Canada: Ontario’s Corporate Environmental Tax Regime–Ministry Of The Environment Releases Draft Environmental Penalties Regulations.

On October 6, 2006, the Ministry of the Environment ("MOE") released the much-anticipated draft regulations concerning the implementation of Environmental Penalties ("EPs"). Last year, in our seminars and publications concerning Bill 133, we predicted that the MOE’s proposed EPs would take the form of a corporate environmental tax – and we were right. In addition to the extensive draft EP regulations, the MOE released an interpretive guideline for the implementation of EPs. Furthermore, draft regulations relating to spill prevention and contingency plans and a further draft regulation relating in part to spills reporting have been posted (collectively the "Draft Regs"). This collection of regulatory prescriptions, schedules, appendices, policies – and yes, even mathematical formulae – more closely resemble the federal Income Tax Act than the professed environmental abatement tool.

At the same time, the MOE has posted a number of draft procedures (determining what constitutes a "toxic substance" and the calculation of monetary benefit for EPs) and a draft compliance policy for enforcement. The Draft Regs and supporting documents have been posted on the provincial government’s Environmental Registry website (click here). The Draft Regs are open for comment through written submissions until January 12, 2007. The Draft Regs are not in effect until proclaimed at some point following the comment period.

Bill 133, the Environmental Enforcement Statute Law Amendment Act, 2005, was passed by the Ontario Legislature on June 13, 2005. Bill 133 made extensive changes to Ontario’s Environmental Protection Act ("EPA") and the Ontario Water Resources Act ("OWRA") as well as other areas of Ontario’s environmental laws. Some of the changes made by Bill 133 became effective immediately while others, such as the EP provisions, were suspended until the supporting regulations were developed and approved.

While Bill 133 made a number of changes, the most controversial amendment concerns an MOE Director’s ability to levy a financial penalty in the form of an EP for certain (previously not specified) violations of EPA, OWRA and related regulations. To impose an EP the Director need only prove the contravention on a "balance of probabilities." There is no due diligence defence available for EPs – these penalties can be imposed even if the corporation took all reasonable steps to prevent the contravention. For certain specified spills or unlawful releases, a corporation has the onus of proving that the unlawful release did not occur and was not a contravention. Finally, if an EP is imposed on a corporation for a particular contravention, the corporation can still be prosecuted for that offence.

For a more detailed review of the Bill 133 amendments please refer to our update released September 1, 2005 (click here).

Two EP Regulations have been drafted – one enabling the environmental penalty provisions in the EPA, and the other the same provisions in the OWRA. Both regulations are similar in substance.

As expected, EPs can be issued to a "regulated person" for violations set out in the Draft Regs. Regulated persons are persons who own, are in occupation of or are in charge, management or control of a plant that discharges to a surface water course or private sewage treatment plant and that are listed in Table 1 of the EP Draft Regs or are in one of the nine Municipal Industrial Strategy for Abatement (MISA) sectors. At this time, the primary focus of the Draft Regs are the MISA sectors.

The MOE contemplates that the EPs regime will be implemented in two phases. Phase 1 violations will include unlawful discharges to water and land, including spills – mainly s. 14 EPA and s. 30(1) OWRA violations. Also included in Phase 1 are violations of the s. 93 EPA duty to restore the natural environment, discharge standards, acute toxicity failures under MISA, notification and reporting obligations under EPA, OWRA, MISA and orders and agreements. The MOE expects to have Phase 1 active by May 1, 2007.

Phase 2 is expected to be implemented 18 months after Phase 1, or November 2008. Phase 2 violations capture many areas, including constructing works, sampling and reporting, record keeping, conditions of operations, violation of orders and all remaining provisions of the MISA regs. The end result is that almost all conceivable violations of EPA and OWRA will be subject to possible EPs.

The first step for the MOE in imposing an EP on a corporation is for the Director to issue a Notice of Intent (NOI) to issue the EP. The NOI should identify the violation, estimate the fine range, set out the amount of any monetary benefit amount and offer the opportunity to provide further information to the Director. The NOI is issued after the Director determines the amount of the EP. The ultimate EP is imposed when the Director serves an EP order.

Calculation of the amount of an EP under the Draft Regs is based on a complex application of set formulae and considerable discretion on the part of the Director. EPs are made up of a "gravity" component and a "monetary benefit" component. In assessing the gravity component, the Director first must determine if an EP is a type 1 (i.e. exceedance of a MISA limit concerning a non-toxic substance), 2 (i.e. failure of MISA acute lethality limit) or 3 (i.e. s.14 EPA violation). The Director must then determine if the violation is "less serious," "serious" or "very serious." The categories are established based on the potential for a violation to harm the environment, human health or the MOE’s ability to protect and conserve the natural environment.

Whether or not a violation relates to a "toxic substance" will play a role in the seriousness determination of an EP. According to the Draft Regs, a "toxic substance" can be either one of the 79 substances listed in Schedule 1 of the Canadian Environmental Protection Act or one of the current 195 substances that have met both the ecological criteria used by Environment Canada and the human health criteria used by Health Canada in the federal Domestic Substances List ("DSL"). If the substance at issue in the violation is a toxic substance, the violation will automatically be elevated from a Type 1 to a Type 2 category of EP.

