The Federal Court of Appeal found that Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act (Act) and certain provisions of the Income Tax Act do not violate section 8 of the Charter, do not intrude “significantly” on the privacy interests of affected persons, and that it is an example of international co-operation in the administration of income tax laws.
“It’s definitely not surprising,” remarked Matias Milet, a tax partner with Osler, Hoskin & Harcourt LLP. “It would be shocking to me if somebody were to dismantle this huge infrastructure that’s been built up to deal with FATCA (the U.S. Foreign Account Tax Compliance Act) in Canada and other countries. I’m not saying the courts are swayed by this, but it just would have been impractical if they found it was unconstitutional.”
Matias Milet, Osler, Hoskin & Harcourt LLP
In 2010, the U.S. introduced FATCA, legislation aimed at thwarting tax evasion through the use of offshore bank accounts. FATCA also imposed “extensive” reporting obligations on foreign financial institutions, compelling them to disclose the identity of U.S. persons who are the beneficial owners of foreign financial accounts. Foreign banks have the choice of opting out of FATCA but face a steep price as they would be subject to a 30 per cent withholding tax on U.S. source payments.
FATCA worried Canada. The Department of Finance was concerned that a broad application of FATCA would have serious negative consequences on Canadians and the Canadian financial system, particularly due to the 30 per cent withholding requirements. According to the Finance Department, Canada likely faced the highest level of exposure to the negative consequences of FATCA as a result of the high degree of interconnection between the Canadian and U.S. economy. There were also concerns that the direct reporting of account holder information to the IRS by Canadian financial institutions would run against Canadian privacy legislation.
Canada, following an agreement with the U.S., enacted legislation and amended ss. 263-269 of the Income Tax Act to compel Canadian financial institutions to provide the Canada Revenue Agency (CRA) with information about accounts held by American citizens, including Canadians with dual citizenship.
Two U.S.-born citizens residing in Canada, Gwendolyn Louise Deegan and Kazia Highton, challenged the Act as ultra vires and unconstitutional, arguments that were dismissed by Federal Court Justice Anne Mactavish in Deegan v. Canada (Attorney General), 2019 FC 960. Deegan and Highton appealed the Federal Court’s conclusion that the impugned provisions (as it is identified in the ruling) do not contemplate an unreasonable search or seizure for the purposes of s. 8 of the Charter.
“The result is unsurprising, since all the objections in the appellants’ arguments are directed at the effects of U.S. law on U.S. citizens who happen to live in Canada,” said O’Brien who believes the Federal Court of Appeal correctly applied the Supreme Court of Canada’s s. 8 case law. “In essence the appellants are insisting that Canada sacrifice the viability of Canadian financial institutions that serve all Canadians in order to protect individuals who are U.S. citizens from a valid U.S. law that has a legitimate purpose. One can complain that FATCA amounts to extraterritorial overreach, but that doesn’t mean Canada’s response is unconstitutional.”
Deegan and Highton argued that the seizure is unreasonable because it was not driven by Canada’s interests but merely to assist the interests of the IRS. They also maintained that the seized information may belong to persons with “no real connection” to the U.S., and that U.S. tax authorities could use the information for enforcement of its tax laws, including prosecution of tax evasion.
In Deegan v. Canada (Attorney General), 2022 FCA 158, released on Sept. 21, the Federal Court of Appeal in a unanimous decision dismissed the appellant’s contention that the seizure was unreasonable because it was spurred by a “deficiency” in the enforcement of U.S. income tax laws. Rather the court upheld Justice Mactavish’s finding that the major purpose behind the impugned provisions was to avoid the “potentially catastrophic impact” of FATCA on Canadian financial institutions, Canadians and the Canadian economy.
“It is true that the effect of the Impugned Provisions is to assist the United States with administering its tax laws,” said Justice Judith Woods, in reasons that Justices Mary Gleason and Eleanor Dawson concurred with. But “contrary to the appellant’s submissions, the Impugned Provisions were designed to address a risk within Canada and better the lives of people in Canada.”
That finding bemuses Milet, who found that the Federal Court of Appeal “laid it on a bit thick.” The impugned provisions were after all, added Milet, enacted to help the U.S. collect tax information on U.S. citizens and designed to be the “least painful way” for Canadian financial institutions to help the U.S. obtain this information. The court “maybe bent over backwards a little too much the other way in describing the purpose of the legislation as having nothing to do with trying to help the U.S. collect information,” said Milet.
The Federal Court of Appeal also found that there is “some support” for the appellant’s contention that the U.S. may use the seized information to further a criminal prosecution. But heeding guidance from the Supreme Court’s R. v. Jarvis, 2002 SCC 73 decision, Justice Woods found that the impugned provisions are “clearly” regulatory in nature and are similar to information automatically provided to the CRA for regulatory purposes such as T4s by employers, T5s by financial institutions and taxpayers’ annual disclosure of foreign holdings. Moreover, the automatic disclosure of information stipulated in the impugned provisions have gained widespread international support through the development of a common reporting standard, as is reflected in amendments to the Income Tax Act in ss. 270-281, added Justice Woods.
“It is difficult to see how a seizure contemplated by the Impugned Provisions significantly intrudes into privacy interests, as the appellants appear to suggest,” said Justice Woods.