updated 2:11 PM CET, Oct 31, 2023

Canadian court is latest to reject FATCA legal challenge

Supreme Court of Canada Supreme Court of Canada

A Federal Court in Ottawa on Monday dismissed the latest legal effort by two dual Canadian/U.S. citizens to block Canada’s implementation of the U.S.’s Foreign Account Tax Compliance Act, dealing a blow to thousands of Americans with dual citizenship and consequent tax obligations not just in Canada but, supporters of the plaintiffs argue, around the world.

Monday’s ruling, by Federal Court of Canada Justice Anne Mactavish, was the latest in a series of court setbacks for opponents of FATCA since the tax-information-gathering law came into force around the world in 2014, and comes some six months after a five-day trial in the matter, which took place in Vancouver in late January and early February.

The ruling also comes just three days after a French court decided in favor of allowing France’s FATCA implementation regime to stand.  As reported, that decision sparked a social media storm on the part of Americans with dual nationality in France as well as abroad. 

Charter of Rights photo

In her 140-page decision, Justice Mactavish found that the so-called FATCA Inter-governmental Agreement (IGA), under which FATCA is implemented in Canada, doesn't breach Canada’s Charter of Rights and Freedoms (pictured left, in a Canadian court), which protects Canadian citizens from the “unreasonable seizure” of their financial information and guarantees them equality under law regardless “of their citizenship or their national or ethnic origin”.

She also found that although the IGA provisions do result in the seizure of the banking information of Americans in Canada, the "seizure" of such account information as it is being carried out is "not unreasonable" and thus not in violation of the charter; and that those affected have only "a limited expectation of privacy" in their data in any event. 

"Although the [provisions of the IGA cited by the plaintiffs] draw a distinction based on the enumerated and analogous grounds of national origin and citizenship, any such distinction is not discriminatory, and thus does not violate... the charter," Justice Mactavish said, explaining her decision to dismiss the case.

Under the FATCA IGA, Canadian banks and other financial institutions – like those of the more than 100 other countries that the U.S. also has IGAs with – are legally required to provide the Canada Revenue Agency with financial information about any "American" clients they have. This includes dual citizens like the two plaintiffs in this case, who came to Canada at a young age and don't have U.S. passports nor consider themselves to be American.

The revenue agency then hands the information to the U.S. Internal Revenue Service.

Critics of FATCA say that the problem for such dual citizens is that the U.S. tax regime, unlike those of all other countries except Eritrea, is based on citizenship rather than residency, with the result that Americans are obliged to file U.S. tax returns and potentially pay U.S. taxes their entire lives, even if they have lived in the U.S. only briefly or even never lived there, but obtained their U.S. citizenship as a result of having American parents. 

Such opponents have sought to use their status as residents, citizens and taxpayers of other countries to challenge the way FATCA is implemented, on grounds that the U.S. law is unconstitutional in their current countries of residence and nationality, in addition to violating their privacy and being an “extra-territorial” revenue raiser on the part of the U.S.

"Ginny and Kazia"

The Federal Court case in Ottawa had been brought by an organization called the Alliance for the Defence of Canadian Sovereignty (ADCS), on behalf of two individual plaintiffs, dual US-Canadian citizens Gwendolyn Louise Deegan and Kazia Highton, both of whom have lived most of their lives in Canada. It was the latest in a series of legal efforts in Canada on the part of plaintiff “Gwen,” who is now co-plaintiffed with “Kazia” but formerly had been paired with another long-time dual Canadian/U.S. citizen named Virginia Hillis.

“Ginny and Gwen,” as they were dubbed by supporters early on, launched their first legal effort in 2014, with the help of the Alliance for the Defence of Canadian Sovereignty, describing themselves at the time as “Canadian citizens born in the U.S., who left at age 5 to live in Canada,” and noting that neither had “ever held a U.S. passport or developed any meaningful relationship with the U.S.”

