Canadians sue government over FATCA
FATCA requires banks in every country to identify their US clients and report their accounts to the US Internal Revenue Service, either directly or indirectly through the banks' own domestic tax agency. The 'Model 1 agreement' signed by Canada with the US in February provides for the latter procedure; Canadian banks will report the affairs of their American clients to the Canada Revenue Agency, which will automatically forward the information to the IRS. This agreement has since been translated into Canadian law via the federal budget (Bill C-31).
However, many Canadians resent Ottawa's willingness to comply with FATCA, although there was little choice given the alternative of a Washington-imposed 30 per cent withholding tax on all proceeds from US investments. They regard FATCA as compromising Canada's sovereignty, as well as a breach of its citizens' (and resident non-citizens') privacy.
The Canadian residents who are most affected by FATCA are those with American nationality, either sole or dual. There are at least a million people living in Canada in this group, and two of them have just launched litigation to challenge the law. It was filed in the Canadian Federal Court against Peter MacKay, who combines the roles of Justice Minister and Attorney General.
The litigants are Gwen Deegan of Toronto and Virginia Hillis of Windsor, Ontario. They were both born in the US but moved to Canada at the age of five and have never lived in the US since then or even obtained a US passport. But neither have renounced their US citizenship and so they are liable under US law to American taxation and reporting requirements.
The grounds for the litigation were researched by a group called the Alliance for the Defence of Canadian Sovereignty. It alleges that Bill C-31 exposes the plaintiffs 'to a deprivation of their liberty and security of the persons', in contravention of the Constitution Act. It also breaches various sections of the country's Charter of Rights and Freedoms by 'failing to protect them from unreasonable search and seizure and by discriminating against them on the grounds of their country of birth', according to Vancouver law firm Farris, Vaughan, Wills and Murphy, which is representing the plaintiffs.
Canada appears to be the first jurisdiction in which FATCA's oft-questioned legality has actually been challenged. But according to US tax lawyer Patrick Martin, FATCA when drafted was not intended to apply to expatriate US citizens anyway, whether dual citizens or not. 'One of the most significant unintended consequences of FATCA is that the US federal government never initially even contemplated US citizens living overseas' says Martin. 'The group targeted were US-resident individuals who were evading taxes through foreign financial institutions.' The unexpected success of FATCA, however, has drawn a large number of people into the IRS net who never expected to have dealings with it, and some are now fighting back.
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