Appeal Filed With The Federal Court Of Canada Seeking A Declaration That FATCA Is Unconstitutional And Should Not Be Enforced In Canada

Posted By: Sunita D. Doobay on August 12, 2014 at 7:43:56 in All

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On Monday, the 11th of August, an appeal was filed with the Federal Court of Canada in Vancouver seeking a declaration that the enforcement by the Canadian Government of the United States’ Foreign Account Tax Compliance Act (“FATCA”) on Canadian soil is unconstitutional. Under FATCA, financial institutions enter into an agreement with the IRS and disclose the names of all U.S. persons who hold accounts with U.S. $50,000 or more. This is on a voluntary basis but it is the rare financial institution that does not enter into a FATCA agreement as failure to comply with FATCA results in a punitive tax of 30% on gross U.S. source income and on gross income from non-U.S. sources but remitted by a financial institution that has entered into an agreement with the IRS.

Canada entered into an intergovernmental agreement (Agreement Between the Government of the United States of the United States of America and the Government of Canada to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention between the United States of America and Canada with respect to Taxes on Income and on Capital) on February 5, 2014 and which was entered into force on June 27, 2014. This agreement, commonly referred to as an IGA, results in Canada acting as an intermediary – Canadian Financial Institutions provide accountholder information of US persons to Canada, and Canada provides the account holder information to the United States. Information gathering started in July of 2014 and exchange of information will happen in the beginning of 2015.

Virginia (Ginny) Hillis and Gwen Deegan, the plaintiffs of the action, are U.S. persons because they were born in the United States. A U.S. person is any individual who was born in the United States, holds a U.S. citizenship or holds a U.S. green-card. The IGA also includes a U.S. person’s estate and a trust that is managed from the U.S.

Ginny and Gwen were born in the U.S. Both plaintiffs left the U.S. when they were five years of age. They never worked or lived in the U.S. Neither of them holds a U.S. passport. However because they were born in the U.S. they are subject to the FATCA reporting requirements. Ginny and Gwen argue in their statement of claim that the IGA unreasonably infringes their constitutional rights under the Charter.

Regardless of the lawsuit which could take years to resolve – it is prudent for Canadians who are considered U.S. persons to be compliant or become compliant with U.S. filing obligations through the new streamline filing compliance procedure or through the Offshore Voluntary Disclosure Program (“OVDP”) before the IRS becomes aware of their existence in Canada.

Last but not least, the following is reproduced from the IGA and it sets out the accounts in Canada that are not subject to FATCA’s disclosure:

A. Registered Retirement Savings Plans (“RRSPs”) – as defined in subsection 146(1) of the Income Tax Act.

B. Registered Retirement Income Funds (“RRIFs”) – as defined in subsection 146.3(1) of the Income Tax Act.

C. Pooled Registered Pension Plans (“PRPPs”) – as defined in subsection 147.5(1) of the Income Tax Act.

D. Registered Pension Plans (“RPPs”) – as defined in subsection 248(1) of the Income Tax Act.

E. Tax-Free Savings Accounts (“TFSAs”) – as defined in subsection 146.2(1) of the Income Tax Act.

F. Registered Disability Savings Plans (“RDSPs”) – as defined in subsection 146.4(1) of the Income Tax Act.

G. Registered Education Savings Plans (“RESPs”) – as defined in subsection 146.1(1) of the Income Tax Act.

H. Deferred Profit Sharing Plans (“DPSPs”) – as defined in subsection 147(1) of the Income Tax Act.

I. AgriInvest accounts – as defined under “NISA Fund No. 2” and “net income stabilization account” in subsection 248(1) of the Income Tax Act including Quebec’s Agri-Quebec program as prescribed in section 5503 of the Income Tax Regulations.

J. Eligible Funeral Arrangements – as defined under subsection 148.1 of the Income Tax Act.

K. Escrow Accounts. An account maintained in Canada established in connection with any of the following:

1. A court order or judgment.

2. A sale, exchange, or lease of real or immovable property or of personal or movable property, provided that the account satisfies the following requirements:

a. The account is funded solely with a down payment, earnest money, deposit in an amount appropriate to secure an obligation directly related to the transaction, or a similar payment, or is funded with a financial asset that is deposited in the account in connection with the sale, exchange, or lease of the property;

b. The account is established and used solely to secure the obligation of the purchaser to pay the purchase price for the property, the seller to pay any contingent liability, or the lessor or lessee to pay for any damages relating to the leased property as agreed under the lease;

c. The assets of the account, including the income earned thereon, will be paid or otherwise distributed for the benefit of the purchaser, seller, lessor, or lessee (including to satisfy such person’s obligation) when the property is sold, exchanged, or surrendered, or the lease terminates;

d. The account is not a margin or similar account established in connection with a sale or exchange of a financial asset; and

e. The account is not associated with a credit card account.

3. An obligation of a Financial Institution servicing a loan secured by real or immovable property to set aside a portion of a payment solely to facilitate the payment of taxes or insurance related to the real or immovable property at a later time.

4. An obligation of a Financial Institution solely to facilitate the payment of taxes at a later time.

For more information, please refer to the following:
Statement of Claim


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