Is Ottawa violating Canadians’ constitutional rights to help the U.S. collect taxes? According to two Ontario women, it is.
Two women are suing the Canadian government over a controversial deal in which Canada has agreed to share the tax information of U.S. persons who are Canadian residents with the IRS.
On its face, the deal may seem to be nothing extraordinary. In practice, however, the costs to privacy, autonomy, and Canadian sovereignty of complying with the United States’ Foreign Account Tax Compliance Act (FATCA) are sweeping. At America’s behest, Canada must share tax information even about Canadians who have never lived a day of their lives in the United States, never worked in the United States, and never owed the IRS a single penny. Merely having dual U.S. citizenship — for example because one was born on U.S. soil to Canadian parents — is enough to trigger the mandatory sharing of private financial information.
Most Canadians believe that FATCA goes too far and are seething that their government has so willingly stepped up to help.
Gwen Deegan is a graphic designer from Toronto. Ginny Hillis is a retired lawyer from Windsor. Each filed a statement of claim in the Federal Court of Canada that accuses the Canadian government of overstepping its constitutional powers by agreeing to comply with a new U.S. law called the Foreign Account Tax Compliance Act (FATCA).
Under the Canada-U.S. agreement, which took effect on July 1, the Canada Revenue Agency (CRA) must provide tax information to the Internal Revenue Service concerning Americans and dual U.S.-Canadian citizens who reside in Canada. That number is estimated to be nearly one million. Canadian financial institutions must search their records for accounts held by clients who meet the definition of “U.S. person” under the law, then supply this information to the CRA so that it can be furnished to the IRS.
While this seems fundamentally unfair from a general fairness perspective, that is not all that the women are hanging their hats on. Indeed, there is a strong constitutional underpinning to Deegan and Hillis’ complaint. The women allege that the deal violates the Charter of Rights and Freedoms for three primary reasons:
(1) first, it exposes them to potential U.S. criminal penalties without a hearing;
(2) second, it infringes on their right to be secure against unreasonable search and seizure by virtue of allowing their financial information to be seized without a warrant; and
(3) third, it violates their equal protection rights by treating two groups of similarly situated people differently. Very simply, it discriminates between those defined as “U.S. persons” and everyone else.
The second argument is particularly compelling in light of the fact that the contents of their bank accounts may now be disseminated by their banks to the CRA and by the CRA to the IRS, without Deegan and Hillis ever knowing about it, let alone having a chance to challenge the disclosure. To make matters worse, there is no requirement whatsoever for a warrant or judicial determination of whether the account holder is actually a “U.S. person,” and meaningful restrictions on how the acquired information can be used are lacking.
What’s most ironic about Deegan’s and Hillis’s situations is that both women are married to Canadians with whom they hold several joint financial accounts. A rhetorical question posed by the Canadian national media is: “Why should the husbands of these women, who are not ‘U.S. persons,’ also be subject to having their private financial information disclosed to a foreign government? Don’t Canada’s constitutional guarantees of liberty, security of the person, and freedom from unreasonable search and seizure protect these men as well?”
In explaining why she initiated the court challenge, Ms. Deegan said, “This is an infringement on Canadians of U.S. origin by our Canadian government. It’s literally a betrayal and I feel we can’t just sit idly by and let it happen.”
The United States taxes “U.S. persons” on their worldwide income, regardless of where the person lives in the world and where the income was earned. For example, a U.S. person could earn his living as Santa’s helper in the North Pole or as an anthropologist in the Congo and still have to report his income to the U.S. Treasury. FATCA requires financial institutions outside of the U.S. to collect the financial information of U.S. persons and submit it to U.S. authorities. Banks that fail to supply the information are penalized.
In addition to the alleged Charter violations, Ms. Deegan and Ms. Hillis claim the Canada-U.S. deal violates the division of federal and provincial powers because according to the Constitution Act, provinces have exclusive control over matters involving privacy and property rights.
Ms. Deegan was born in Washington State in 1962 to a Canadian and a U.S. citizen. She moved to Canada in 1967. She has neither worked nor lived in the U.S. since she was five years old and she has never had a U.S. passport.
“I’ve been a Canadian all my life. And for them to say that now, all of a sudden, they’re just going to hand me over to a foreign government to let them plunder my retirement savings is absurd. And I refuse to let them do this without a fight,” Ms. Deegan said. “All I can do is fight the Canadian government and what they’ve done to capitulate to the United States and this absolutely absurd law.”
Ms. Hillis was born in the U.S. in 1946 to two Canadian citizens. She moved to Canada with her family in 1951. She hasn’t lived in the U.S. since and doesn’t have a U.S. passport.
“I felt very strongly that I needed to be involved on behalf of the possible one million others in Canada in my situation,” Ms. Hillis told the National Post.
In addition to her specific personal circumstances, the issues of sovereignty, privacy, and search and seizure raised in the legal claim “were of too much importance for me to take a passive role,” she said.
In an article published in the National Post, Marni Soupcoff summed up the issue like this:
“Taxes — governments will go to extraordinary lengths to collect them, and will often lose sight of the constitutional checks on their own power in the process. That the Canadian government has done so for the benefit of another country’s coffers, rather than its own, not only compounds the constitutional violations at issue; it adds insult to injury. Canadians are having their rights infringed to satisfy a foreign entity’s overreaching greed.”