2,221 thoughts on “Canadian FATCA IGA lawsuit: November 1, 2014 legal bill will be paid on time! / Poursuite canadienne contre la FATCA et le gouvernement canadien : nos frais légaux du 1er novembre 2014 seront payés à temps !”

1. @Hazy – expressing my outrage Hazy ….. ignorance out there is what enables this sort of bad law to get past.

2. @NativeCanadian,

   Thank you for educating your relative about the harm of FATCA and receiving a commitment to donate to ADCS.

3. @nervousinvestor, hazy

   Did Canada end up exempting trust reporting in its IGA, as speculated here?

   http://www.advisor.ca/tax/tax-news/cra-may-ignore-fatca-trust-rules-147928

   Roy Berg does a great job explains why trusts come under FATCA’s jurisdiction here but don’t bother complaining as “right minded” people should just “carry on”:

   http://www.mondaq.com/canada/x/292046/Income+Tax/In+FATCALand+a+Canadian+Trust+is+a+Bank

4. When u do your postings… minor suggestion… besides using the words *american citizens* also include a sub class such as green card or visa holders… I am not sure the different types of visas available so I just threw it in… because when people read… *american citizens* they automatically think it does not pertain to them… there are lots of people who got gcs who went home &/or they still have it or it expired… they are effected by this… that may help them identify with the cause to raise funds… I never knew u had to formally give up the gc… thought it was like other countries… once it expired… it was over… I spoke to some GC holders who did the same as my family did… pay taxes on what is made in the US… what we made elsewhere… we already paid taxes in that foreign country where it was made… ain’t no american citizen… we are legal visitors… so basically.. it works this way now on the whole amount… pay to the country u made the money in… pay the US cause we are tax slaves…. then if u go back to your home country… pay them also to bring the money home…. for this… social assistance is starting to look good…

5. @US_Foreigner_Person,

   Dash has also pointed out that we have to consider the harm caused to green card holders and others (visa holders) who are not U.S. citizens.

   If you or anyone know of such people who reside in Canada and who might be interested in being a witness please contact me on the ADCS site. We need just one witness for each group.

6. Another suggestion for a witness:

   A Canadian citizen, hitherto unaware of his alleged US obligations, with a net worth in excess of USD2M. We’re not looking for a 1%er here, rather someone (perhaps a retiree) who has acquired, through a lifetime of hard work, either or both of the following:

   -Savings set aside for retirement that include a number of financial products, such as Canadian mutual funds, which are classified as PFICs under the US tax code; preferably consisting of long term holdings.

   -A home purchased decades ago which the individual still owns.

   $1000 per month invested into equity markets starting 40 years ago, and yielding 8% per annum, would be worth $3.5M today. I don’t fully comprehend the US tax code’s Excess Distribution rules applicable to this situation, but I am aware that PFICs, when held for a long time, can result in a tax liability that exceeds the taxable gain. The gain is $3 020 000. Had he owned US mutual funds, the tax would be $604K; Canadians without US tax complications would pay around $650K. The individual concerned might pay $2M, $3M or possibly more in US tax.

   Let’s assume this individual purchased a home 40 years ago for $150K. At 6% per annum property appreciation, it would be worth around $1.5M today, for a gain of $1.35M. Taxable gain in the US is $1.1M (assuming principal residence exemption) for tax of $220K. I believe that in Canada there is no tax on the sale of a principal residence.

   None of this considers the fact that the US deemed sale of assets on expatriation may not be a recognised taxable event in Canada, so the US tax paid in the year of expatriation might not be creditable against Canadian taxes, rather it might only result in an increase in cost basis. Furthermore, there is uncertainty as to whether the $250K principle residence exemption under the US tax code applies to a deemed expatriation sale.

   If the individual was subject to US taxes on US assets, the amount of tax payable upon disposal of the two assets would be $824K, leaving a net worth of $4 176 000.

   If the individual was subject to Canadian taxes on Canadian assets, the amount of tax payable would be $650K, leaving a net worth of $4 350 000.

   A Canadian citizen with alleged US tax obligations and Canadian assets would owe PFIC tax of perhaps $2M and tax on the property of perhaps $270K on the US deemed disposal of these assets. Were he to sell the assets the following year, he would owe Canadian tax of ($3.5M – $2M – $480K)x0.22 = $225K approximately. Total tax payable would be around $2.5M, leaving a net worth of $2.5M.

