Compliance with U. S. tax law may violate Charter

While the Harper government conducts clandestine negotiations with the United States over a new tax information exchange agreement, Canada’s leading constitutional legal expert is telling the federal government such an agreement risks major violations of Canada’s Charter of Rights and Freedoms, and possibly a host of other federal and provincial privacy rules.

The issue revolves around an obscure piece of U. S. legislation passed in 2010 called the Foreign Account Tax Compliance Act ( FATCA). This legislation requires every financial institution in the world ( banks, credit unions, brokerages, insurance companies, etc.) to identify who among their account holders are U. S. citizens, or U. S. persons ( someone who had a green card) and report their financial data to the Internal Revenue Service ( IRS).

It is by far the most egregious example of a U. S. tendency to pass laws and impose them extra- territorially. The club to force compliance? Don’t comply and the U. S. will withhold 30 per cent of every U. S.- origin financial transaction that goes through the bank, whether it’s justified or not. The Americans argue that they are trying to ferret out tax cheats, but the impact of FATCA goes far beyond identifying tax cheats and is now creating tax misery for nearly seven million U. S. expatriates all over the world.

FATCA compliance costs for the world’s financial institutions are astronomical, and Canada’s banks are hoping that the federal government will negotiate an intergovernmental agreement ( IGA) with the Americans that would allow them to report data on U. S. citizens to Canada Revenue Agency, which in turn would send it to the IRS. The U. S., to facilitate this approach, has written a Model Agreement to be used as a template for these bilateral tax agreements.

But a major obstacle to all this is Canada’s Charter of Rights and Freedoms, which prohibits ( Section 15.1) discrimination based on several criteria, including “national or ethnic origin.” Constitutional expert Peter Hogg has pointed this out in a five- page letter to the Finance Department, which is co- ordinating the IGA negotiations with the US.

“In my opinion, the procedures mandate by the Model IGA are discriminatory in a way that would not withstand Charter scrutiny,” Hogg says in his letter. “These procedures effectively treat individuals differently, and adversely, based on an immutable personal characteristic, specifically citizenship. If Parliament were to enact legislation authorizing and permitting this type of differential and adverse treatment, the legislation would contravene the equality protections in section 15 of the Charter.”

Hogg’s letter goes on to point out that Section 1 of the Charter allows governments to impose reasonable limits to Charter provisions, but then argues “… any argument attempting to use Sec. 1 to justify limitations on the equality rights would be extremely weak. The objective of ensuring compliance with U. S. tax laws is probably not important enough to justify breaches of the Canadian Charter, and even if it was … the measures contemplated ( by the U. S.) are grossly disproportionate to the objective.”

There are about one million people in Canada — the vast majority Canadian citizens — who have connections to the U. S. in one way or another. Some are “accidental” Americans — born in Canada to parents who are ( or were) U. S. citizens; Americans who left the U. S. decades ago and thought they automatically renounced their U. S. citizenship when they became Canadians; and border babies — people born to Canadian parents in the U. S. who came home as infants.

All these are snared by the U. S. tax net, and it is their financial information that would be compromised by a Canada- U. S. IGA. Why? Because the U. S. is one of only two countries in the world that taxes you based on your citizenship, not your residence. The IRS cares nothing for the fact that you may never have lived in the U. S. and maybe you don’t even speak English. You’re still taxable.

Hogg, former Dean of Osgoode Hall Law School, has practised constitutional law for 40 years and wrote the only comprehensive treatise on constitutional law. He says his interest in this issue is personal.

While Hogg’s letter focuses on what he believes is a clear violation of Sec. 15 of the Charter, he alludes to potential conflicts with several other federal and provincial right to privacy laws. These include Sec. 7 ( protects “liberty”) and Sec. 8 (“unreasonable search and seizure”). He also suggests that financial institutions that are provincially regulated ( e. g. credit unions) might not be subject to a federally imposed IGA.

Because the U. S.- Canada negotiations over an IGA are ongoing, Hogg would not consent to an interview on the issue. But his strong advice to Ottawa is, don’t sign an IGA based on the American Model I template.

Sources close to the negotiations say the Americans are very reluctant to move off this template because they have already signed IGAs with other governments and would be forced to re- negotiate.

Although FATCA was passed in 2010, it is only now being implemented, and the world’s financial institutions must be ready to comply ( if that’s their choice) by Jan. 1, 2014. With Canada in the middle of negotiations with the U. S., the banks are getting very nervous about a ticking clock. Should Canada decide not to sign an IGA, the banks will be left to their own devices and will have to make their own deals with the IRS — a vastly more complicated and expensive process.

Looming over all of their heads, if Hogg’s analysis is correct, will be a potential for a Charter challenge. With more than a million Canadians adversely affected by this, the odds of a class- action suit coming together look pretty good.