Q: What do a loan shark and an exspouse have in common?
A: Chances are, they’re both charging you interest.
Bad jokes aside, separated and former spouses in family court often find themselves facing high interest payments to their spouses following the completion of lengthy litigation. Lawyers and spouses in court should be aware that there are a number of factors that can affect these interest payments and how courts order them.
Most people are aware that following separation, a legally married spouse has the right to make a claim to the court asking them to divide marital assets. In Ontario, we call this payment "equalization."
The goal of equalization is to recognize that marriage is, among other things, an economic partnership and that the positive economic growth of two persons in a marriage should be split equally between them upon the breakdown of that partnership.
Typically, in a marriage, one spouse will have amassed greater personal wealth than the other in the form of liquid assets such as bank accounts, RRSP’s, etc., or real-estate and other tangible forms of personal property. If this accumulation occurred during the course of the marriage, that spouse will typically owe an equalization payment to the spouse who has not accumulated as much personal wealth. This payment can be made a number of ways, including an unequal division of the proceeds of sale from the matrimonial home, a spousal rollover of an RRSP, pension splitting, or a simple cash payment.
What many people are not aware of is that the right to an equalization payment occurs immediately upon separation, which is commonly referred to as the "valuation date." While equalization claims are frequently resolved by negotiated agreements, sometimes a court order is required. This means it can take many months, or sometimes years, before an equalization claim can be completed.
Because the right to an equalization payment arises upon separation, the party that was entitled to a payment is also entitled to receive interest on the amount that was owing between the date of separation and the date of the court order being made. This is called prejudgment interest.
The amount of prejudgment interest that a person is entitled to receive is set by the Courts of Justice Act and is established by when the court action was started. This should not be confused with the postjudgment interest rate, which applies after a court order is made and is typically higher. While prejudgment interest will typically be awarded on judgment, there are circumstances that would cause the court not to award prejudgment interest.
Recently, in the case of Fielding v. Fielding 2015 ONCA 901, the Ontario Court of Appeal discussed situations in which it would not be appropriate to award the recipient of an equalization payment with pre- judgment interest.
In this case the husband and wife separated in 2010 and the husband moved out of their matrimonial home. The wife remained living in the home. The husband planned to sell the home and wanted to do so once the wife found her own residence and moved out. The wife started a court action for divorce and equalization. The trial judge found that the husband owed the wife approximately 1.5 million dollars as an equalization payment. As the trial occurred four years after separation, in 2014, the wife requested prejudgment interest on this amount.
The trial judge refused to grant prejudgment interest to the wife because she had remained in the home following separation and therefore had the advantage of the asset. The wife did not pay rent to the husband and the husband was unable to obtain any of the equity that he had in the home. The Ontario Court of appeal confirmed the trial judge’s decision and noted that a trial judge is at liberty to decide whether or not to award interest, and is not required to do so.
This decision is good news for many people who may find themselves in the all too common situation of living outside of the matrimonial home following separation. It recognizes the difficult financial burden that they are required to carry when they are required to obtain new residence while the other party remains in the family home. Therefore any spouse or lawyer involved in a family law dispute would do well to remember the decision of Fielding v. Fielding when the issue of pre- judgment interest arises.