I came across this and am now reading. I am posting the “Conclusions” of “FATCA and FBAR Reporting by Individuals: Enforcement Considerations from a Canadian Perspective” by Andrew Bonham in the link below in case others are interested and haven’t yet come across this.
Canadian Tax Journal, Vol. 60, no. 2, 2012
CONCLUSIONSDespite the increasing trend toward judicial comity, the revenue rule and the penal/public-law rule are still the law of the land. With respect to the enforcement of FBAR fines and penalties, since the BSA is not a taxing statute, the revenue rule would not apply, and ultimately any application or action brought by the United States for FBAR enforcement in a Canadian court would be barred by operation of the penal rule. A similar action brought for enforcement of FATCA claims would be barred by both rules.
This leaves the matter of the impact of the assistance-in-collection provisions of the Canada-US tax treaty. Again, since the BSA is not a taxing statute, FBAR collection claims would not fall under the provisions of the treaty. The issue of FATCA individual reporting claims is more problematic. In the event that the United States were to make an application for enforcement of fines for failure to file FATCA returns, the minister would have the discretion to reject or accept such applications. However, the statutory interpretation of paragraph 1 of article XXVI A may alone be determinative of the issue, thereby obviating the need for the exercise of that discretion — an outcome that would, no doubt, be welcomed by the minister so as to avoid a reciprocity war. However, the existence of that discretion could still be used as a negotiating tool as Canada seeks some compromise with the United States on the FATCA FFI requirements.In my view, paragraph 1 of article XXVI A should be interpreted such that no claims consisting of only a punitive component could properly form the subject matter of a revenue claim. This interpretation is consistent with the OECD interpretation which requires an underlying tax claim to form a part of the revenue claim. This interpretation is also more in keeping with good tax policy than an interpretation that would allow stand-alone claims for penalties.If the recommended interpretation were not accepted by the minister, and the minister were to proceed with assistance in collection of FATCA claims, Charter considerations would apply to the collection mechanism of the CRA, and it would be open to any aggrieved taxpayer (alone or perhaps as part of a class action) to assert that public policy should preclude cooperation with enforcement on two grounds:(1) that the FATCA FFI disclosure requirements (which would form the basis for a FATCA revenue claim) would not be constitutional in Canada; and (2) that “but for” the information obtained by FATCA FFI disclosures, the United States would in most cases have no basis to impose FATCA fines in the first place. The case law does indicate that the constitutionality of a foreign law can be examined where the issue of constitutionality is incidental to the litigation. However, as is also noted in this article, the threshold for refusing a foreign claim on the basis of public policy alone, at least in the context of private international law, is a very high one indeed.One thing does seems clear, and that is the fact that because of the existence of article XXVI A, paragraph 8, no dual US-Canadian citizens resident in Canada can be subject to enforcement of either the FBAR or the FATCA regime insofar as their Canadian assets are concerned. The presence of that paragraph may well compel a number of individuals resident in Canada to seek Canadian citizenship as a means of avoiding potential US claims under the treaty.Finally, although the revenue rule and the penal/public-law rule would currently preclude Canadian courts from assisting in collection, the ever-expanding role of judicial comity may one day see a repeal of these rules, or at least a relaxation of their strictures. Should that occur, the United States would be in a position to resort to principles of public international law as a basis for enforcement, even against dual citizens. In such a case, it may well be open to defendants to argue that the mere fact of their US citizenship should not, in and of itself, be enough to satisfy the real and substantial connection test—especially in cases where the defendant has had little or nothing to do with the United States and has certainly derived no benefit from his or her US citizenship.
This is a good article. I read it when it came out in the spring and again a couple of weeks ago. What is interesting about it is that it is a fairly academic article written from the perspective of a Canadian lawyer. I was considering doing a detailed post on it at some point and would recommend it.
Speaking of Canadian lawyers/professors, Queen’s law prof is speaking at McGill law school on Monday October 15 if anybody is in the Montreal area.
A detailed post on this by you would be great!
