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FATCA is Good Law in Canada

18/09/2015


​As I noted in my blog September 5, 2014, FATCA is not your Enemy, Canada and the United States negotiated an Inter-governmental Agreement (IGA) to share banking information, pursuant to the U.S. Foreign Account Tax Compliance Act (FATCA). The purpose of the IGA is to reduce tax evasion.

Tax information is provided by Canadian banks to CRA, and CRA provides it to other revenue authorities under exchange-of-information agreements. The IGA is merely an extension of this long-established practice.

FATCA is an information-gathering protocol. It doesn't change the way people are taxed. But for a long time, many Americans in Canada (who are subject to U.S. taxation of worldwide income) did not file U.S. returns. And without meaningful information, the IRS couldn't chase them down. With the IGA, it's very hard to hide. Now these people are having to come clean.

Some people think that they shouldn't be in the net to begin with and to put back the shield that previously existed, they sued the Canadian government (spoiler alert: They lost).

The lawsuit

Gwen Deegan and Ginny Hillis are U.S. citizens living in Canada. They sued the Attorney General for Canada, arguing that the IGA is unconstitutional because:

  • It deprives them of the right to life, liberty and security of the person, because it facilitates U.S. tax, interest and penalties;
  • It amounts to an unreasonable search and seizure, because it infringes upon their privacy;
  • It discriminates against U.S. citizens, based on their national origin, and
  • It amounts to a surrender of Canadian sovereignty.

    The full statement of claim can be seen here.

The decision

As I predicted in my earlier blog, and for substantially the same reasons, the plaintiffs lost and the IGA was upheld on September 16.

  • The IGA was legally authorized by Canada, with an implementation act and is properly incorporated into the Income Tax Act (Part XVIII). It is consistent with the tax treaty (Article XXVII), so the formalities were followed.
  • The action of CRA providing information is not affected by the potential tax liability that an individual may have in the United States (or the absence thereof). All that matters is whether the information is "foreseeably relevant." For a U.S. citizen, since he is required to report worldwide income, the test is clearly met.
  • The mere provision of information is not tantamount to having CRA assist the IRS in collection of tax (which is generally prohibited). There is a difference between providing information to be used in assessment and verification, and the actual collection of tax.
  • Furthermore, the judge showed some (in my opinion, appropriate) deference to the government, in noting that revenue authorities are usually best situated to determine what information is needed.
  • The fact that taxpayers may have to file in more than one country did not affect the decision. Effectively, the judge said "c'est la vie" (that's life).
  • The Canadian Bankers' Association, representing the institutions most affected, supported the IGA, because the alternatives were worse.
  • The fact that the plaintiffs (and hundreds of thousands of others) were "accidental Americans" attracted some sympathy, but was of no concern under the law.
  • The status of the IGA under U.S. law may be ambiguous (the Senate has not approved it), but it clearly has standing as such in Canada.
  • In short, "All [the plaintiffs'] arguments are unfounded in law or otherwise unconvincing," said the judge.
  • In response to the plaintiffs' arguments that the U.S. rules are unfair and overly burdensome, the judge said that the government's lawyers summed it up best:

    Those are all policy issues for the U.S. government and the U.S. Congress. They've made their decision as to what their laws will be. We have committed to live with that within the treaty. The treaty does not give us an opportunity to say to them, we disagree with your policies, and we will not assist you to implement them. We have agreed to assist them to the extent that information is relevant to their laws, and that's their realm.

The judge had some sympathy for the plaintiffs, who effectively crowd-funded the lawsuit. He said: "This is a case where, in view of the nature of the issues and the public interest involved in clarifying the scope of novel provisions affecting hundreds of thousands of Canadian citizens, no costs should be ordered against the losing parties."

The judge did not decide whether the IGA and related provisions were unconstitutional. That decision should arrive prior to the end of September.

This is a good decision

As I said in my previous blog, this is not only the right decision, it is the best outcome for Canada. A decision to strike down the IGA would have created chaos in Canada's financial sector, because it is tremendously integrated with the U.S. system.

The real problem: Citizenship-based taxation

As I've said before, the real problem is citizenship-based taxation. The United States is the only advanced nation that taxes its citizens regardless of where they live. But solving that problem is another matter altogether.