Canada: Environmental Liabilities and their Impact on Business Valuations

Last Updated: October 9 2015
Practice Guide by Duff & Phelps

Environmental liability is an issue that arises in many business valuations, in particular, where the subject company handles or is exposed to hazardous or potentially hazardous substances.  Depending on the circumstances, both known and contingent environmental liabilities may materially affect the fair market value of the shares or net assets of the company subject to the valuation.

Generally speaking, environmental liability is comprised of two separate aspects:  regulatory liability arising from the violation of government rules and regulations; and civil liability that results from a lawsuit initiated by person claiming to have been harmed as a result of one or more common law causes of action (e.g. negligence, nuisance and trespass) allegedly caused by some other party.  In general, regulatory standards are increasingly onerous and stringent as standards tighten imposing greater compliance-related costs on a regulated company.  Monitoring for compliance by provincial environmental agencies is on the rise and there is a trend towards aggressive enforcement in several jurisdictions.  At the same time, the consequences of regulatory non-compliance are more serious as government agencies explore new methods of punishing non-compliance.  Further, the possibility of a large award for damages as a result of civil lawsuits over environmental actions is increasing with the possibility of class actions and the willingness of certain courts to impose larger penalties.  As a result, larger industrial companies as well as those companies with potentially significant environmental issues are devoting greater resources to environmental matters, frequently having one or more full-time employees dedicated to monitoring environmental compliance and related matters and keeping up with the ever-changing scope of guidelines, rules and regulations.

In Canada, the most comprehensive piece of federal legislation related to the environment is the Canadian Environmental Protection Act, 1999 (“CEPA”).  Enacted in 1985 and significantly revised in 1999, this Act consolidated and repealed a number of earlier statutes, among them the Clean Air Act, the Environmental Contaminants Act, the Ocean Dumping Control Act, and parts of the Canada Water Act.  CEPA establishes controls over the release, use and elimination of certain regulated substances that can impact air, land, and water; controls the use of substances that are thought to deplete the ozone layer; imposes requirements on the registration and use of new chemicals, substances and genetically modified or designer organisms; and has introduced the concept of pollution prevention programs.  In addition to CEPA, the federal Fisheries Act prohibits the deposit of substances into aquatic habitats that could harm aquatic organisms and aquatic habitats.  An aquatic habitat has been broadly interpreted and in some cases, has included areas where surface water flows for only part of a year.  In addition to federal environmental regulation, all of the provinces and territories have complimentary environmental laws e.g. the British Columbia Waste Management Act, the Ontario Environmental Protection Act, the Quebec Environment Quality Act and the Newfoundland Environment Act.  Provincial and territorial environmental laws and regulations govern various activities that impact on human health and the environment within each jurisdiction, including prohibiting the release or discharge of certain substances in excess of specified standards, governing the transport, storage and disposal of hazardous and non-hazardous waste and imposing requirements or the ability to require remediation of contamination or contaminated properties under certain circumstances.  The third layer of environmental regulation lies at the municipal level.  In general, municipalities have powers to enact by-laws to regulate the release or discharge of process effluents and industrial waste into the sewer system, but it appears that this scope can be broadened.  A recent Supreme Court of Canada decision has potentially provided municipalities the ability to regulate other aspects of the environment as long as such matters have not been assumed or assigned to the provincial/territorial or federal government.

Environmental liabilities generally are difficult to quantify with any degree of certainty.  In open market transactions, environmental liabilities often are dealt with through provisions that assign, exclude or allocate liabilities between the parties.  These provisions can include negotiated representations, warranties, indemnification, holdbacks and escrow arrangements that are set out in a share or asset purchase agreement or are addressed in a stand alone agreement.  This allows for a sharing of ‘environmental risk’ between the vendor and the purchaser.  In notional market valuations, it typically is not the case that environmental liabilities can be dealt with in the same manner as in open market transactions.  In notional market valuations, two options exist when faced with an environmental liability issue:

  • attempt to reasonably quantify the environmental liability based on available evidence.  This typically can be done reliably only in circumstances where adequate evidence is available to assist in quantifying an alleged environmental liability; or
  • in the absence of adequate evidence to assist in quantifying the alleged environmental liability, any valuation conclusion should be qualified to account for this.