I see this piece was referenced by Hazy2 and subject matter discussed here: http://maplesandbox.ca/food-for-thought/
@Calgary411- what an excellent article. Thanks for posting it.
Brock society has discussed that FBAR is not a tax form (this is discussed in the article above–I wouldn’t question it.).
Otherwise you run into IRS form 8938 and its delightful siblings
These issues below were a topic in my International Law Class today (in relationship to business transactions, not personal taxes. however the law principles are assumed the same )
(I am not a lawyer, I audit this class)
First, I noted
A treaty is at the highest level of law. (In USA, it is defined as being a half level higher than other laws or statutes.) This would have to be researched in your country of residence.
A tax treaty exists, defining each country’s obligations.
(Form 8938 is an IRS tax form. (along with its 3520 partners etc) 8938 is relevant at the higher income levels, the other new forms relate to foreign business ownership, trusts, etc)
Then we note
tax issues between governments are enforced according to the tax treaty agreement
we know that taxes are not necessarily decided by a court.
If it were to become a court issue (tax court?) –I noted that courts generally assume that the other international court has made its decision–they don’t question it (they don’t want to get involved in decision-shopping).
I noted: If there is a strong public policy in the country of residence, it could (locally) trump a USA court decision and the country of residence could decide not to enforce a particular court decision. “Public Policy” is said to be difficult to argue—-it requires a very strong case with a strong public policy.
fyi, I noted there are few instances where one can sue a foreign government–legalise: “The King Can Do No Wrong”
*I read this article a couple of weeks ago and really need to reread it before contacting the author, which I thought to do. Although I am not a lawyer, I believe I understand the crux of his argument. However, I am unclear how his interpretation of the law would intersect with application of FATCA and related US legislation and regulation. Here is my take:
FATCA calls upon Foreign Financial Institutions to deliver information on accounts held by “US persons” or suffer penalties. This is essentially a contractual arrangement between the FFI and the IRS. It would proceed without reference to courts, though individuals affected presumably have recourse to the courts.
At stage 2, the FFIs require “US persons” to file with the US or suffer penalties such as having accounts closed or forfeiting 30 percent withholding. Again, this does not proceed through the courts, though again individuals presumably have recourse to the courts for redress, perhaps in the form of a class action suit.
There is nothing about FATCA that requires Canadian institutions or the IRS to proceed through CRA or the Canadian court system.
Am I missing something? I am prepared at some point to take these questions to Bonham for clarification, and I would be ready to share his response, with his permission. First, however, I want to be a little more sure that I haven’t missed something.
*One thing to remember which he doesn’t point out in his article in Quebec at least the “revenue rule” is actually statuatorily part of the Civil Code. Only the National Assembly in Quebec City can change it.
What is the import of the Quebec law?
@NorthernShrike- For Mr. Bonham one of the clear problems with FATCA is that it gives the IRS more rights with respect to information gathering than the Canadian courts have said is possessed by the CRA. Mr. Bonham states that FATCA is clearly a fishing expedition. The IRS is basically “trolling” or setting a gill net in the world’s financial system and up until now fishing expeditions have been outlawed under the Canada/U.S. Tax Treaty. This is the same complaint that the Swiss have levelled against FATCA.
He also clearly sees that the revised U.S./Canada Tax Treaty along with FATCA and FBAR enforcement are eroding the “Revenue Rule” and bypassing Canadian court rulings. This is indeed bad for national sovereignty.
For me another chilling thing is the grouping of fines, penalties and interest with actual tax obligations in the Canada/U.S. Tax Treaty. The government of Canada has to get smarter and refuse to sign on to these provisions of the Tax Treaty which make American law operative beyond U.S. borders. The fundamental problem is that citizenship based taxation means that a tax treaty between the U.S. and another country is essentially not the same treaty. The tax treaties are totally asymetrical in their application. And the asymetry of power favors the U.S.
*To the existent the US tries to go around Ottawa and in to the Canadian court system directly(which to be clear they have not attempted since the 1960s/70s) as a matter of Canadian law they would by doing so under the property and civil rights powers of the province NOT the taxation powers of the federal government.