   Bilateral tax treaties define ‘groups’ very narrowly when applying the non-discrimination clauses, and the US would certainly argue that the three scenarios depicted above aren’t comparing similarly situated taxpayers; but the marginal differences in circumstances as compared against the massive disparity in tax treatment is hopefully something that Canadian courts would consider; not least of all because of the fact that the Canadian tax authority would miss out on $425K of revenues and $2.3M of capital would leave Canada for the USA.

   These are ‘back of the envelope’ calculations to provide a feel for the magnitude of the injustices that can be perpetrated under the US’s unique interpretation of CBT. The real problem, perhaps, is that if we are able to identify an appropriate individual whose circumstances would make them an ideal witness to present these injustices, they’re likely to go into hiding rather than expose themselves to the IRS through a public court appearance. Perhaps we could find a compliant proxy: a Canadian citizen compliant with his US tax burdens who could testify that he has invested the majority of his savings in the US for many years in order to avoid the PFIC problems. That would demonstrate capital flight that has already occurred under US CBT and highlight the deemed expatriation issues, but the egregious PFIC issues might not face judicial scrutiny.

7. Domino,

   Yes — as you say, perhaps we can find a retired person, who would like to renounce from IRS tax obligations, and made the terrible “mistake” of buying years ago a middle class house, for example in Toronto or Vancouver, that has appreciated in value especially in US dollars. Add to this the value of a company pension (not the monthly benefit but the total cashed out value) etc. etc. and you can easily exceed $2million, placing the person into “covered” territory and a crippling expatriation tax.

   You also mention the logical possibility of investing savings in the US rather than in Canada to avoid IRS problems. This (shocking) suggestion aimed at transferring even more Canadian assets to the U.S. was actually made by one of the investment experts at the Toronto ACA conference — investment advice that did not go over that well with the (Canadian) audience.

   I will add these witness suggestions to the list.

   This lawsuit requires a lot of money and brave witnesses (like Plaintiffs Ginny and Gwen). We need both. Please keep donating and, a few of you, help out Canada by becoming a witness.

8. @Stephe Kish

   I read the lawsuit and it sounded like the case against CBT, not just against the IGA.

   Re: invest in the U.S. | Fidelity Investments said I could no longer buy anything in the account (after a few decades) because of my “foreign” address. I called quite a few brokerages who declined my business. Not easy to invest in the U.S.

   I have suggested previously to develop “business” and “compliant strategy” tracks to this website – to better attract those with a spare coin or two to contribute to ADCS.

   In terms of witness suggestions (if we now consider the broad injustice of CBT): Canadian citizen only widow of deceased compliant US Person who had enough wealth (over $660 k or thereabouts) to trigger estate tax provisions. This would be a very good one as likely the widow would have extinguished their US tax liability or continue with it in a very controlled and defined US based QDOT trust. They should not have fear of the IRS, just resentment about it all.

   Some detail on estate tax – they have this in the U.S. but not Canada. If your spouse is a U.S. citizen then there is a several million exemption and the assets pass to the surviving spouse. However, if the spouse is a nonUS person then the exemption is much lower in the $660 k or there abouts level. The intent of the laws were to prevent the surviving non US citizen spouse from taking the wealth out of the U.S. !!! And away from US taxation. So clearly there was no consideration for the US Person living abroad with non US citizen spouse.

   Here are some real injustices of it all. If the U.S. person had a full life then that is different. Let’s say they die say mid 40s unexpectedly. For Estate provisions all the assets get valued. In the U.S. they want to capture retirement funds and insurance proceeds. The assets get valued without consideration of debt against those assets! So let’s say they just brought a house and maybe have an investment property but with lots of debt.

   The wealth above the exemption are for a 40% tax or the amounts above, unless the balance exceeding this is placed in a U.S. based QDOT trust. The surviving spouse may live on the earnings of the QDOT (while I believe paying normal U.S. tax on it) with any principal withdraws taxed at 40%. To meet all the requirements the surviving spouse may have to sell the family home or put it into the QDOT and pay market rent to the QDOT to live in the family home!

   For the 40% there is no credit against Canadian tax as Canada does not have estate tax, so Canadian taxes may apply to all the liquidation required to meet the U.S. estate tax requirements.

   One thing I did not mention: if the house is 50/50 owned then the U.S. may ask the surviving spouse to prove that they contributed 50% to it else the U.S. would consider the house 100% owned by the deceased US person.

9. How’s the Harper government going to respond to this lawsuit!?

   Let me guess. It’s going to involve a LOT more thinking than what got them into it.

