Canada’s Federal Court recently dismissed a lawsuit challenging the constituionallty of the US-Canada intergovernmental agreement (IGA), which requires Canadian financial institutions to comply with the U.S. Foreign Account Tax Compliance Act (FATCA).
U.S. -Canada FATCA Background
On Feb. 5, 2014, the U.S. and Canada signed a Model 1 IGA to implement FATCA (the U.S.-Canada IGA). As such, Canadian financial institutions would report FATCA information on accounts held by U.S. persons, including U.S. citizens who are residents or citizens of Canada, to the Canada Revenue Agency (CRA). The CRA would subsequently exchange the FATCA information with IRS pursuant to the existing provisions of the U.S.-Canada income tax treaty.
Current Federal Court of Canada Ruling
On Aug. 11, 2014, Virginia Hillis and Gwendolyn Louise Deegan, two American-born dual citizens of Canada and the U.S. living in Canada (the plaintiffs), filed a lawsuit to challenge the Canadian constitutionality of the U.S.-Canada IGA. They asserted that the automatic collection and automatic disclosure of the required FATCA information would be contrary to the provisions under the U.S.-Canada income tax treaty and/or to section 241 of the Income Tax Act (ITA).
The plaintiffs urged the Canadian court to render its final decision and issue a permanent injunction before the required FATCA information is sent by the CRA to IRS. Otherwise, the plaintiffs will suffer irreparable harm. On the contrary, the Attorney General of Canada and the Minister of National Revenue (the defendants) claim that the collection of such required FATCA information is authorized by the U.S.-Canada IGA, and that its disclosure to the IRS is not inconsistent with the U.S.-Canada income tax treaty or in violation of section 241 of the ITA. Canada is required to transmit the FATCA information to the U.S. for the year 2014 by Sept. 30, 2015. Counsel for the defendants has indicated that to comply with this legal requirement, the CRA will start to send such required FATCA information to the IRS on or around Sept. 23, 2015.
Canada’s Federal Court rules in favor of the government. According to Canada’s Federal Court, the collection and automatic disclosure of account holder information about U.S. reportable accounts contemplated by Articles 2 and 3 of the IGA is legally authorized in Canada by the provisions of the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act, the Economic Action Plan 2014 Act, and the ITA. Moreover, contrary to the assertions made by the plaintiffs, the collection and automatic disclosure of the FATCA information is not inconsistent with the provisions of the U.S.-Canada income tax treaty, and does not otherwise violate section 241 of the ITA.
US Taxpayers with Canadian Financial Accounts
If you are a U.S. taxpayer with assets in Canadian financial institutions, you may be subject to FATCA and FBAR reporting requirements. Please contact our office for a free, no-obligation consultation if you have questions or concerns about your financial reporting requirements.