Maybe this is why Dan Mitchell is considering escaping to Canada…? LOL
Should Advocates of Small Government Escape to Canada?
*The Federal Government does through foreign affairs and POGG powers have the ability to block certain types of extraterritorial judgements it views as being against public policy. This is done through the FEMA or foreign extraterritorial measures act. Video below has more description.
Tim’s comment reflects my law professor’s latest lectures. Public policy is very difficult to argue.
Forms 8938 and 3520 etc penalties are tax issues covered by the tax treaty. The international concept of “comity” would allow enforcement of US law in the resident state by the resident state authorities (Canada). Treaties are at the top of the hierarchy of laws.
The argument at the top I believe is meant to address how the FBAR penalties need not be enforced in Canada as they are Treasury isssues not tax issues.. Just don’t step in USA.
I am looking for a place that does not have treaties with US and does not honor comity with US. Iran, North Korea, Cuba, and perhaps the Ecuadorian embassy are what I know of so far.
@Mark Twain- I wonder if Canada wouldn’t be well within its rights to declare inapplicable under the tax treaty any penalty that is levied under those forms? After all form 8938 is still only FBAR form that has only been modified by asking for the date when the account was opened. This question is not at all a substantial change from the FBAR and clearly demonstrates that the U.S. is playing fast a loose with the tax treaty.
The 3520 form penalties should be tossed out since the accounts are perfectly legal to have under Canadian law and their possession is not an attempt at tax evasion.
The U.S. basically in contemptous of the laws of other countries. And its attempt to rewrite its own laws so that their penalties can be read into the tax treaty just shows the disrespect and contempt that the U.S. holds for all countries and its expat citizens.
(I’m not a lawyer)
I see the sole reason for creating the 8938 series of nooses was that the IRS lawyers woke up to the discussion above and created those TAX forms.
I should be studying my real homework, but accidently landed on this which applies to the Canucks and Mexican lucky ones.
NAFTA article 1102: National Treatment, 1103: Most Favored-nation treatment, 1104: Standard of Treament, 1105 Minimum Standard of Treatment
Marvin Feldman v Mexico, Dec 26, 2002
A businessman was given gruff by the Mexican government (insinuated that it was because he was a loud foreigner), and was subject to denial of tax exclusions on cigarettes and eventually an aggressive audit by Mexico. He eventually rose his case to (NAFTA?) Tribunal, who found that he had been discriminated BY THE Mexican GOVT on the basis of his nationality and won his case.
Certainly a Canadian lawyer worth his 25 cents ought to be able to first sue any Canadian institution demanding info only from US citizens. If he was worth 50 cents he ought to be able to sue the US govt also in the NAFTA tribunal.
Intl law affords a govt the ability to screw its citizens wherever they are.
“Comity” means that a US court decision is enforced in Canada. Only STRONG local public policy overcomes law, treaties, or Comity.
Treaties are the highest form of law
I don’t see how to avoid the penalties, but you ought to be able to sue the Canuck bank and take the USA to the NAFTA tribunal. NAFTA is a treaty. In the USA, a treaty is a half step higher than a law.
If NAFTA made an individual decision, it ought to be recognized in a USA court—by Comity
The cost of lawsuits on Canadian banks could be high.
I am not a lawyer–only repeating lectures
excuse me. Faulty logic. I don’t see USA screwing its citizens as a NAFTA thing, since it is completely within its own jurisdiction.
Canadian banks screwing US investors would be discriminatory based on nationality, according to NAFTA rules mentioned.
You can see why I am not a lawyer.
Marvin Feldman v Mexico, Dec 26, 2002
found for the plaintiff based on Nafta 1102.
Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.
Clauses on national treatment are part of the standard repertoire of bilateral investment treaties. In
their typical version, the clauses state that the foreign investor is accorded treatment no less favourable
than that which the host state accords to its own investorsIn the past decades, the wording of the clauses
has essentially remained the same. This is true at least for the practice of European states.