10. Don’t know if this was posted here already, but the author supports the legal challenge, and gives a ‘border baby’ example;
    http://blogs.windsorstar.com/open-newsroom/letters/invasion-of-charter-of-rights

11. Rand Paul slated as next President
    http://www.telegraph.co.uk/news/worldnews/republicans/11052897/Americas-eyes-opening-to-ophthalmologist-as-unlikely-potential-president.html

12. @Stephen Kish & JC

    JC, you make a good point. Are we arguing against CBT or the IGA? My previous post focuses on various US tax laws that illustrate the inequities of CBT as levied against US persons abroad. I hadn’t lost the IGA plot. I should have highlighted the key conclusion of that comment, which is not the unfair treatment of the Canadian taxpayer with unwanted US obligations, rather it was:

    that the Canadian tax authority would miss out on $425K of revenues and $2.3M of capital would leave Canada for the USA.

    Most countries signed IGAs to protect their financial industries from 30% US sanctions, while they justify the burdensome regulations to the politicians and electorate in terms of the reciprocal US reporting obligations which would reduce tax evasion and raise revenues. The Florida and Texas Bankers Associations’ lost their case to have DATCA repealed earlier this year. While the technicalities of that decision were based on arcane points of the APA and RFA (laws that define the USG’s authority to draft regulations, including FATCA), the judge stated that the “regulations will improve U.S tax compliance, deter foreign and domestic tax evasion, impose a minimal reporting burden on banks, and not cause any rational actor – other than a tax evader – to withdraw his funds from U.S. accounts”. Or to put it more succinctly: it will raise revenue.

    I have no knowledge of Canadian constitutional law, but I am speculating that the Attorney General of Canada will rely on similar compliance and revenue arguments to justify the limitation of privacy and anti-discrimination rights in the IGA. I may be way off course here, and wasting everyone’s time with these lengthy comments, and I’ll happily devote my time to more constructive endeavours if this is the case. In the meantime, I have considered the asymmetry of the reciprocal reporting in the IGA and its relevance to the differing taxation regimens (RBT v CBT) of Canada and the US. Almost every scenario that I have attempted to think through results in loss of revenue to, or capital flight from, Canada. I’ll give you a few examples:

    Firstly a disclaimer: I’m completely unfamiliar with Canadian tax law, so I’ve applied my general understanding of RBT taxation to specific Canadian situations. There are so many complex tax rules intersecting on each example, that I’ve undoubtedly overlooked important factors. I haven’t accounted for the higher proportion of wealthy US tainted Canadians that are probably IRS compliant on account of their close ties with the compliance industry. I’ve provided a few estimates of figures just to put some meat on the bones. Take them with a pinch of salt; it’s the general principles that are important.

    -Estate tax: JC mentions that Canada has no estate tax. US estate tax presently generates $20B per annum from a population of 300M. Canada has 1M US persons, if half are already compliant, the other half coming into compliance will generate capital flight to the USA of around $33M per year, and perhaps $100M if the last 5 years are to come into compliance. I won’t repeat it hereafter, but all capital flight results in future revenue loss to Canada, as that capital will no longer generate taxable earnings. If $33M earns 5% per annum, revenue losses will be around $700K per annum.

    -CFC rules: Many ‘US persons’ in Canada will have formed or invested (10% or more) in corporations as legitimate entities to operate their businesses. These are deemed CFCs in the US and are taxed at 39.6% (perhaps lower for small entities) versus 15% corporate tax in Canada. If there are 5000 such corporations (0.5% of Canadian US persons) earning an average of $50 000 per annum (both completely illustrative figures not based on any research), the capital flight to the USA would be $61M per annum. I’m not sure if the treaty allows the credit of Canadian corporate tax against the personal earnings derived from a fiscally transparent CFC. If not, then capital flight would be $84M. Five years’ compliance required by the IRS? Over $250M.

    -PFIC Taxation: Assume 100 000 US tainted Canadians have savings that contain PFIC investments. The excess distribution rules, as I (poorly) understand them, become increasingly punitive the longer PFICs are held. Rational actors, upon becoming aware of this situation, can be expected to immediately realise these investments. Estimating a 60% PFIC tax rate versus Canadian CGT of 22% on, say, $10 000 of unrealised PFIC gain will send $380M from Canada to the USA. PFIC taxes, being cumulative, won’t compound over a 5 year period, but realisation of PFIC gains over the prior 5 years required by the IRS might seize perhaps another $100M of hard earned Canadian savings. When I have time, I’ll post another comment about PFIC migration.

