American Expats Sue Canada over FATCA

Two American expatriates residing in Canada have filed suit against the Canadian government for its compliance with the U.S. government’s controversial Foreign Account Tax Compliance Act (FATCA). Enacted in 2010, but only recently coming into effect, FATCA requires foreign banks to disclose account information to the IRS from all “U.S. persons”, a term that includes dual nationals and citizens now residing abroad. The U.S. government’s goal is to stop offshore tax evasion and require account disclosure from all “U.S. persons”.

With a population of around 1 million American expats in Canada, there is widespread frustration with the Canadian government for not asserting its sovereignty and protecting its citizens and residents. “I am a proud Canadian,” said plaintiff Ginny Hillis in a press release. “Why is my government branding me with being a potential U.S. tax evader merely because of my place of birth- and turning my personal information over to a foreign government’s jurisdiction?”

The lawsuit itself focuses on the constitutionality of the FATCA agreement between Canada and the U.S., arguing that disclosing this information violates several provisions of the Canadian Charter, including the right to life, liberty, and security of person, the right against unreasonable search or seizure, and the right to equal protection under the law. In a statement, Canadian government has responded by declaring its intention to defend the agreement in court and reaffirming the government’s belief in the agreement’s constitutional validity.

Regardless of the lawsuit’s outcome, it is unlikely there will be much success in reducing the effect of FATCA on Canadian residents and banks. Even if the intergovernmental agreement is declared unconstitutional, the same reporting requirements would be unilaterally imposed by the U.S. upon Canadian banks, who would have to comply or face a severe withholding tax on U.S. sourced payments.  Canadian residents are not alone in this dilemma- more than 80 countries have reached agreements with the U.S. to disclose account information, and many U.S. Persons worldwide will soon face the possibility of investigation from the IRS into their foreign bank accounts.

However, there is a pathway to U.S. tax compliance designed for American expatriates with unreported accounts. The IRS’s new Streamlined Foreign Offshore Procedures offer expats a simple, less punitive path to getting current with your U.S. tax obligations.  However, the Streamline Procedures do not offer amnesty from criminal prosecution. To obtain amnesty, one would need to participate in the 2014 Offshore Voluntary Disclosure Program (OVDP).  It is clear that, regardless of the legal controversy, FATCA is here to stay, and the time is now to disclose foreign accounts to the IRS and avoid the risk of heavy financial penalties and criminal prosecution. For any American expat with concerns about account disclosure requirements, Daniel Rosefelt & Associates, LLC, Attorney & CPA recommends contacting an experienced tax law professional as soon as possible.