The Tax Times: Canadian FATCA IGA With U.S.Faces Constitutional Challenge in Court

Thursday, September 17, 2015

Canadian FATCA IGA With U.S.Faces Constitutional Challenge in Court

In August last year, two women, Gwen Deegan of Toronto and Virginia Hillis of Windsor, launched a challenge to the Ottawa government's implementation of the US Foreign Account Tax Compliance Act (FATCA). Both are US citizens by birth but have lived in Canada since infancy and have no US passport, but are still liable to US worldwide taxation and FATCA reporting requirements.

They claim the law contravenes the US-Canada Treaty, which prohibits the exchange of the type of information specified by FATCA. They also allege it contravenes Canada's Constitution Act and Charter of Rights and Freedoms.

FATCA requires banks in every country to identify their US clients and report their accounts to the US Internal Revenue Service (IRS), either directly or indirectly through the banks' own domestic tax agency. In February 2014, the Canadian government signed a 'Model 1 agreement' with the US requiring Canadian banks to make FATCA reports to the Canada Revenue Agency (CRA), which will automatically forward the information to the IRS. This agreement was later translated into Canadian law through implementing legislation.

The court has committed to giving a ruling before September 30, 2015 when the Canada Revenue Agency is scheduled to begin sending FATCA reports to Washington.

If the court overturns the inter-governmental agreement, Canadian banks will have no easy way of complying with the FATCA reporting regime. If they attempt to disclose their US clients' account details direct to the IRS they are likely to be challenged under Canada's privacy legislation. If they do not disclose the information required, they may then be forced to pay the non-compliance penalty specified by FATCA, a 30 per cent withholding tax on all their US-sourced investment income.

However, appeals will certainly follow the first-instance outcome, whatever it is. In the meantime the Canada Revenue Agency will not be able to pass on the banks' FATCA disclosures to the IRS.

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