Ginny and Gwen lost their first FATCA challenge, after the court determined that the FATCA Inter-governmental Agreement signed by Canada, which governs the way Canada collects data on behalf of the U.S. and passes it on, didn’t violate Canada’s existing tax treaty.

Deegan and Highton then sought to challenge the FATCA IGA by arguing that it violates key sections of Canada's Rights and Freedoms charter, which, as noted above, Justice Mactavish said it does not.  

The defendants in the matter were named in court documents as the Attorney General of Canada and the Minister of National Revenue.

It wasn't immediately known whether the plaintiffs plan to appeal the matter, as they vowed they would in February, after the trial ended.

On Monday, ADCS co-chairman Stephen Kish, who is a Toronto academic by profession, said the organization’s legal team was examining the ruling and was expected "to get back to us" by next week with its thoughts on what the next step should be. 

Isaac Brock Society member reaction 

Many Canadian/Americans reacted with fury to the decision within hours of its publication in their usual way, by posting comments on the Isaac Brock Society website, launched in 2011 and read and contributed to since then by American/Canadian dual citizens unhappy with what they say are the unfair and intrusive aspects of their American citizenship.

Several took issue with a headline carried by the CBC network and other news websites that said "Court dismisses challenge of deal that helps U.S. nab tax cheats in Canada."

“I guess Canadian citizenship doesn’t mean much anymore," one such "Brocker" wrote.

"How can it possibly be that someone born to Canadian parents while living temporarily in the USA, having left USA in diapers, is an 'American living in Canada' and a 'tax cheat' for not reporting to what is essentially a foreign government?

"For shame fellow Canadians think of their neighbours and co-workers as second class Canadians who due to their misfortunate birthplace 'have only a limited expectation of privacy of their data'.

"What a sad day!”

 Added another "Brocker": "Why is a Canadian court enforcing something onto a Canadian citizen, that is not enforceable without warrant on a U.S. citizen on American soil, and is not enforceable without warrant on a non-dual Canadian citizen on Canadian soil?"

Said a third: "Did I read that right? The judge said that discrimination based upon 'country of origin' is OK in Canada?"

Unintended consequences of FATCA

FATCA's effects on American expatriates who have spent most if not all of their lives abroad has been an issue almost from the day it was signed into law by President Obama in March, 2010. At the time the law had been drawn up in the wake of revelations about wealthy Americans, many of them resident in the U.S., who had been using foreign banks in places like Switzerland and elsewhere to hide cash and other assets from the U.S. IRS.

The law unintentionally created a number of side effects that have made life extremely difficult for many American expatriates, who have struggled to obtain bank accounts, mortgages and other financial products and services abroad almost from the day it was signed. American expats also struggle with the tax filing requirements and, in some cases, double tax burdens it also has brought.  

Among the most vociferous in seeking to challenge FATCA have been the so-called "accidental Americans" like "Ginny," "Gwen" and "Kazia," who have spent most if not all their lives outside of the U.S. and receive no benefits from the tax regime they are obliged to be a part of. It isn't known how many such "accidentals" exist, but, as reported, the Paris-based Accidental Americans Association has estimated there are more than 300,000 across Europe and "tens of thousands" in France. 

Even the U.S. government admits to not knowing exactly how many Americans live outside of the U.S., but the latest estimates have been in the neighborhood of 9 million – significantly more than previously believed, even as recently as three or four years ago.

Some supporters of FATCA argue that it's no more burdensome than the Common Reporting Standard, an OECD-initiated, global tax information exchange regime that was introduced recently, in the wake of FATCA, and which borrows heavily from FATCA in its requirement of financial institutions to automatically provide information on their foreign clients to these clients' governments. (The U.S. has declined to participate in the CRS, arguing, it's said, that it has no need to because it has FATCA.) However, critics point out that nationals of other countries aren't as affected by the CRS as American expats are by FATCA because the U.S. is the only country that taxes on the basis of citizenship rather than residence. 

Click here to sign up to receive the American Expat Financial News Journal's free weekly news bulletin, and occasional breaking news bulletins