March 30, 2022 – The Next Step In A Long Journey

Long-awaited ADCS-ADSC, 'Gwen and Kazia' FATCA appeal hearing in Canada takes place today – March 30, 2022 https://t.co/QbWGgp4mdu

— U.S. Citizen Abroad (@USCitizenAbroad) March 30, 2022

The ADCS Lawsuit Discussed In The Legal World

On the eve of the @ADCSovereignty #FATCA Canada lawsuit appeal, here is an article that discusses the history of the case and how it relates to the Can/US Tax Treaty. https://t.co/WyBfb55deL

— U.S. Citizen Abroad (@USCitizenAbroad) March 29, 2022

I came across an interesting article today. The article is of interest for at least four reasons which include:

29173_collecting_another_countrys_taxes__recent_experience_in_the_canada-u_s__context

1. The gradual weakening of the common law “Revenue Rule” which historically has operated to prevent one country from collecting tax debts owed to another country. Notably the Judge in the Retflavi case cited:

The “revenue rule,” a common law doctrine, generally provides that “the courts of one sovereign will not enforce the tax judgments or claims of another sovereign.” Attorney Gen. of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 106 (2d Cir. 2001). A treaty, however, can override the revenue rule. See Her Maiesty the Queen ex rel. B.C. v. Gilbertson, 597 F.2d 1161, 1165 (9th Cir. 1979).

2. The exchange of information and the enforcement provisions found in the Canada US Tax Treaty. In Retflavi the court commented in explained that Article 26A of the Canada US tax treaty means that:

Article 26A provides the IRS with the authority to assess and collect taxes deemed “finally determined” by Canadian tax authorities and to treat any such revenue claim as an assessment under United States law.

3. The discussion of the Dewees (U.S. citizen living in Canada with a $120,000 US “tax debt”) and Retfalvi (Canadian tax resident living in the USA with a $123,000 CDN tax debt) cases which reinforce the role of citizenship in precluding collection assistance.

Paragraph 8 of the Article XXVIA provides:

No assistance shall be provided under this Article for a revenue claim in respect of a taxpayer to the extent that the taxpayer can demonstrate that . . . . the revenue claim relates to a taxable period in which the taxpayer was a citizen of the requested state

4. The discussion of the FATCA Canada lawsuit (appeal to be heard tomorrow) which (so far) has upheld the constitutionality of the FATCA IGAs (July 2019) and that the IGAs are consistent with the Canada/US Tax Treaty (2015). Specific references in the article include:

In relation to the 2014 US/Canada Tax Federal Court Of Canada FATCA Tax Treaty Decision – per Justice Martineau:

At Paragraph 76 of its decision, the Federal Court concluded that the I.G.A. was not contrary to
the Treaty or the Income Tax Act and it was not up to the court to amend the law. The court
stated:

True, a great number of Canadian taxpayers holding US reportable accounts are likely to be affected by a reporting system that in many quarters is considered unjust, costly and ineffective, considering that at the end of the day they are not likely to owe taxes to the US. In the absence of legislative provisions requiring all Canadian financial institutions (provincially and federally regulated) to automatically notify their account holders about reporting to the CRA under the IGA and Part XVIII of the ITA, these taxpayers may also be taken by surprise by any consequences that flow from such disclosure. The plaintiffs may find this deplorable, but apart from a constitutional invalidation of the impugned provisions or a change of heart by Parliament or Congress, or the governments of Canada or the US, there is nothing that this Court can judicially do today to change the situation. The impugned provision

s have not been held to be ultra vires or inoperative. Judicial courage requires that judges uphold the Rule of Law.

In relation to the 2019 Federal Court Of Canada Charter Decision – per Justice MacTavish:

DEEGAN V. CANADA

A similar conclusion was reached in Deegan v. Canada.18 The provisions of the Implementation Act and Sections 263 to 269 of the Income Tax Act, R.S.C. 1985 (5th Supp.), were challenged by individuals who were accidental Americans.

