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A court has ruled that Toronto can start levying a billboard tax expected to generate an estimated $10.4-million a year for arts initiatives in the city.

The city has won an appeal in a court case against the outdoor advertising industry that finally gives teeth to its billboard tax that came into effect in 2009. As a result, Toronto can start levying the tax, which is expected to generate an estimated $10.4-million. It's a contentious tax that is unprecedented in Canada, the billboard companies say, and could significantly affect their market success.

The background

The City of Toronto voted in the billboard tax, technically a third-party sign tax in 2009. It would have allowed the city to levy $1,100 to $24,000 per sign – depending on the size and type of billboard.

The legal challenge

After advertising giant Pattison Outdoor Advertising LP/Pattison Sign Group and the Out-of-Home-Marketing Association of Canada launched a legal challenge, the Ontario Superior Court ruled last year that the tax would not apply to billboards lawfully erected before April, 2010, and should be phased in. Since most of the city's billboards were put up before that date, the decision nullified any revenue-generating potential from the tax.

Lawyers for Pattison Outdoor and OMAC had argued that the billboard tax was discriminatory because it exempts advertisers that are in a relationship with the city, like Astral, which owns street furniture such as bus shelters. Pattison Outdoor's lawyers also said the company could not survive unless it could pass on the economic burden of the tax through increasing advertising rates or reducing rents paid to landowners. Such an indirect tax, the lawyers argued, was unconstitutional. The Ontario Superior Court judge disagreed on both arguments, saying only that the tax could not be retroactively applied.

The Ontario Court of Appeal's decision

The ruling handed down on Monday effectively reverses the earlier decision on grandfathering.

What it means for city

The municipal government can start levying the tax, which staff estimated would have brought in just over $11-million in 2011, minus $1.8-million to enforce tougher billboard rules passed at the same time. "It's absolutely fantastic," said city councillor Shelley Carroll, a proponent of the billboard tax when she served as budget chief to mayor David Miller. While Rob Ford was against the tax before he became the mayor, Ms. Carroll says she hopes he comes around, adding that the council has yet to be briefed on the details of the court decision. "This is a super positive for us," added Devon Ostrom of Beautiful City, the coalition of arts groups that championed the tax. "The court did the right thing in overturning the previous decision, and we look forward to seeing the city honour its art commitments in the next budget."

What it means for billboard proprietors

Pattison Outdoor has 885 sign structures in Toronto, including several large billboards along the Gardiner Expressway, and will be on the hook for more than $3.7-million. Jason Squire, one of the lawyers for the company, said his client is considering taking the case to the Supreme Court. "We have 60 days to seek leave to appeal," he said, adding Pattison Outdoor was disappointed by the results. "The tax is so significant on a sign-by-sign basis that it's going to make my client's signs uneconomical and the likely outcome will be that these taxed signs will have to be taken down rather than pay the tax," Mr. Squire said. He added this situation creates an unfair advantage for companies like Astral, which have an agreement with the city and are exempt from paying the billboard tax.

Editor's Note: Toronto City Council has discussed directing the proceeds of the city's billboard tax to arts initiatives, but has not made a decision to that effect. Incorrect information appeared in an earlier version of this article.