An environmental liability can fall into one of the following categories:

  • a known environmental liability – that is a legal or regulatory compliance obligation of the subject company to incur a one-time or ongoing future expenditure(s) due to the past or ongoing manufacture, use, emission, release, or threatened release of a particular substance, or other activities, that may impair or adversely affect human health or the environment (referred to herein as ‘Environmental Activities’).  For example, the subject company may be ordered or otherwise required by regulatory authorities to clean-up or address an on-site landfill, waste pile, emission source or contaminated area so that compliance with current legal requirements is achieved;
  • a planned environmental liability – in certain circumstances, a company may not  face a legal or regulatory obligation but may choose, for ‘public policy’ or other reasons, to incur a one-time or ongoing future expenditure(s) due to Environmental Activities.  For example, the subject company may decide to incur costs to alter its handling of a particular hazardous substance in circumstances where the current practice meets existing regulations but is perceived to be a health threat by the company’s employees or customers; or
  • a contingent environmental liability – that is a potential legal obligation to incur a one-time or ongoing future expenditure(s) due to Environmental Activities.  For example, the subject company may be named as a defendant in a regulatory prosecution or civil lawsuit related to the subject company’s alleged breach of a regulation or for allegedly causing a nuisance.  One other example is the uncertainty over the impact of future regulatory changes, particularly when a government has released a policy statement or introduced draft regulations for consideration that tighten existing laws, but does not provide a definitive date when such changes will take effect.

Environmental liabilities vary with both the nature and timing of the cost.  Examples of one time costs might include:

  • initial capital outlays and expenditures needed to clean up contamination which existed at the valuation date; and
  • initial capital outlays and associated expenditures needed to comply with current environmental laws (e.g. air scrubbers, waste water treatment upgrades, control equipment, design changes, etc.).

Examples of ongoing costs might include:

  • additional operating costs resulting from capital outlays (e.g. the hiring of personnel to operate new environmental equipment; maintenance, repair and monitoring costs);
  • foregone revenues resulting from the forced curtailment of operations; and
  • additional operating costs resulting from required changes to the subject company’s waste disposal practices.

When assessing the impact of additional costs, potential cost savings or other benefits that might arise from capital outlays or operational changes resulting from environmental compliance requirements should also be considered.

Environmental liabilities include:

  • compliance obligations related to laws and regulations that apply to the manufacture, use, handling, disposal, and release of chemical or other hazardous or toxic substances and to other activities that may impair or adversely affect human health or the environment.  In this regard, whether the subject company was in compliance with existing laws and regulations at the valuation date should be considered along with the possibility that new laws and regulations will be enacted that the company may  be in a difficult position to comply with, at least initially.  In the event that it is discovered that the subject company is not in compliance, the expected costs of achieving compliance should be assessed.  These costs can range from modest outlays necessary to conform to administrative requirements (e.g. record keeping, reporting, training, etc.) to more substantial outlays, including monitoring costs and capital costs for new equipment or changes to the facility to alter existing processes.  A newer trend among certain regulators is to require financial security from a company to guarantee certain regulatory obligations (e.g. closure costs).  Further, when assessing compliance costs, exit costs (e.g. waste disposal and site closure costs) should not be overlooked;
  • remediation obligations (existing and future) related to contaminated property (either leased or owned that resulted from the operations of the company, although with owned properties, this obligation is often broadened).   Remediation costs typically are incurred to bring the condition of the lands into compliance with existing laws, regulations, or in some cases, commercially accepted remediation guidelines that have been accepted by business as an appropriate standard.  These are sometimes included as part of compliance obligations;
  • obligations to pay fines and penalties for non-compliance.  These are punitive and are intended to act as a deterrent to the subject company;
  • obligations to compensate private parties for damages in respect of personal injury, property damage, and economic loss.  Damages could be awarded to individuals, their property, and/or businesses due to the release of toxic substances or other pollutants or as a result of contamination that has impacted their property;
  • obligations to pay punitive damages for grossly negligent conduct; and
  • other environmental related obligations.  For example, ethically motivated environmental expenditures.

Due Diligence

When valuing a business that has or may have environmental liabilities, some or all of the following activities should be undertaken, as considered necessary and appropriate:

  • interviews and correspondence with the compliance officer and/or other employees of the subject company who are knowledgeable with respect to the subject company’s environmental affairs;
  • review of the following documents, as applicable:
    • minutes of meetings of shareholders, the board of directors and any regulatory or environmental committees of the board;
    • recent business plans prepared by management of the subject company with a particular focus on any budgets/forecasts of any environmental related expenditures that might exist;
    • legal opinions received pertaining to potential environmental liabilities to the subject company and/or the recourse available to the subject company against third parties.  For example, the environmental issue facing the subject company may have been caused by the subject company when it was under different ownership.  In this circumstance, the subject company and/or its current shareholders, may have legal recourse against these prior owners;
    • environmental certificates, approvals, permits and licences;
    • filings with securities regulators such as the Ontario Securities Commission, U.S. Securities and Exchange Commission, etc.;
    • environmental insurance policies;
    • internal non-financial audits, environmental audits and health and safety audits;
    • correspondence between the subject company and governmental environment ministries and other agencies that may oversee environmental matters;
    • independent environmental site assessment reports or environmental consulting services reports  in the possession of the subject company;
    • due diligence documents prepared to obtain financing or for a recent sale of either the shares or net assets of the subject company;
    • real estate transaction records;
    • documentation regarding the firm’s corporate compliance program, environmental management system and incident reports;
    • statements of claim against the subject company for damages resulting from alleged activities or incidents that caused environmental-related harm;
    • court orders against the subject company for damages in respect of environmental matters; and
    • financial statements, including supporting notes and schedules pertaining to environmental matters.