    -Net Investment Tax: A Forbes article on 19 February 2014 claims that the richest 1% of Americans will pay, on average, $23 000 each in the new Net investment tax. Applying these statistics to the US Canadian diaspora suggests $230M will leave Canada annually to fund Obamacare. The US will not allow this tax to be set off against any foreign tax credit. Unless Canada has enacted a similar provision then that money might go directly from the Canadian taxpayer to fund Obamacare. This is more an issue of a new US tax, rather than revenue loss attributable to the IGA, but the IGA will be identifying additional Canadian assets that the IRS can seize to fund Obamacare.

    -Expatriation Tax: You guys have dedicated so much time to the issues surrounding the Federal Register, that I’m just going to say 50 Canadians a year pay on average $1M for a total of $50M per annum. For reasons illustrated in my previous post, this might result in a step up in basis by $50M for the relevant assets, costing Canadian tax revenues around $11M annually. This has been costing Canada since 2008 when s877A was enacted; numbers will probably increase as the IGA provides new lambs to the IRS slaughter.

    -FBAR and Other Information Filing Fines: Impossible to estimate. The IRS will look at high value accounts, and presumably take a view that such wealth could only belong to financially aware individuals who must therefore be exercising wilful negligence or practicing criminal evasion.

    -Trusts, Partnerships, Personal Holding Companies, Pensions, Annuities etc: Where Canadian tax laws allow forms of ownership that provide advantages to individuals for saving money, operating businesses or holding assets, the IRS will reverse any such advantage and seize a piece of what’s left.

    – Home Sales: The IRS levies a 20% tax on the gain, to the extent that it exceeds $250K, of a principal residence. This will disproportionately affect retirees and empty nesters who choose (or chose in the past five years) to downsize after decades of dedication to their communities and families. Additional real estate statistics will be required to estimate the quantum of capital flight to the USA, but individual taxpayers will regularly be paying in excess of $100K to comply with this provision.

    Of course, the IGA promises reciprocal reporting, so we need to evaluate the benefits that Canada will receive in order to fully assess the fiscal consequences of the Canadian government’s enactment of the IGA. In this regard, I must refer to the previously quoted Memorandum Opinion of the Florida Bankers’ Association court case. The judge states on page five, in reference to every Brocker’s favourite US senator, Carl Levin, that “He further praised the proposal for creating no new burden on banks, since most banks “already have in place comprehensive automated systems to produce needed information to the IRS” from the existing Canadian reporting requirements”.

    So there you have it, from the horse’s mouth. The Florida Bankers lost their case because the US did not impose any additional compliance burdens on US banks that weren’t already in existence to comply with existing Canadian reporting requirements. Canada will be getting exactly what it has already been getting for many years. Benefits to Canada under reciprocal IGA reporting = $0. Burden: $100Ms of Canadian capital moving to the USA;$1Ms of future tax revenues lost as a consequence of this capital leaving; $10Ms revenue lost annually via taxes being redirected to the US and perhaps $100M annually in FATCA compliance costs to be borne by all Canadians through increased financial fees.

    PFIC Migration: this one is going to grind the Brockers’ gears, but a rational actor, considering his recent PFIC disaster, will seek to reinvest his savings in a more tax favourable environment. There’s only one viable solution here: SEC registered US financial products. While it’s true that many US tainted Canadians will use their IRS compliance to qualify for expatriation, those facing the exit tax might consider ongoing IRS obligations to be the lesser of the two evils; at least while they contemplate the possibility of changes to these punitive tax laws (c.f. OVDP v Streamlined, ACA RBT lobby). These 1%ers are likely to have savings running into millions of dollars each. It’s true that overseas Americans can no longer purchase US mutual funds, but ETFs and CEFs are still available, and represent the only non-PFIC investment funds available to these investors worldwide. It’s also true that many brokerages are turning away non-resident Americans entirely, but these are 1%ers; they’ll manage to comply with the residency requirements which largely require a US address (holiday home, US friends/relatives or a hold-mail address) and a self-certification that you are US resident. For the first time they’ll be glad that they can legally claim that status. After this initial exodus of Canadian savings to the US, which could run into billions of dollars, a steady trickle of Canadian capital, which otherwise would have been parked in Canadian financial products, will rather be finding its way into brokerage and retirement accounts in the US.

