a down payment, is it considered a loan or a gift? Great question! It depends on the circumstances. It is more likely to be considered a loan if you created a promissory note, loan documentation, repayment plans, etc. The more it resembles a real bank loan, the more likely a court is to see it as one. In a divorce, the couple will then treat it as a loan when calculating the equity in the home. But most parents don’t do loan paperwork.
On the other hand, if you simply received the money via wire with a handshake agreement that will pay it back, it may be considered a gift. If it is considered a gift, there’s no requirement for anyone to pay you back because… it is a gift! This issue can create a lot of conflict for couples on separation which can be avoided with a prenup.
What is a prenup?
A prenup, sometimes called a marriage contract in Canada, is a contract between future spouses that outlines their financial responsibilities, property division, spousal support requirements, and much more. The most common reason for a prenup in Canada is to avoid an unfair division of assets, such as one spouse receiving a portion of the other spouse’s parents’ loan. The best news? Prenups are easy to get in Canada. Check with your province’s laws to make sure you follow the requirements to obtaining a valid and enforceable agreement.
How a prenup can help protect the bank of Mom and Dad
You can get a prenup in Canada that protects each party’s assets, including gifts or loans from parents. You can ensure that the parties both pay back the parents’ loan from any proceeds 50-50 instead of unfairly benefitting from other people’s investments. In addition, you can note that any gifts from third parties, such as parents, remain in the possession of the spouse who receives it. This ensures that the downpayment money stays with the child whose parents gave it in the event of a divorce. Win-win for everyone, and Mom and Dad feel protected, too!
Anna-Marie Musson is a Family Lawyer with over 20 years’ experience. A graduate of Windsor Law, Anna-Marie began practising in 2003. She was a partner at a prominent national Bay Street law firm before starting her own firm. Anna-Marie helps professionals and high net worth clients navigate the financial, emotional, and legal issues in divorce and separation. She also helps clients preserve their net worth and avoid financial ruin with Marriage Contracts (Pre-nups) and Cohabitation Agreements. Anna-Marie is the host of the Modern Divorce Show on 105.9 The Region and also hosts the upcoming Podcast – Love & Wealth.
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