A long-awaited legal challenge against the US Foreign Account Tax Compliance Act (FATCA) was rejected in the courts.
The Federal Court of Canada rejected an attempt from Virginia Hillis and Gwendolyn Deegan claiming that FATCA infringed the Canadian Charter of Rights and Freedoms and their right to enjoy security of person and unreasonable search and seizure.
Both were born in the USA but left the country with their families to live in Canada at the age of five years old.
“I am Canadian,” said Hillis “I have no US passport and no connections with the country but I am called a tax evader because of the laws in the country where I was born. It’s not right that Canada is passing my personal information to the IRS.”
Nevertheless, under US tax law, they have an obligation to declare their worldwide income to the Internal Revenue Service (IRS).
Option to renounce citizenship
Under FATCA and an agreement signed between the US and Canadian governments, banks and other financial institutions in Canada must report the details of any accounts and investments controlled by US citizens.
As the pair are expats, the report only concerns accounts with balances standing in excess of US$200,000.
The court ruled that even if FATCA flouted Canadian law, the plaintiffs had the option to renounce their US citizenship, which would mean their financial information would not go to the US.
Now the case is settled, the Canadian government intends to start sending financial data to the IRS on September 23. Around a million US expats living in Canada are expected to be impacted by the ruling.
FATCA is an international tax network involving more than 100 countries and almost 175,000 banks and financial institutions.
The law is designed to capture unreported financial information about US taxpayers with offshore assets and bank accounts.
Backed by President Barack Obama, FATCA should raise the US Treasury around $10 billion.
“Had the case been won, the tax agreement between the US and Canada would have been called in to doubt with severe consequences for financial institutions who could have faced hefty fines or been frozen out of the banking system,” said tax lawyer Ray Berg.
“The data exchange will go as planned because there is really no time to appeal and once the exchange has taken place, their argument is lost.”