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Canadian citizens' challenge to FATCA enforcement will be further appealed

Monday, 11 February, 2019

The second trial of Canada's enforcement of the US Foreign Account Tax Compliance Act (FATCA) – Gwendolyn Louise Deegan et al v The Attorney General of Canada et al – ended earlier this month in Vancouver. The verdict is not yet known. But, whatever it is, it is certain to be further appealed, according to the Alliance for the Defence of Canadian Sovereignty (ADCS), which brought the case on behalf of two individual taxpayers.

The plaintiffs claim Canada's intergovernmental agreements (IGAs) with the US, in which it undertook to implement the provisions of FATCA against Canadian residents, are a breach of its constitution.

FATCA requires financial institutions to identify clients who are US taxpayers, and to report their financial accounts directly or indirectly to the US Internal Revenue Service (IRS). Canada's IGA is of the Model I type, under which Canadian banks will report the affairs of their US clients to the Canada Revenue Agency (CRA), which then forwards the information to the IRS.

The US' system of worldwide taxation then allows the IRS to collect taxes from expatriate Americans, many of them so-called 'accidental Americans,' who have US nationality by birth but may never have been to the country.

According to the plaintiffs, Gwendolyn Louise Deegan and Kazia Highton, the Canadian federal government has abrogated the Charter of Rights by forcing disclosure of their private affairs to a foreign government without due cause. Both are Canadian citizens who were born in the US but have lived in Canada since infancy. At least one of them, Deegan, does not even have a US passport.

The Canadian government’s defence is one of necessity: that that it had no choice but to make an agreement with the US, because of the serious financial repercussions if it did not. FATCA imposes a 30 per cent withholding levy on all payments from US institutions to foreign countries that do not cooperate in enforcing the FATCA reporting rules.

Moreover, says the government, FATCA only applies the same requirements as the OECD's Common Reporting Standard (CRS), now implemented by most countries, although the CRS does not apply automatic withholding tax sanctions against non-participants.

A trial on the same dispute in 2015, with slightly different arguments, ended in defeat for the challengers. In this latest hearing, which took five days in a federal court, the plaintiffs argued that the IGA violates key sections of Canada's Charter of Rights and Freedoms, which protects Canadians from violations of their right to life, liberty and security, unreasonable search and seizure, and similar freedoms. The Alliance for the Defence of Canadian Sovereignty (ADCS) said an appeal would ultimately follow, 'no matter who wins'.

Sources