13. @Domino

    Thank you for this valuable and completely correct comment. The point is that:

    1. FATCA is a tool to enforce U.S. taxation of residents of other countries.

    2. By taxing the residents of other countries, the U.S. is imposing a tax on the capital of other countries.

    Therefore, by agreeing to the imposition of FATCA, the government of Canada has agreed to pay a Canadian capital tax to the USA forever.

    What your comment correctly implies, is that the long run costs of the Canadian (or any other government) agreeing to FATCA will far exceed the costs of non-compliance. This is the reality that they don’t understand.

    Here is an earlier post that discussed this issue in the context of PFICs.

    http://isaacbrocksociety.ca/2012/06/12/how-citizenship-based-taxation-steals-from-the-treasury-of-other-countries-pfic-edition/

    The bottom line is that U.S. citizens are a threat to the “capital base” of any country where they reside. Sooner or later, this will be understood. At that point you expect countries to take steps to protect their capital base from the U.S. imposed capital tax.

    I expect these steps will include:

    1. An unwillingness to accept immigrants who are U.S. citizens.

    2. Special rules imposed on known U.S. citizens in Canada (or any other country). I expect that the rules would include a prohibition of any U.S. citizen reaping the benefits of tax deferral which are available to other Canadians.

    Example: In Canada the gain on the sale of a principal residence is tax free. U.S. citizens in Canada are subject to U.S. tax laws. Under U.S. tax law the sale fo a principal residence is taxable. By NOT taxing the gain on the residence and allowing the U.S. to then tax that gain, the U.S. is removing productive capital from Canada. Obviously this cannot be tolerated. (There are numerous other examples.)

    Now that Canada has agreed to FATCA and made the hunt for U.S. persons mandatory it must now protect itself from the consequences of having identified those U.S. persons.

    I predict a general amendment to the Income Tax Act of Canada which will say:

    “No person defined under U.S. law to be a U.S. person or U.S. taxpayer may have the benefits of the tax free sale of a principal residence or any other tax benefit in Canada.”

    It’s coming.

14. @US Citizen Abroad | The amendment to the Canadian tax laws you suggest would represent a “tidy up” in terms of CBT – yet these are not currently barred by the Canadian-US tax treaty so unnecessary. May I suggest a likely further scenario of amendment of the Canadian-US tax treaty, that redefines and clarifies the ‘prevention of double taxation’ to exempt the family home, mutual funds, insurance proceeds, small businesses, retirement and Canadian tax deferred accounts from US taxation of Canadian based income and assets for Canadian tax residents.

15. @US Citizen Abroad

    “No person defined under U.S. law to be a U.S. person or U.S. taxpayer may have the benefits of the tax free sale of a principal residence or any other tax benefit in Canada.”

    Now finally I think you may have identified a taxation measure which the US will consider to be in violation of the anti-discrimination article of its numerous tax treaties.

16. @JC

    I would rather have it in the Income Tax of Canada and not in the Treaty. Why? Very few know what’s in the treaty, but they will know what’s in the ITA. Having it in the ITA, will force the Government to publicly explain that U.S. citizens are a threat to Canada’s tax base – a threat that has been aggravated by the Government’s own legislation enacted pursuant to the IGA.

    @Domino

    Bring it on.

17. @Domino,

    You ask whether we are going after CBT or the IGA.

    The lawsuit goes after the act that implements the FATCA agreement between Canada and the U.S. Information provided on CBT will provide part of the context. Separately, ADCS is exploring other options that might defeat components of CBT.

    —Badger, thanks for the suggestion. I will try to contact the writer of the article. We were never successful in finding a “border baby” willing to be a plaintiff. Perhaps one would be willing to assume the risks of being a witness.

18. @Domino

    “-CFC rules: Many ‘US persons’ in Canada will have formed or invested (10% or more) in corporations as legitimate entities to operate their businesses. These are deemed CFCs in the US and are taxed at 39.6% (perhaps lower for small entities) versus 15% corporate tax in Canada.”

    This is just plain madness for a small business owner trying to be in compliance with both Canadian (local) tax laws and US (foreign) tax laws.

    A US-tainted small business owner has to pay 15% corporate tax on the company’s earnings in Canada, but the same owner also has to pay 39.6% of the company’s earnings to the US in the form of personal income tax. The US does not recognise Controlled Foreign Corporations (CFC) as being legitimate corporations and ignores the corporate veil.

    So where is the small business owner supposed to get the money to pay the US? If s/he takes the money from the company to pay the 39.6% personal income tax to the US it has to come out in the form of dividends or salary. What if the person’s salary isn’t high enough to cover 39.6% of the company’s earnings? What if the business owner is not the only shareholder and other shareholders don’t want to pay dividends?

