Many, many people have complained about FATCA (short for the Foreign Account Tax Compliance Act). The Republicans hate it. Privacy advocates hate it. Banks say it is expensive and hate it and taxpayers with unreported foreign accounts really fear and hate it. Thus far, nobody has challenged the law. Until now.
According to published reports, two American expatriates have sued the Canadian government claiming Canada’s FATCA agreement violates their Constitution.
The suit was filed on Monday in the Federal Court of Canada. It claims that the Intergovernmental Agreement (called an “IGA”) between the two nations violates both the Constitution Act of 1867 and the 1982 Canadian Charter of Rights and Freedoms. Specifically, the suit claims that the collection and disclosure of bank account holder information violates the privacy rights of the individual account holders. It also says the agreement violates the “unwritten principle” that Canada can’t forfeit its sovereignty to a foreign nation.
At the risk of offending our Canadian neighbors (and every time we discuss Canada’s participation in FATCA someone gets offended), we think the suit is likely to fail. Although FATCA may not be the most efficient way of addressing tax evasion, the Canadian government suffers from tax evasion just as much as the United States and has pledged to defend the agreement.
For those not familiar with FATCA, the law was passed by Congress in 2010 and requires foreign banks to review their account records and report those accounts with ties to the United States. Since 1970, U.S. taxpayers have been required to report most foreign bank and financial accounts. Compliance has been spotty, especially by American expats and what we term as “accidental Americans – folks who hold dual citizenship by virtue of birth or birth parents but have never lived here. Because of our large border with Canada and close proximity, there are many Americans living in Canada.
The suit was filed by two Americans who live in Canada. The first, Ginny Hillis, was born in Michigan in 1946 to parents who were Canadian. Although she has not lived in the U.S. since she was 5 years old, FATCA presumably applies to her since she is an American and has “foreign” (Canadian) accounts. The second plaintiff, Gwen Deegan, was also born in the U.S. but has not lived here since she was 5 years old.
An editorial in the Canadian paper, the Star said, “Let’s hear it for Ginny Hillis, a 68-year-old retired Windsor lawyer who this week told both the IRS and Canada Revenue Agency to pound salt. She and a woman from Toronto have done what no politician in this country has had the guts to do, which is tell the U.S. government it has no right to know anything about the personal finances of those born stateside but legally residing here….”
The Canadian government says it will fight the suit and defend the agreement.
What is the story behind the story? Unlike Americans who live and work here yet decide to bank overseas, many American expats simply had no idea they were required to report their foreign accounts. There is an estimated 1 million Americans living in Canada. Many have American citizenship simply because they were born to an American parent even though they have never lived here.
The penalties for not reporting a foreign account can be huge. If the IRS feels the failure to report was “willful,” the penalties are up to the greater of $100,000 or 50% of the highest historical account balance. In some cases, taxpayers can even go to jail. There is no evidence that the IRS is treating accidental Americans or expats this way but folks are worried; understandably worried given the aggressive enforcement efforts of both the IRS and U.S. Department of Justice.
American expats and others with unreported foreign accounts should be concerned about FATCA but most will not face its harsh penalties. Like it or not, the law is probably here to stay. Find out your obligations and options by speaking with an experienced tax lawyer well versed in FATCA and FBARs (Report of Foreign Bank and Financial Accounts), CPA or expat tax service.
And if you are so inclined to get more involved, we understand that Ms. Hillis and Ms. Deegan are seeking $83,990 (CDN) in donations to keep their suit alive.
Have an unreported Canadian account and want answers? Give us a call and let one of our FATCA and FBAR lawyers help you understand your rights. For more information, contact attorney Bethany Canfield at Consultations are free and confidential. IRS foreign reporting services offered worldwide.