Friday, July 14, 2006

Family Loans and Limitation Periods

I suggest to people who wish to assist their children financially that they consider lending money to their children instead of making an outright gift. The loan can be at made at a low or no interest, and the parent can forgive the loan in the future. But, by making a loan, instead of a gift, the parent can retain the right to be repaid if things don’t work out as well as planned. From the parent’s perspective, it is best if the loan is secured by a mortgage.

For example, if a mother makes gives money to her daughter to buy a house, and the daughter’s marriage later breaks down, the daughter’s husband may have a claim to a share of the house. But, if it is a loan, secured by a mortgage to her mother, the daughter won’t have as much equity in the house, and the husband’s potential claim on the marriage breakdown is reduced accordingly.

If a parent provides a loan, it is important for the parent to be aware of limitation periods. In British Columbia, there are limitation periods for starting lawsuits, and if a limitation period is missed, the claim is said to be statute barred. In other words, if you wait too long, you are out-of-luck.

In a recent case, Paterson v. Ridout, 2006 BCSC 1016, in Duncan, Gertrude Ridout created a trust for her son David Ridout. The trustees then lent David Ridout and his wife Ruby Ridout $124,500 to assist them to buy a house. The loan was without interest, and David and Ruby Ridout would have to repay the loan to the trustees when the trustees demanded repayment. The loan was made on September 28, 1995, and was secured by a mortgage against the house.

In 2001, David and Ruby Ridout separated. In January 2002, the trustees asked for repayment, and on April 11, 2006, they started foreclosure proceedings in the Supreme Court of British Columbia.

Ruby Ridout applied to court for a declaration that the limitation period expired before the trustees started the foreclosure proceeding. Master McCallum agreed. Section 3 (6) (a) of the Limitation Act, RSBC 1996, c. 266 , set a 6 year limitation period. Master McCallum held that the six years began to run in the case of a loan payable on demand from the time that the loan was made. The trustees could not recover the loan to David and Ruby Ridout.

I suspect that many people do not realize that in British Columbia the limitation period begins when the demand loan is made, rather than when the demand for repayment is made. This differs from a loan for a fixed term, such as five years. Demand loans may be common in loans between family members, and the limitation period is a potential trap for the unwary.

How could the trustees have better protected the trust funds? Section 5 of the Limitation Act, says that, if the borrower acknowledges the debt in writing or makes a payment before the limitation period expires, this extends the time for bringing a claim. The time before the acknowledgment or payment is not included in reckoning the limitation period. If the loan had required small annual payments, of say $100 a year, and David and Ruby Ridout complied, then the time limit would have been extended, and the trustees could have sued to recover the loan.

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