OTTAWA – The federal appeals court has upheld the constitutionality of laws that allow account information held by Canadian financial institutions to be disclosed to US authorities.
Two US-born women, Gwendolyn Louise Deegan and Kazia Highton, who now live in Canada, questioned Canadian regulations implementing a 2014 agreement between the two countries that allows information sharing.
The two unsuccessfully argued in federal court that the provisions breached the Charter of Rights and Freedoms guarantee to prevent improper seizure, prompting them to take their case to the Court of Appeals.
The United States considers all American citizens to be permanent tax residents in the United States for federal income tax purposes, with “Specified U.S. Persons” taxing their worldwide income, regardless of whether they live, work, or derive income in the United States.
The US Foreign Account Tax Compliance Act, known as FATCA, requires banks and other entities in countries outside the United States to report information about accounts held by US persons, including dual Canadians.
As part of the resulting tax regime, Canadian financial institutions are required by law to provide the Canadian Internal Revenue Service with account information for customers whose information indicates they are US citizens. The tax authorities then submit the information to the US Internal Revenue Service.
Information from Canada shared with the US includes names and addresses of account holders, account numbers, account balances, and details such as interest, dividends, and other income.
In her 2019 ruling, federal judge Anne Mactavish concluded that while Canadian regulations result in the seizure of Americans’ banking information in Canada, those affected have “limited expectations for the protection of their information.”
In their submission to the Court of Appeals, Deegan and Highton said the banks provide a “trawling” function in collecting and reporting the information that the US Internal Revenue Service may use under US law, including law enforcement.
The Canadian government told the Court of Appeals that failure to comply with US measures would have had a serious impact on Canada’s financial sector, its customers and the economy at large.
Financial institutions that fail to comply with FATCA reporting requirements are subject to a 30 percent withholding tax on various types of US-source payments, which the Treasury Department believes could lead to “serious instabilities in Canada’s financial system,” the federal filing said.
A three-judge panel of the Court of Appeals found no reason to overturn Mactavish’s conclusion that Canada’s provisions are constitutional. In their justification, the judges rejected any suggestion that the provisions were harsh or onerous.
Judge Judith Woods, writing on behalf of the panel, said the provisions are an example of international cooperation in administering income tax laws.
“Records indicate that such collaboration is widely accepted and has increased in recent years,” Woods wrote.
Furthermore, she said, the complainants failed to demonstrate that the provisions “are more restrictive than is necessary to be effective or that Canada could have achieved a more favorable outcome for the individuals concerned.”
This report from The Canadian Press was first published on September 23, 2022.
Jim Bronskill, The Canadian Press