    Even if enough dividends are received for the purpose of paying personal income tax, the dividends themselves are taxable at Canada’s rate as well as being taxable by the US. Taxes on dividends are stacked on top of each other (unless treaty protected) because dividend income is considered to be passive not earned.

    CFC rules (created by the Democrats under Clinton) for expats mean taxes stacked upon taxes until the small business owner as well as the business itself no longer exist.

    In other words, the CFC rules make it virtually impossible for US-tainted persons to own small businesses in the form of corporations. Tax treaties may help somewhat, but not every country in the world has a tax treaty with the US.

    Nobody on this planet other than US-tainted persons is subject to such abuse.

19. @JDL and All,

    — I happened to look at the comments to the article Badger found (above) that pointed out the problems a “border baby” would have re future obligations to transfer retirement savings to the United States.

    We say that FATCA and CBT are “abuses” but there are Canadians like the commenter who feel the following:

    “That [FATCA] was done to make Canada less accessible as a safe haven for US citizens trying to dodge paying taxes. I also file a return for both countries, no big deal, and I’m okay with paying my fair share on both sides of the border as well as doing my part in allowing both countries to deal with illegal activities.”

    These people are unlikely to ever be convinced that FATCA and CBT cause unreasonable harm.

    Donate to http://www.adcs-adsc.ca today. The weekend has been slow for donations. A big bill comes due in 68 days.

20. @USCitizenAbroad

    Now that the Canadian Government has made discrimination legal in Canada, anything can happen.

21. @Stephen Kish – some comments from reviewing the above you may wish to discuss further with Joseph Arvay in due course:

    @Domino and others raise some good points re the lack of “meshing” between US & Canadian tax systems. The hypotheticals he suggests are, of course, real and many more could be suggested besides. Another easy-to-grasp difference is foreign exchange: A Canadian unlucky enough to buy a house in the early 90’s that DIDN’T appreciate in value could still have a large tax bill to pay to Uncle Sam just by having been frugal enough to pay off their mortgage! The C$ was worth about $0.63US back then and, if the poor sod paid off his or her mortgage in 2009-2012 (depending on the month) the C$ may have been worth $1.06-$1.07US. By the simple magic of converting the original mortgage to US$ when advanced in 1993 and then the repayment in 2012, a substantial debt forgiveness amount would arise which, you guessed it, is added to income for US tax purposes (and of course has no corresponding Canadian tax credit or earned income exclusion to “shelter” it because it never happened!). I cite this as a simple example.

    From the Charter litigation point of view, the challenge is to establish that the obviously discriminatory statute (at some level, EVERY statute discriminates) rises to the point of creating actionable and thus prejudicial discrimination before the onus is shifted to the government to defend it under s. 1 if it can. We all know that the government’s position – repeated multiple times by Mr. Ernwein in the committee hearings – is that this is simply an “information sharing” agreement. What’s the harm in that?

    The answer, at its core, IS CBT. We should not be too shy about admitting it. In effect, the plaintiffs will be arguing that whether or not CBT is a valid exercise of the discretion of the US in its sovereign right, the mandatory application of CBT OUTSIDE the US and within the sovereign sphere of Canada is not. Absent the Charter, I suppose our government could exercise its own sovereign authority to open the door and allow Uncle Sam to have its way with Canadian taxpayers. By defending their right to privacy from US inspection, the plaintiffs are implicitly arguing that they have a RIGHT to choose to comply fully with Canadian law (obviously) but to dispute the applicability of American law to their situation IN CANADA. By arming the IRS with confidential financial information concerning the business and affairs of the Canadian who might be the potential victim of US demands, Canada is prejudicing the right of those Canadians to defend themselves against US predations, including by “hiding in the weeds” (as is critically alleged by various “compliance condors” as many on this site like to call them). The judge does not have to find that the US has no right to its bizarre policy of CBT or even its overly inclusive citizenship laws. Within the US, that is strictly their affair. We are only asking the judge to accept that a Canadian has a right not to follow foreign law while living peaceably in Canada following Canadian law.

    The IGA is all about the US building a data base of potential targets after all. Once they have the data, it cannot be retrieved – the genie cannot be ordered back into the bottle nor do any of the “protections” in the US Canada Tax Treaty actually serve to protect the affected individuals from anything since the very thing they fear is the unjust demands and exactions of the agency to whom the data is delivered.

