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In recent testimony before the Canadian House of Commons Finance Committee, Queen's University law professor Arthur Cockfield testified the American Foreign Account Tax Compliance Act (FATCA) "is really a sea change" in the long-standing tax information exchange relationship between Canada and the United States.
Historically, the neighbouring nations exchanged information on temporary residents in each country. The FATCA Intergovernmental Agreement (IGA) requires Canada to provide information on permanent residents of Canada, including Canadian citizens who were born in the United States.
Currently, each country tracks and reports portfolio interest, income and dividends. FATCA IGA mandates Canadian financial institutions, through Canada Revenue Agency, (CRA) to hand over to United States Internal Revenue Service (IRS) total quantum of account as well as depardosits and withdrawals.
"Under current Canadian domestic law, banks do not provide that to the CRA. They only provide income information that's needed to assess a taxpayer's tax liability. This is very personal information and very sensitive information that Canada has never shared with any foreign country previously," explained Cockfield.
McGill University H. Heward Stikeman chair in tax law and tax law professor Allison Christians told the committee "there are long-standing limitations on how we and how countries generally react to the revenue and penal laws of other countries. We call these limitations the "revenue rule". The revenue rule says that Canada won't lend assistance to the U.S. to collect U.S. debts of people who were Canadian citizens when the debts arose. Period, full stop, no qualifications."
FATCA "Ferrets Out" Canadian Citizens
"But FATCA, as reflected in the bill before us today, tells us to ferret out our own citizens as likely U.S. tax debtors and present them and their financial resources to our most important treaty partner in an agreement of dubious status that may not even be a tax treaty," Christians advised.
An estimated one million Canadians will be affected by FATCA, potentially making Canada the country where FATCA will have the most impact. Many of these Canadians have been Canadian citizens since birth or for decades. Some were born in the United States because it was the nearest hospital for their mothers to give birth, but they have lived their entire lives in Canada, have never worked or had income from the United States and have never had a U.S. Social Security Number. Others were told four, five or six decades ago by U.S. Consulates they were "permanently and irrevocably" relinquishing American citizenship by becoming Canadian citizens.
Yet, in the Canadian House of Commons, Canada's Minister of State for Finance Kevin Sorenson called them "American citizens abiding here in Canada."
"It's extremely important, absolutely essential, under any FATCA agreement that the definition of a U.S. citizen could never, never, never include any Canadian citizen who is a resident in Canada," insisted lawyer John Richardson.
FATCA and Canadian Laws
The FATCA IGA violates existing Canadian laws, including banking, privacy and human rights laws. In addition, Canadian leading constitutional lawyer and scholar, Peter Hogg wrote to the government in the early stages of negotiations advising that a FATCA IGA like the one that was signed "would not withstand...scrutiny" under Canada's Charter of Rights and Freedoms.
Cockfield "agree(s) with those constitutional law experts who suggest the IGA violates the Charter, more specifically section 15, the prohibition against discrimination on the basis of national origin or citizenship. We're really creating two different regimes. On the one hand, if you're an American or a U.S.-Canadian citizen or you happen to be a loved one of one of those U.S. persons, you're subject to a totally different across border tax information reporting regime than other individuals...
"This is really a gotcha penalty regime the Americans are imposing on these unfortunate roughly one million Canadians. In my opinion it does violate the Charter."
Cockfield, who has written a book on North American Free Trade Agreement (NAFTA), pointed out problems FATCA creates for Canadian businesses. 'A U.S. person who substantially owns a Canadian business will now have a foreign government looking at that account information. It could, in my view, harm cross-border competition, frustrate cross-border mobility. I believe it violates the NAFTA agreement.'
Cockfield expressed concern the FATCA IGA "is a very dangerous precedent
"It's based on a model IGA. It's the same one the Americans use for Luxembourg and the Cayman Islands, and every tax haven in the world the Americans are trying to sign up. We have a unique cross-border relationship, more trade between our two countries than any other two countries in history, more permanent resident flows than any two other countries at least with respect to both our populations, so the deal is a bad deal for Canada in light of this unique relationship."
Cockfield also asserted Canada gets "nothing" under the IGA except protection of Canadian financial institutions from threatened sanctions of 30% withholding on US transactions if they do not comply. Cockfield suggested Canada had options to deal with those threats, including challenges under NAFTA and other public international challenges like to World Trade Organization.
He stressed "We're a democracy, a sovereign country." Cockfield suggested Canada "either could have or still can do a better job of protecting Canadian interests."
Because the IGA violates existing Canadian laws, the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act was introduced by Canada's Conservative government to prevail over all Canadian laws except the Income Tax Act. This Act is part of their Budget Implementation Act omnibus bill.
"This bill suggests that this will be done in furtherance of the existing tax treaty. It goes significantly further," said Christians. "It forces us to ask ourselves how we can open our citizens and their money to the U.S., yet claims this does not constitute lending assistance. Canada must protect Canadians, and that is what the lending assistance rule and the limits on information disclosure do. They assert that the U.S. should have no enforceable tax claim that should be assisted by Canada on Canadians."
"We need to make clear we won't take part in any enforcement in any form of assistance, whether it be in information or collection when it comes to Canadian citizens... We cannot use a phrase like "information gathering" to blind ourselves to what is really occurring. Information sharing is not the end, it is the beginning. Our information exchange must also comply with Canadian law concerning when Canadian tax officials may divulge confidential taxpayer information."
At the Finance Committee, New Democratic Party (NDP), Liberal Party and Green Party introduced numerous amendments to exclude Canadian citizens and permanent residents from FATCA reporting, to ensure Canadian laws prevail over the American law, to review the Act to ensure it is constitutional and meets the Charter of Rights and Freedoms and other amendments. All amendments were defeated by the Conservatives. It is expected the Act will be passed when the budget is voted on in the House of Commons this month.
Through Alliance for the Defence of Canadian Sovereignty, a small group of Canadians launched fund raising for a legal and constitutional challenge to the FATCA IGA and implementation Act if it passes as written.
Tags: Canada | law | FATCA | tax | United States | Finance | Tax | interest | business | Luxembourg | individuals | dividends | banking | Internal Revenue Service (IRS) | enforcement | budget | Compliance | Foreign Account Tax Compliance Act (FATCA) | trade | Other | North America
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