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Canadian Court Denies FATCA Challenge – Door Open For Appeal

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Canadian_Court_Denies_FATCA_Challenge__Leaves_Door_Open_For_Appeal.jpgOn 16 September 2015, the Federal Court of Canada denied a request for an injunction to prevent the collection and disclosure of Foreign Account Tax Compliance Act (FATCA) information to the United States regarding American citizens living in Canada.

Background On FATCA

To improve US taxpayer compliance in reporting foreign financial assets and offshore accounts, Congress passed FATCA in March 2010 as part of the Hiring Incentives to Restore Employment Act. The legislation is intended to ensure that the US obtains information on accounts held abroad at foreign financial institutions (FFIs) by US persons. Failure to disclose such information can result in a 30 percent withholding tax on payments of US-sourced income.

To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, and to ease their compliance burden, the US Treasury Department has developed model intergovernmental agreements (IGAs), under which information on financial accounts held by US persons is reported by FFIs to their home tax authority, which then exchanges the information with the US Internal Revenue Service.

Related: The Foreign Account Tax Compliance Act [Whitepaper]

Canada v. USA

The case – Virginia Hillis and Gwendolyn Louise Deegan v. the Attorney General of Canada and the Minister of National Revenue – was filed by two American-Canadian dual citizens living in Canada, but prepared by the Alliance for the Defence of Canadian Sovereignty (ADCS).

The lawsuit challenged the constitutionality of the country's involvement with FATCA, arguing that the FATCA IGA violates provisions of the Canadian Charter of Rights and Freedoms, which guarantees life, liberty, and security of person; security against unreasonable search and seizure; and equal protection of law without discrimination. The complaint suggested that FATCA goes against the principle "that Canada will not forfeit its sovereignty to a foreign state."

It also alleged that the provisions of the IGA for the automatic collection and disclosure of taxpayer information to the US are contrary to the provisions of the existing Canada-US double taxation agreement, "as the information is not relevant for carrying out the provisions of the DTA, or the domestic tax laws of Canada or the US."

In addition, it was said that the provisions of the IGA subject US citizens resident in Canada to taxation and requirements that are more burdensome than the taxation and requirements to which Canadian citizens resident in Canada are subjected.

Related: Canada Challenges FATCA

The Ruling

Rejecting the plaintiffs’ arguments, the Federal Court concluded "that the collection and automatic disclosure of account holder information about US reportable accounts contemplated the IGA is legally authorized in Canada by the provisions of the IGA Implementation Act." Moreover, it found that the collection and automatic disclosure of any such information is not inconsistent with the provisions of the Canada-US DTA.

Related: A Landmark Case For Trust Administrators: Fundy Settlement v Canada

The Consequences

Within the terms of the IGA between Canada and the US, the Canada Revenue Agency will now be able to disclose to the IRS the personal bank account information of US citizens. The first exchange, relating to information collected in 2014, was expected to take place on 23 September 2015.

However, as the Court also declared that its decisions were "without prejudice to the plaintiffs' right to pursue their claim that the impugned provisions are ultra vires or inoperative because they are unconstitutional or otherwise unjustifiably infringe Charter rights," the ACDS subsequently declared that the ruling does not mean the end of the case, which it believes will eventually be heard by the Supreme Court of Canada.

US FATCA Whitepaper

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