    In order to establish that there is a legitimacy to the desire to remain obscured from the gaze of the IRS, I think it will be necessary to establish two facts to the satisfaction of the judge. Firstly, there is considerable doubt as to who is actually subject to the demands of the IRS in the first place. The confusing merry-go-round of changes in US policy towards expatriation and citizenship over the years means that there are hundreds of thousands of people who quite legitimately believe that they are NOT US Persons but who the IRS may choose to pursue in any event, placing an onus upon them (read the US statute – the onus is on the expatriate to demonstrate expatriation…) and requiring them to submit to US jurisdiction and US courts to prove the negative fact (non-citizenship). I might add that the right of the US to tax FORMER citizens in perpetuity until they are satisfied about the modalities of their departure (the perpetual “covered expatriate” should likely be explained as whatever minimal deference the US can claim in favour of its CBT policy choice is stretched even thinner in defending the right to tax the 2014 income of a former citizen who expatriated in 1999 but remains “covered” until the IRS agrees with the mode of his or her departure. A former citizen is, after all, a FORMER citizen and is by definition NOT a current citizen! Subjecting law abiding Canadians to that material litigation risk – even if they are all ultimately successful – is certainly a form of prejudice that ought to be easily palpable to a judge once explained.

    The background facts to establish this first point can come from our two plaintiffs and/or any other witnesses who may have “indicia” of US Personhood (and thus be caught by the IGA) while having bona fide grounds for disputing that they are current citizens. My long winded background was designed to lead to this simple point: HYPOTHETICALS can be be validly proved by expert witnesses. An expert witness on US citizenship law, for example, could easily paint the confusing tapestry of changes in US citizenship law (and the punitive anti-expat rules woven into the tax code in the past 20 years). This might diminish the need to find a live body exposed to publicity (and US retribution) to act as a proxy for every variant on a situation.

    The second fact that could be established by expert witnesses is the myriad of ways the US tax code fails to mesh with/would unduly impair the ordinary life of expats. This would blunt the oft repeated comment that “if they don’t owe tax to the IRS, so what’s the big deal?” While they USUALLY don’t, almost any life led normally in Canada would run afoul of the US rules with potentially devastating consequences and the judge should understand this in understanding the nature of the prejudice that simple information sharing represents. Here, I think the judge could understand by way of argument the legitimate fear of Canadians to opening themselves up to the unknown avenues of retribution that IRS might choose to take by coming forward publicly in this litigation. Somebody like Alison Christians may well have enough background to present the evidence.

    An expert could thus describe some or all of the following:
    – the way fx conversions creates phantom gains (taxable) and phantom losses (non-events);
    – the encyclopedic reach of FINCEN reporting once the magic threshold of $10,000 in accounts is reached (everything from telephone cards to Aeroplan accounts, for example, are disclosable or subject to massive, punitive fines which can only be appealed inside the US and its court system to which Canadians would not normally have ready access);
    – the fact that FINCEN/FBAR rules result in mandatory disclosure of all accounts of business partners (even if “pure Canadian”), spouses, employer’s etc. While the IGA itself does not necessarily mandate the disclosure of ALL accounts subject to FBAR, once the foot is in the door, FBAR and punitive sanctions do the rest. One of my favourites – and one I think would resonate with a judge – is law firm trust accounts. If a law firm has trust accounts (and they all do), and if a law firm has a “US Person” as a partner (and I guarantee that every firm larger than fifty DOES have a US Person as a partner: it is a statistical certainty), then all of their accounts, including confidential client accounts, must be disclosed to the IRS by that partner or be subject to punitive sanctions. The IGA would capture many of these but there is a little more ambiguity in its application here and I haven’t spent enough time on the issue to satisfy myself that it would. I am quite sure the Treasury regs would though.
    – the means by which PFIC rules would substantially confiscate Canadian held mutual funds (and not that Canadian securities laws by and large prohibit Canadians from acquiring US mutual funds that might satisfy the US);
    – the imperfect protection of pensions and RRSP’s under the Tax Treaty;
    – lack of protection for RESP’s, RDSP’s, TFSA’s etc (even if exempt under the IGA, the exemption is a mere speed bump to their disclosure and taxation);
    – the complexities of operating a small business (need for two separate books of account in two currencies, different accounting standards, different reporting standards) and the resulting pariah status of “mud blood” Canadians with US indicia in going in to such businesses in partnership with “pure blood” Canadians born anywhere else in the world to parents who have never been to the US…etc.

    The list would take me too long to draw up here and I know that just about everyone who frequents this blog has their own “top ten” list of ways coming into compliance has been or is a near impossibility.

