This article appears in the September 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
The Ontario Court of Appeal upheld a lower court’s decision in July that found a father who transferred over $10 million in cash and real estate to his son had done so by way of gift rather than by loan.
The case law suggests that property transferred to an adult child is presumed to be in trust unless the adult child can prove the transfer was intended to be a gift.
In Falsetto v. Falsetto, a teenage son began working in his father’s Ottawa business in the late 1990s, maintaining rental properties. At that time, the father and son had reconciled after years of estrangement following the father’s separation from his wife, the son’s mother.
The father didn’t pay his son even though the son worked six days a week in the business. Instead, the father told his son he intended to eventually give him the business.
The son started his own flooring business in the early 2000s. After that, he began buying, renovating and selling homes, and then building and selling his own properties. The father visited the son on job sites almost daily.
In 2010, the son told his father about a property he was thinking of buying. The father supported the idea and provided him with $475,000 to help with the purchase.
Between 2010 and 2016, the father transferred other assets to his son, including money from a settlement agreement, cheques from personal accounts and titles to property. At trial, the son testified that before each transfer, he verified with his father that the transfer was a gift.
In 2022 the father sued his son, saying the transfers were not intended as gifts. Instead, he said he wanted his son to use the transferred amounts to buy property in the father’s name or in trust for the father’s benefit. The father further alleged that the son had breached his fiduciary duty as the father’s power of attorney for property.
In the lower court’s decision, the trial judge relied on the 2007 Supreme Court of Canada decision in Pecore v. Pecore, in which the top court held that when a parent gratuitously transfers property to an adult child, the law presumes the child holds the property on trust for the parent.
However, the adult child can rebut the presumption of trust by providing evidence that the parent intended to make a gift of the property; that the child accepted the gift; and that there was “a sufficient act of delivery” to complete the gift transaction.
In Falsetto, the lower court judge found the father’s testimony regarding the transfers wasn’t “credible or reliable,” while the son’s was “consistent and credible.” Independent witnesses also testified that the father told them he had intended to make or had made gifts to the son.
The trial judge found the evidence also showed the son accepted the transfers and used the money to acquire properties, and that he received and deposited the cheques in his account or that of his company.
Finally, the trial judge found there had been no breach of fiduciary duty.
On appeal, the higher court declined to review the evidence on whether the transfers were gifts, stating it would not “re-try the case” where the trial judge had made no “palpable or overriding” error in applying the law or reviewing the facts. And while the higher court agreed with the father’s contention that the son had a fiduciary duty, it found the son had not breached it.
The Falsetto decision is a further reminder of the importance of documenting financial transactions, “even between family,” said Matthew Urback, partner with Shibley Righton LLP in Toronto. “So many people don’t know about this presumption of resulting trust” set out in Pecore.
Even when a gift is clearly contemplated, Urback said, it’s a good idea to document the gift “as a way to rebut the presumption.”
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