The plaintiffs alleged that those provisions cause Canada to act as an intermediary between Canadian financial institutions and the I.R.S. Those institutions are required to provide C.R.A. with certain information concerning financial accounts belonging to customers whose account information suggests that they may be U.S. persons. C.R.A. then provides that information to the I.R.S. As a result, the plaintiffs alleged that the provisions of the Implementation Act violate the Canadian Constitution,19 asserting that they constitute an unreasonable seizure of financial information belonging to U.S. persons in Canada. The plaintiffs also alleged that the information exchange under the Implementation Act violated other provisions of the Canadian Constitution because they singled out individuals based on citizenship or national or ethnic origin.20 Finally, the plaintiffs alleged that the violations do not constitute reasonable limitations on the privacy and equality rights of affected individuals.21

The Federal Court disagreed with the allegations and held that the disputed provisions of the Implementation Act are not unreasonable and do not violate the Canadian Constitution.

The information that is obtained by C.R.A. from Canadian financial institutions is not an unreasonable search and seizure. Departing from the approach taken under the revenue rule, the Federal Court determined that an expectation of privacy is appropriate principally when a Canadian statute is criminal or quasi-criminal in nature. Reporting of tax information by Canadian financial institutions to C.R.A., and ultimately to the I.R.S., does not fit into that
protected framework. Tax is essentially a regulatory statute, and the information relates to the manner in which income tax is calculated and collected. Hence, a lesser expectation of privacy exists.

The Federal Court also disagreed with the plaintiff’s assertion that the information is not of a kind that is regularly obtained under the Income Tax Act and therefore should not be delivered to C.R.A. Following the holding in Hillis v. Canada, the banking information is foreseeably relevant to U.S. tax compliance and can be obtained by C.R.A. pursuant to a request from the I.R.S. under Article XXVII of the Treaty.

To the extent that the disputed provisions draw a distinction based on national origin and citizenship, they are not discriminatory. In reaching its decisions, the Federal Court took into account the detailed negotiations that were carried on by the Canadian government, attempting to negotiate a carve-out for Canada. When the Canadian government realized that a carve-out was not possible, it realized that entering into an I.G.A. was the only way to avoid a potentially devastating effect on the Canadian financial sector.

The plaintiffs alleged that the purpose of the Implementation Act was to assist the U.S. government in implementing F.A.T.C.A. and finding U.S. tax evaders and cheats, a purpose that cannot be described as pressing and substantial for the Canadian government or Canadian residents. However, at the same time that Canada was negotiating its I.G.A. with the U.S. government, the O.E.C.D. was involved in developing and implementing a common standard for the automatic multilateral exchange of financial account information along the lines of the I.G.A.

Hence, the Implementation Act could not be said to be out of line with global expectations of
financial privacy.

Finally, the argument that the Implementation Agreement resulted in discrimination based on citizenship and national origin were misplaced. The Federal Court held that a classification based on national origin is a form of discrimination only where it perpetuates ongoing disadvantages or prejudice. That is not the case where compliance with laws of a country of citizenship are in issue.

The Charter does not require Canada to assist persons resident in this country in avoiding their obligations under duly-enacted laws of another democratic state, nor does it require this country to shelter those living in Canada from the reach of foreign laws.

Indeed, as was noted earlier, insulating persons resident in this country from their obligations under duly-enacted laws of another democratic state is not a value that section 15 of the Charter was designed to foster.

Overall, the arguments raised by the plaintiffs paled in comparison to benefits that are derived by the banking industry in Canada. The I.G.A. was necessary for Canadian financial institutions to be deemed compliant with the requirements of F.A.T.C.A. and simplified the related data gathering obligations. In sum, the Implementation Act allowed Canadian financial institutions to avoid 30% withholding taxes on the receipt of capital payments on loans to U.S. residents and simplified the information gathering that would otherwise have been required under F.A.T.C.A.

The March 30, 2022 FATCA Appeal – Federal Court Of Appeal

The appeal will focus on whether the US Canada FATCA IGA violates S. 8 of the Canadian Charter Of Rights And Freedoms. Sections 7, 15 and the Tax Treaty will not be grounds of appeal.

Information about the appeal may be found here.