    What I would want the judge to leave the hearing understanding is that the IGA operates directly to coerce people into “coming into compliance” with the IRS OR forces them into litigation with the IRS in a foreign country (and in both cases, violates their right to privacy along the way). I would also want him or her to understand that EITHER outcome represents not a trivial mosquito bite but a very real and present threat to the life savings of people (as in all or substantially all of their net worth being open to attack) PLUS a threat to their right to earn a living in Canada. How employable do you think a CFO would be if any employer would have to turn over its files to the IRS in employing him or her? What are the career prospects of a potential US Person who wants to be a partner in a legal or accounting firm or other professional firm with client trust accounts? What shareholder in a small business would dare tell other shareholders the dark nature of his or her past (as a person with “US indica”). I have mentioned before a Canadian-born acquaintance who was in a small business that was undergoing reorganization that was subjected to questioning about whether he was a US person (since the reorganization proposed would not be able to be done if any shareholders were actually US persons). This person – with US parents and no ready means of acquiring an “expatriating event” – was faced with a choice (and I don’t know how he resolved it, but he still works at the same firm so I expect that he choose to simply hide his ancestry). These are not fanciful or alarmist issues – the IGA has legitimized a general witch hunt for Canadians with US indicia and those “outed” by the process will find their career paths restricted and the necessity of engaging in lengthy and uncertain litigation in a foreign country at best or potential economic ruin at worst.

    The “just renounce” argument will also need to met and, once again, I think expert evidence as to the Catch 22 nature of that process would be a reasonable way to go (although I would not be able to resist noting that anyone who wants to renounce this year before yet another tax year begins is out of luck in Toronto at least…).

    Sorry for the long ramble. I really mainly wanted to bring your attention to the prospect of filling some evidentiary gaps with expert testimony to allow the judge to understand the hypotheticals that would be raised are real and tangible, not fanciful. I suspect that we will be continually handicapped by the unwillingness of people to subject themselves to publicity in court. To the extent we can enlist more people, that of course is the best way to go. To the extent we cannot, I would suggest filling in gaps with experts like Alison.

22. Thanks for the very informative ‘long ramble’.
    Real estate brokers use trust accounts for deposits as stakeholders for real estate transactions. Imagine the reporting complications should a broker or client be a US person. Your thoughts on that?

23. @Anne Frank

    That is the most inspirational piece of judicial prose I’ve ever had the honour to read. During the five minutes I spent reading , the IRS, the Treasury, the compliance condors, Jack Townsend and every jingoistic halfwit that ever posted a tax evader comment withered in my mind to the point that I was able to blow them away as the burden of CBT seemed conquered; for a while at least.

    I’m fairly new here, and I haven’t found a way to search for comments by name. Perhaps, you’ve addressed this topic before, but have you focused your considerable skills on contemplating the likely defenses the Attorney General will be arguing in this case? My experience with judicial proceedings is that often the other side gets an advantage allowing them to frame the debate, and you find the matter being decided on issues that you haven’t adequately considered.

24. @Anne,

    The list of different harms caused by the US tax rules that are aimed at life control of Canadians is, as you say, endless. Also, we anticipated of course that we will need expert witnesses who are experienced and can help detail the harm caused in general and to the Plaintiffs and witnesses in particular.

    But we only have part of one handful who have agreed to be potential witnesses. They cannot cover all harms. We will need a lot more.

    Regarding expert witnesses, my own thinking as a sometime expert witness is that we will need a few with extensive experience (U.S. and Canada personal and business tax filings, both IRS compliance and renunciation paperwork etc.) and standing, and no axe to grind for either side — are impartial and will be seen to be impartial.

    Any volunteers for witnesses (harmed and to be harmed) and suggestions for expert witnesses? Let me know at the ADCS website.

25. I would like to echo Domino’s comment to Anne Frank. I have several times expressed my hope that our extraordinary writers like Badger and many others are saving every post they make here. I would say the same for Anne and Domino and the newer writers we’ve been so lucky to have come aboard the Good Ship Brock. Someday there will be a book about our struggle to obtain justice in this FATCA’d up world and their words of wisdom will need to be retrieved and included and Brock is a very large site now to search.

    @ Domino
    One way to search, although not perfect, is to put [name] says + isaacbrocksociety.ca into your regular search engine. Doing that for “badger says”, for instance, gets me 728 hits using StartPage and 3550 with Google. Pretty impressive, isn’t it.