La Cible

22 lacible | Août 2020 FEATURE ARTICLE LOANS TO CHILDREN The COVID-19 public health crisis is having major financial impacts for many people. Job losses and salary decreases have led many people to look for financing to make ends meet. Some may turn to family for the assistance they need. When a child's financial situation is precarious, for example, a parent may want to help by lending them some money. Before giving such a loan, it is important for the parent to talk to the child about their financial situation, their capacity to pay and both parties' expectations about the loan. The child/borrower has to understand that it is not a gift from the parent. The purpose of this step is to maintain family harmony and avoid disagreements once the money has been handed over. Before considering a loan, the parent/lender needs to make certain their financial situation allows for it. To do this, they can simulate the impact on their cash flow. They should also plan for a scenario in which the loan cannot be repaid. To make a record of the loan, a document should be drawn up, in the form of a loan agreement, a promissory note or a notarial deed. As for the terms of the loan, it is crucial to plan for a reasonable rate of interest (if the parent/lender wants the loan to bear interest) and to establish a payment schedule. The Civil Code and Cash Loans Section 2314 of the Civil Code of Québec defines a simple loan as being a contract by which the lender hands over a certain quantity of money or other property to the borrower, who makes a commitment to return a like quantity, of the same kind and quality, to the lender after a certain time. A cash loan is a simple loan, so to be valid, the lender must give the money to the borrower and the borrower must return the borrowed sum in accordance with the terms of the loan. These basic components should be outlined in the loan contract. François Archambault M.Tax, DDN, LL.B., B.B.A., C.Adm., F.Pl. Senior Advisor Expertise Centre National Bank Private Banking 1859 Content of the Loan Agreement The loan agreement should include the following clauses: 1. Parties to the deed: One or more borrowers. If the loan is to help the child and their spouse, the spouse should also be a party to the loan contract. 2. Amount of the loan. 3. Disbursement of the loan: One or more disbursements. 4. Term of the loan (duration/payability): It may be a fixed-term loan or a demand loan. 5. Applicable interest rate. 6. Collateral: If the lender wants to take an asset of the borrower as collateral. For example, an investment. In this case, for the security interest to be enforceable against other creditors, it must be published in the Register of Personal and Movable Real Rights (RPMRR). 7. The terms and means of repayment: 7.1 Beginning of payments. 7.2 Monthly or other payments. 7.3 Transfers, cheques, bank transfers; regular, fixed, flexible, payable at term. 7.4 Capital and interest, combined or not. 7.5 Prepayment: with or without penalty. 7.6 Place of payment. 8. Provisions in case of borrower default. Prescription Prescription is a method for settling an obligation, by the passage of time, when its execution is not required by the creditor by the deadline. It frees the debtor from the debt by the simple passage of time, if there is no action on the part of the creditor. In Québec civil law, there are two types of prescription: acquisitive and extinctive. For debts, extinctive prescription is an important concept, because under some conditions, it may extinguish the debt. In the case of a demand loan without interest, if the parent/creditor does not require the capital to be reimbursed and three years pass, the debt may be extinguished by extinctive prescription. If this period has passed, the debt can be reinstated if the child/borrower makes a payment or recognizes the debt. For this type of loan, it is highly recommended that you include a clause in the agreement that the debt is automatically renewed on every anniversary of the loan.

• Cover