Note that the MOE is seeking input from stakeholders during the comment period as to whether the list of toxic substances should be closed (thus only changed by amending the reg) or open (subject to ongoing discretion by a Director through applying the principles used by the federal government in establishing the DSL listing).

After the Director has determined the initial gravity of the violation, it will fall within a specified fine range (i.e. Type 3, less serious would be $15,000 to $25,000 per day). It is then open for the Director to apply discretion to set the fine within that initial range. Factors that can influence discretion include: history of violations; membership in Ontario’s environmental leaders program; extent of delay in complying with the requirement contravened; and the extent of the deviation from the requirement and the issue of toxic substances. If the violation is a multi-day violation, the Director then applies a percentage-based multiplier for the multiple days, thus increasing the amount of the penalty with each successive day.

The Director must then determine if the corporation has gained a "monetary benefit" from the violation. The monetary benefit a corporation may gain through non-compliance can take the form of "avoided costs" or "delayed costs." The MOE guidance document for EPs states that a monetary benefit amount will only be assessed and added as part of an EP when avoided or delayed costs "can be identified and clearly linked to legal requirements…and the amounts are not trivial." The calculation of a monetary benefit amount will be guided by the "Draft Procedure for the Calculation of the Monetary Benefit Component of Environmental Penalties." The calculation contained in the draft procedure can only be described as complicated and confusing. These calculations will not be completed with a pencil and paper. It can be expected that in light of these provisions, the MOE abatement branch will be requesting detailed documentation concerning a corporation’s financial matters as part of an investigation in support of the issuance of EPs. Correspondingly, it can be expected that considerable dispute will arise in response to a monetary benefit calculation.

A corporation that has been issued a NOI of an EP may then request a reconsideration by the Director. In doing so, the corporation will need to provide information and make submissions to the MOE in an attempt to persuade the Director to reduce the amount of the EP, including challenging the calculation of any monetary benefit component. This must be done within 15 days of the service of the NOI (unless the Director agrees to a longer period). Certain specified prevention and mitigation steps taken by the corporation can impact the Director’s discretion to apply "modifiers" to the initial EP amount. The amount of reduction can range from 10% to 30%, depending on the type of prevention or mitigation effort undertaken. Additionally, if a corporation has in place an Environmental Management System at the time of the violation that meets the specified requirements in Schedule 1 of the Draft Regs, a further reduction of 5% will be applied. Preventative measures that are relevant include: risk analysis; maintenance; containment structures; monitoring systems; process controls; and training. Post-violation mitigation efforts that are relevant include: implementing a spill response plan; speedy response measures; and pollution containment and recovery. These percentage reductions do not apply to any monetary benefit amount assessed.

The Draft Regs propose that during the discussions with the Director, the corporation facing an EP ($10,000 or greater) can enter into a "settlement agreement" with the MOE concerning the violation. A settlement agreement will require the corporation to take steps "beyond those required by law" to prevent, eliminate or reduce the discharge of a contaminant. The MOE has branded these extra steps "beyond compliance projects" ("BCP"). BCPs must produce tangible human health and/or benefits to the natural environment. If the Director enters into a settlement agreement, the corporation can see a further 75 percent reduction in the gravity portion of the EP (no reduction will be offered for any monetary benefit amount assessed). The MOE is seeking comments from stakeholders on the settlement agreement process and what types of projects would constitute an eligible BCP. Settlement agreements cannot be confidential - all settlement agreements must be made public on the Environmental Registry website.

Once the submission process is complete, or if no action is taken by a corporation to an NOI, the Director will issue a EP order. The EP order will specify the final amount owing and set out the time to pay. EP orders can be appealed to the Environmental Review Tribunal by giving notice within 15 days of the issuance of the EP order. Initiating an appeal will stay the effect of the EP order pending the appeal.

As part of the regulations and documents posted with the EP regulations, the MOE has posted a draft regulation under EPA concerning "Spill Prevention and Contingency Plans."This draft regulation would apply to the same group of corporations as listed in the EP Draft Regs (mainly MISA sector). These corporations would be required to develop and implement a spill prevention and contingency plan for their facility. In preparing the plan, all potential spills that may occur at a facility, or that relate to a facility, that are reasonably foreseeable and that may cause an adverse effect, must be identified. The draft regulation does not require plans for specific pollutants. The MOE is seeking comments from stakeholders on whether or not a specific pollutant list should be created, or if the decision should be left up to the individual corporations.

This draft regulation would amend regulation 675/98. The regulation applies to all persons who have an obligation to report a spill (this goes well beyond those captured currently by the draft EP regulation). This draft regulation does little more than amend the existing regulation to make Class X – non-reportable spills linked to those described as such by a spill prevention and contingency plan, as described in the draft regulation relating to such plans. Unfortunately, the MOE has not provided sufficient guidance on limiting or clarifying what spills or unlawful discharges need to be reported. The enactment of Bill 133 in June 2005 created a situation where a greater number of spills and discharges had to be reported.

The Draft Regs are open for comment until January 12, 2007. It will be important for corporations and their industry sector associations to submit their views and concerns to the MOE. The most contentious aspects will be the assessment of "monetary benefit" amounts, settlement agreements and BCPs and the likely expanded scope of abatement branch investigations to gather documents and question individuals to support an EP. The MOE has promoted this as an abatement tool, but this regime is certainly punitive in both its form and expected effect. We would be pleased to assist in providing comments or drafting submissions to be presented to the MOE.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.