Federal Court Confirms the Canada Revenue Agency’s Authority to Make FATCA Disclosure to the U.S. Internal Revenue Service
On September 16, the Federal Court of Canada in Hillis and Deegan v. Canada (Attorney General) dismissed an application to prevent the Canadian Revenue Agency (“CRA”) from sharing information obtained from Canadian financial institutions with the United States Internal Revenue Service (“IRS”) pursuant to the United States’ Foreign Tax Compliance Act (“FATCA”), holding that the extraterritorial nature of FATCA is legally authorized and not inconsistent with Canadian law.
First introduced in 2010, FACTA forces non-American financial institutions to disclose certain financial information about American account holders and imposes a 30% withholding tax on any United States sourced payments to financial institutions that are not in compliance with FATCA.
Although American citizens are legally required to file annually with the IRS regardless of where they are resident, FACTA significantly strengthens the IRS’ international taxation capabilities and increases the United States tax compliance risks for American citizens earning income abroad by providing the IRS with significantly greater information regarding an individual’s tax position and allowing the IRS to confirm information that should otherwise be included in the taxpayer’s annual filings. However, FATCA does not impose greater tax liability on or otherwise alter the existing obligations of United States taxpayers residing abroad.
In Hillis and Deegan v. Canada (Attorney General), the plaintiffs, who are dual citizens of Canada and the United States but have resided in Canada for a significant period of time, sought a declaration that the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act (the “IGA”) was of no force and effect. Passed in conjunction with Canada’s 2014 budget, the IGA serves to ratify FATCA by authorizing the CRA to share such information as is necessary for Canadian financial institutions to comply with FATCA with the IRS.
In their arguments, the plaintiffs maintained that FATCA imposes higher disclosure obligations on non-United States financial institutions than that which is authorized under the Canada-U.S. Tax Treaty or Canadian domestic law. To this end, the plaintiffs claimed that the automatic collection and disclosure of taxpayer information was overbroad as such disclosure was not qualified on the basis of whether or not the information disclosed was foreseeably relevant for assessing the taxpayer’s liability under the Canada-U.S. Tax Treaty and could potentially be utilized by the United States government for investigative purposes other than tax compliance.
However, the Federal Court disagreed noting that financial information from a foreign jurisdiction about individuals who are or purport to be residents of such jurisdiction is relevant for tax purposes even if the information does not affect the taxpayer’s tax liability. Moreover, these controls are similar to those imposed on Canadian financial institutions under the Income Tax Act (Canada).
In its reasons, the Court avoided any analysis of the fairness of the American tax regime and refused to consider whether the American system of world-wide taxation, subject to applicable tax treaties, was a fair or desirable taxation regime. As Canada lawfully enacted the IGA, the reach of FATCA was extended into Canadian domestic law in a manner consistent with Canada’s international treaty obligations and, as a result, the CRA possessed the necessary authority to disclose information with the IRS.
This decision confirms the authority of the CRA to disclose information obtained from Canadian financial institutions with the IRS. However, as Hillis was an application for injunctive relief and not dispositive of the plaintiff’s claim, the IGA remains subject to challenge by the plaintiffs, including a pending challenge to the constitutionality of the IGA under the Charter of Rights and Freedoms.
Shea Nerland provides a variety of cross-border tax planning strategies to individuals and businesses in Canada and the United States, including matters related to FATCA compliance.
Invitation for Discussion:
If you would like to discuss this blog in greater detail, or any other tax or estate planning matter, please do not hesitate to contact one of the lawyers in the Tax & Estate Planning group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your business, we would be pleased to provide additional details or advice about your specific situation, if desired.