Quantification Considerations

Once it has been established that either known or contingent environmental liabilities exist, it typically is necessary to attempt to reasonably quantify them.  There are two basic approaches to do so.  First, the discount rate applied to projected discretionary after-tax cash flows can be increased to reflect the increased risk that the identified environmental liability may negatively affect future cash flows.  The second method is to attempt to calculate the present value of the after-tax future environmental costs (net of any potential benefits) and to adjust the fair market value otherwise determined by this amount.  This could include one-time costs, an ongoing stream of costs, or both.  The latter method typically is preferred if appropriate evidence supporting said costs exists.

When quantifying environmental liabilities, consideration generally should be given to:

  • the likely quantum and timing of anticipated prospective after-tax environmental related costs (net of related benefits).  Depending on the circumstances, it may be appropriate to engage an independent expert to assist in estimating the amount and timing of said costs;
  • the probability of the environmental liability materializing and the cost thereof where said liability is contingent on a future event (e.g. the outcome of existing litigation).  Where appropriate, an assessment of the best-case, worst-case and most likely case scenarios should be undertaken;
  • possible recourse by the subject company against third parties (e.g. prior owners) with respect to the environmental situation at hand.  Depending on the circumstances, the advice of independent legal counsel may be appropriate; and
  • where a transaction involving the shares or net assets of the subject company was aborted prior to the valuation date as a result of an environmental issue, the different negotiating positions of the vendor and the buyer specifically related to the environmental issue.  Often, this can provide persuasive evidence as to how the vendor and buyer quantified the environmental liability in an open market scenario contemporaneous to reasons for a notional valuation being conducted.

Independent Environmental Assessments

Where there is a known or perceived risk that the subject company is exposed to an environmental liability, the subject company’s management may have obtained or may be in the process of obtaining, some form of environmental compliance audit or Environmental Site Assessment (“ESA”). 

An environmental compliance audit is typically conducted by an independent certified auditor for the purpose of assessing the level of compliance of an operation with applicable environmental laws and regulations.  The auditor will review business operations, practices, emissions and materials handling, storage and disposal practices before identifying any deficiencies.  A report can then be generated containing a list of deficiencies and, if requested, recommendations for correcting any identified deficiencies.

There are three types of ESAs:  Phase I, II and III ESAs.

The goal of a Phase I ESA is to identify environmental issues.  It is designed as a screening tool to research historical and current site uses, determine if potential impacts are possible, and recommend further work to confirm those suspicions.  Items included in a typical Phase I ESA can include a site description and the current use, past historical uses, current and past material and waste storage practices, properties surrounding the subject site and potential areas of concern.  A Phase I ESA typically involves an environmental consultant evaluating the subject property without collecting air, soil or groundwater samples.  The consultant indicates if there are any issues of environmental concern that have been identified and what further investigation is required to confirm the presence or absence of the concern. 

Phase II assessments are more thorough than Phase I assessments and therefore provide a better indication of the likely costs of clean-up or other matters to address the identified environmental concerns.  Phase II ESA’s can consist of air, soil, surface water, groundwater and waste sampling; analyses; interpretation; and report preparation.  Recommendations can consist of no further action, maintaining awareness of a concern, or further investigation of a concern that exists to delineate identified impacts.

Phase III ESA’s are the final stage of environmental assessments.  They consist of developing alternative proposals and cost estimates for cleanup and other remediation activities prior to actual implementation.  Phase III ESA’s typically are time consuming and costly.


As society’s attention continues to focus on the health of the environment, environmental liability issues likely will continue to surface with greater regularity.  As a result, environmental liabilities likely will continue to come under greater scrutiny in both notional market and open market transactions.

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centers
Competition and Antitrust
Mergers and Acquisitions
Labour and Employment
More Advice Centers
Useful Resources
CBVs are experts in their field. The following articles and papers have been written by CBVs, several articles have been featured in various national publications.
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions