In proceedings filed with the Ontario Superior Court of Justice on August 20, 2007, Boniferro Mill Works ULC ("Boniferro") successfully challenged the stumpage fee practice of the Ontario Ministry of Natural Resources (the "MNR"), persuading the Court that the residual value charge ("RVC") assessed by Her Majesty the Queen in Right of Ontario ("HMQ") as a component of the Crown timber pricing system purportedly authorized by the Crown Forest Sustainability Act 1994, S.O., 1994, c. 25 (the "Act") is unlawful. Boniferro convinced the Court that the RVC is a tax which HMQ has no authority to impose. Tranmer J. found that Boniferro is entitled to a complete accounting of all RVCs paid since it purchased its sawmill. HMQ appealed the Boniferro decision, which appeal was heard by the Court of Appeal on September 2, 2008. The Court of Appeal decision is expected to be released in early 2009.
A number of forestry companies have issued claims for refunds of RVC’s paid to HMQ based on the Boniferro decision, which claims are not being actively pursued pending the decision of the Ontario Court of Appeal and, if applicable, the ultimate decision of the Supreme Court of Canada.
The background to this issue is that the MNR is authorized under the Act to determine the price for Crown timber. The MNR has established a pricing model for Crown forest resources with four components: the Forest Renewal Charge, the Forestry Futures Charge, the Minimum Charge, and the Residual Value Charge (RVC). The stated purpose of the Forest Renewal Charge is to fund forest renewal in harvested areas. The Forestry Futures Charge funds forest renewal to replace timber killed or damaged by fire or natural causes, forest protection and other renewal activities not covered by the Forest Renewal Charge. The funds collected under the Forest Renewal Charge and the Forestry Futures Charge are deposited in designated trust funds separate and apart from the Consolidated Revenue Fund of the province of Ontario.
The Minimum Charge is a fixed charge set annually by the MNR to ensure a minimum level of revenue from the sale of Crown timber. The stated purpose of the RVC is to permit the MNR to share in the financial rewards of strong end product markets. Funds received in payment of both the Minimum Charge and RVCs are treated as general revenues and deposited into the Consolidated Revenue Fund.
The RVC is calculated according to a formula established by the MNR and is applied monthly. The RVC is a variable rate representing the difference between the net mill sale price of a given product and the base cost allowance for that product. The net mill sale price is the price received from the customer. The base cost allowance is the sum of total production costs plus an allowance for profit and risk. RVCs are assessed when the net mill sale price of a manufactured product exceeds a predetermined threshold price set by the MNR.
The argument against the legality of the RVC is that it is a tax on the profits of manufacturers of forest products because, unlike the other components of the Crown timber pricing, it cannot be characterized as either a regulatory charge, like the Forest Futures and Forest Renewal Charges, or a proprietary charge like the Minimum Charge which is assessed on trees at the point of harvesting and relates to market prices of trees. Since there is no express legal authority for the imposition RVC in the Act, it is ultra vires.