The federal government has shared more than 1.6 million Canadian records with the U.S. tax service
A Canada-U.S. deal that lets Canadian financial institutions send customer information to U.S. authorities to help track down tax cheats does not violate the Charter of Rights and Freedoms, a judge has ruled.
Federal Court of Canada Justice Anne Mactavish dismissed an appeal from two American citizens, Gwendolyn Louise Deegan and Kazia Highton, who now live in Canada and have no real ongoing connection with the United States.
The U.S. Foreign Account Tax Compliance Act, or FATCA, requires banks and other institutions in countries outside the United States to report information about accounts held by U.S. individuals, including Canadians with dual citizenship.
The Canadian government already has shared more than 1.6 million Canadian records of “U.S. persons” with the IRS.
Among the items of Canadian information being shared with the U.S. are the names and addresses of account holders, account numbers, account balances or values, and information about certain payments such as interest, dividends, other income and proceeds of disposition.
Deegan and Highton challenged the constitutionality of Canadian provisions implementing a 2014 agreement between the countries that makes the information-sharing possible.
They argued the provisions breach Charter of Rights guarantees that prevent unreasonable seizure and ensure the equality of people under law.
Mactavish concluded in her decision released Monday that although the provisions do result in the seizure of the banking information of Americans in Canada, the affected people have only “a limited expectation of privacy” in their data.
She also ruled that the provisions do not violate the charter guarantee that every person is equal under the law without discrimination based on national origin.
Under the tax arrangements, Canadian financial institutions are legally required to provide the Canada Revenue Agency with data concerning accounts belonging to customers whose information suggests they might have American citizenship. The revenue agency then hands the information to the U.S. Internal Revenue Service.
Nearly all countries levy income taxes based on residency, while the U.S. system is based on citizenship.
The U.S. considers all American citizens to be permanent tax residents in the United States for federal income-tax purposes, taxing the worldwide income of “specified U.S. persons” regardless of whether they live, work, or earn income in the United States.
“The result of this is that every Canadian resident who is an American citizen is subject to U.S. federal taxation on all of their income from all sources, wherever that income may be derived, even if he or she is also a Canadian citizen,” Mactavish says in her decision.
“Canada clearly found itself in an extremely difficult position as a result of the enactment of FATCA by the American government.”
U.S. law requires extensive financial and asset reporting, with the threat of significant penalties for failure to meet the obligations.
However, Mactavish notes, the U.S. government estimates that fewer than 10 per cent of all people who file American tax returns from outside the United States ultimately owe any taxes to Washington.
In addition, a tax treaty between Canada and the United States allows residents of Canada to receive credit for some taxes paid to the federal and provincial governments that otherwise would have been owed to the U.S. revenue service.
Deegan and Highton unsuccessfully argued the provisions require Canadian banks to transfer the information of potentially hundreds of thousands of people annually to the federal revenue agency in Ottawa without judicial authorization or any state oversight.
They said this amounts to “a massive fishing expedition and a seizure that offends every core precept of the citizenry’s right to a reasonable expectation of privacy.”
Mactavish pointed out that the Supreme Court of Canada has found that taxpayers’ privacy interest in records that may be relevant to the filing of income-tax returns is “relatively low.”
The method used to collect this information is “minimally intrusive” and the data shared with the U.S. revenue service is afforded protection under the tax treaty between the two countries, she added.