De Facto Expropriation: Supreme Court of Canada Clarifies the CPR Test

By Douglas J. Conolly and Ashley K. Dhaliwal

On October 21, 2022, the Supreme Court of Canada (the “SCC”) released its long-anticipated decision in the case of Annapolis Group Inc. v. Halifax Regional Municipality, 2022 SCC 36 ­­ (“Annapolis”). In a 5-4 decision, the SCC provided clarification regarding the test for de facto expropriation in Canada and appears to have lowered the threshold for an aggrieved owner’s advancement of a de facto expropriation claim.

Types of Expropriation

Expropriation can generally be defined as a taking of land, or an interest in land, for public use or in the public interest. There are two types of expropriation recognized in Canada:

1. de jure expropriation, which is a formal taking conducted pursuant to the relevant federal or provincial expropriation legislation; and
2. de facto expropriation, which is a constructive taking, or as the majority in Annapolis described it at para 18, “effective appropriation of private property by a public authority exercising its regulatory powers.”

CPR Test

As set out in Canadian Pacific Railway Co. v. Vancouver (City), 2006 SCC 5, [2006] 1 S.C.R. 227 (“CPR”), in order to establisha de facto expropriation claim, which gives rise to a common law right to compensation payable to the aggrieved owner, the owner must prove:

1. an acquisition of a beneficial interest in the property or flowing from it; and
2. removal of all reasonable uses of the property.

Prior to the Annapolis decision and following the CPR decision, many academics and lawyers alike were of the view that the articulation and application of the CPR test had rendered de facto expropriation nearly impossible to prove, and more specifically, that the threshold to satisfy the first prong of the CPR test was so high that it left no difference between de jure expropriation and de facto expropriation.

Acquisition of Beneficial Interest

Among other things, the majority’s reasons in Annapolis responded to these concerns by reviewing the line of authority underlying the CPR decision in an effort to provide some guidance regarding the interpretation of the first prong of the test (at paras 38 to 40):

In our view, the foregoing jurisprudence — upon which the CPR test was expressly stated as resting — supports an understanding of “beneficial interest” as concerned with the effect of a regulatory measure on the landowner, and not with whether a proprietary interest was actually acquired by the government. Conversely, that same jurisprudence supports the view that “beneficial interest”, as that term appears in the first part of the test stated in CPR, refers not to actual acquisition of the equity that rests with the beneficial owner of property connoting rights of use and enjoyment, but to an “advantage” flowing to the state. We say this for two reasons.

First, to require actual acquisition would collapse the distinction between constructive (de facto) and de jure takings — a distinction which CPR explicitly preserves (paras. 30‑37). Simply put, if a constructive taking requires an actual taking, then it is no longer constructive. It follows that the Court of Appeal’s requirement of an actual acquisition of the Annapolis Lands cannot be necessary to satisfy the CPR test for a constructive taking.

Secondly, interpreting “beneficial interest” broadly (as meaning a benefit or advantage accruing to the state) ensures CPR’s coherence to Manitoba Fisheries and Tener, neither of which understood “benefits” in the strict equitable sense of that term. Again, the references to those authorities in CPR demonstrate that CPR merely sought to affirm, and not to alter, our law of constructive takings. This interpretation is supported by the explicit wording under the first part of the CPR test: “. . . a beneficial interest in the property or flowing from it . . .” (para. 30 (emphasis added)). An interest flowing from the property affirms that a “beneficial interest” can be more broadly understood as an advantage, and need not be an actual acquisition.

The Dissent

The dissenting judges, however, viewed the majority’s decision (which included, but was not limited to the points highlighted above) not as a clarification of the CPR test, but rather as a “reformulation” and “unwarranted departure from CPR” (at para 85). The dissent and the majority also disagreed regarding the implications of the Annapolis decision on liability of municipalities engaged in land use regulation. The dissenting reasons raised concerns about a dramatic expansion of this liability whereas the majority disagreed regarding the impact, citing the state’s ability to protect itself by way of statute (at para 22):

It is important to stress that the rule contemplates that governments have the power to immunize themselves from liability to pay compensation for a taking. While, as we explain, we do not “expand” that liability but merely affirm it, the point is that governments may effect takings without paying compensation, so long as the enabling statute clearly expresses that intention. Notably, in CPR, the legislation at issue — the Vancouver Charter, S.B.C. 1953, c. 55 — immunized the City from compensating landowners for any loss as a result of the restrictions on land development and use (CPR, at paras. 12, 19 and 36‑37). From the standpoint of government, the exigencies of the rule are modest and easily satisfied.

Conclusion

The practical impacts of this decision will depend heavily upon the legislative and factual framework in which a de facto expropriation claim arises, as well as the trial courts’ interpretations and applications of the principles enunciated in the SCC’s reasons, and therefore, whether the decision in Annapolis ultimately achieves the majority’s goal of rectifying “situations where cases do not neatly fit within the expropriation legislative framework and would otherwise ‘fall between the cracks’” (at para 44) remains unclear. That said, however, the Annapolis case certainly opens the door for the advancement of de facto expropriation claims that would have likely been disregarded as bound to fail prior to the release of this decision.