Canadian Court Dismisses FATCA Lawsuit

Sovos
October 3, 2015

There is no avoiding FATCA, a Canadian court has recently ruled. FATCA continues to withstand legal challenges, eliminating the last hope that some businesses had that FATCA will go away. The latest court ruling further proves FATCA and the expansion of global reporting are here to stay.

The lawsuit was filed by two American expatriates – Virginia Hillis and Gwendolyn Louise Deegan – who live in Vancouver. In Virginia Hillis and Gwendolyn Louise Deegan v. the Attorney General of Canada and the Minister of National Revenue, these plaintiffs were seeking an injunction that would prevent Canada’s tax authority from sharing reportable account data with the United States.

The Federal Court of Canada dismissed the plaintiff’s lawsuit against the Canadian government on September 16, which challenged the legality of the Model 1 IGA that Canada and the United States signed on February 5, 2014. Canadian financial institutions will now have to proceed with turning over account information of US citizens living in Canada.

Under the provisions of FATCA, foreign financial institutions (FFIs) that enter into an intergovernmental agreement with the US are required to turn over account information – including names, addresses and Tax Identification Numbers. Institutions are required to report such information on individual accounts for US citizens with a minimum balance of $50,000. For entities with a majority controlling ownership by a US citizen, the minimum balance on accounts is $250,000.

Unless specifically exempt, FFIs that do not register and agree to report such account-holder information face a 30 percent withholding tax on certain US-source payments made to them, according to the IRS.

Plaintiffs Claim FATCA is a Violation of Canadian Constitution

The Wall Street Journal wrote that the plaintiffs’ lawsuit sought to challenge the Canadian Constitutionality of the Canada-US agreement, claiming it violated certain provisions of the Constitution Act of 1867 and the 1982 Canadian Charter of Rights and Freedoms.

Tax-News wrote that the suit alleged the collection and disclosure of taxpayer information to the US violated the existing provisions of the Canada-US double taxation agreement (DTA), “as the information is not relevant for carrying out the provisions of the DTA, or the domestic tax laws of Canada or the US”.

Tax-News also reported that the agreement between the two governments subjected US citizens living in Canada to more burdensome tax requirements than Canadian citizens are subject to.

Lawsuit Ruling and Implications for FATCA

In its ruling, the Canadian court stated that the collection and disclosure of account-holder information, per the intergovernmental agreement, is “legally authorized in Canada by the provisions of the IGA Implementation Act.” The court also ruled that the collection and disclosure of such information did not violate the provisions of the Canada-US DTA.

FATCA was passed to target tax evasion. To avoid having to pay US tax rates, some US citizens have “offshored” their assets in countries that either have more favorable tax rates or no taxes at all.

Though FATCA was passed in 2010, this year is the first in which financial institutions and foreign governments will report account information on US citizens living abroad. The court’s decision to dismiss the lawsuit clears any road blocks that would prevent FFIs in Canada from complying with FATCA. The Canada Revenue Agency has indicated that the automatic transfer of data under the Canada-US IGA will proceed as planned and FFIs should have started transmitting information on September 30.

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Author

Sovos

Sovos is a leading global provider of software that safeguards businesses from the burden and risk of modern transactional taxes. As VAT and sales and use tax go digital, businesses face increased risks, costs and complexity. The Sovos Intelligent Compliance Cloud is the first complete solution for modern tax, giving businesses a global solution for tax determination, e-invoicing compliance and tax reporting. Sovos supports more than 7,000 customers, including half of the Fortune 500, and integrates with a wide variety of business applications. The company has offices throughout North America, Latin America and Europe. Sovos is owned by London-based Hg. For more information visit www.sovos.com and follow us on LinkedIn and Twitter.
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