2019 FC 960, 2019 FC 960

T-1736-14 2019 FC 960 Gwendolyn Louise Deegan and Kazia Highton ( Plaintiffs ) v. The Attorney General of Canada and the Minister of National Revenue ( Defendants ) Indexed as: Deegan v. Canada (Attorney General) Federal Court, Mactavish J.—Vancouver, January 28, 29, 30, 31 and February 1; Ottawa, July 22, 2019.

Constitutional Law — Charter of Rights — Unreasonable Search or Seizure — Action challenging constitutionality of Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act (Implementation Act), Income Tax Act , ss. 263 – 269 (collectively Impugned Provisions) — Impugned Provisions implementing into Canadian law Agreement between the Government of Canada and the Government of the United States of America to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital (Canada-U.S.

IGA) — Canada-U.S.

IGA negotiated given Canadian government’s concerns resulting from enactment by U.S. of Foreign Account Tax Compliance Act (FATCA) in 2010 to ensure compliance with U.S. taxation system —- FATCA requiring that certain persons (including U.S. citizens) provide financial information to American Internal Revenue Service (IRS) — Impugned Provisions causing Canada Revenue Agency (CRA) to act as intermediary between Canadian financial institutions, IRS — Plaintiffs both American citizens from birth also Canadian citizens — Neither having any current connection with United States — Plaintiffs commencing action in 2014 asserting that automatic collection, disclosure of taxpayer information to IRS as required by Impugned Provisions ultra vires federal legislation that implemented Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital (Canada-U.S.

Tax Treaty), Income Tax Act , s. 241 — With respect to Charter, s. 8 , plaintiffs arguing Impugned Provisions unjustifiably infringing s. 8 — Whether Impugned Provisions infringing Charter, s. 8 ; if so, whether such limitation of rights reasonable limit that was justifiable in free, democratic society within meaning of Charter, s. 1 — Purpose of Charter, s. 8 to protect individuals’ reasonable expectation of privacy against unwarranted intrusions by State — Assuming seizure taking place in present case (i.e. seizure of affected individuals’ banking information), issue whether that seizure reasonable — Given reporting obligations to IRS, those affected by Impugned Provisions having only limited expectation of privacy in banking information in issue here — Seizure herein reasonable — Global context, wherein sharing of taxpayer information between countries has received international acceptance, supporting such conclusion — Use of documents by CRA for domestic income tax purposes will not result in unreasonable seizure of information in question contrary to provisions of Charter, s. 8 — Method used to collect banking records determined to be minimally intrusive; information shared with IRS afforded protection under Canada-U.S.

Tax Treaty — Since seizure of banking information under Impugned Provisions not violating Charter, s. 8 , not necessary to consider whether Impugned Provisions could be justified by defendants under Charter, s. 1 — Action dismissed.

Constitutional Law — Charter of Rights — Equality Rights — In action challenging constitutionality of Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act (Implementation Act), Income Tax Act , ss. 263 – 269 (collectively Impugned Provisions), plaintiffs claiming Impugned Provisions violating Canadian Charter of Rights and Freedoms, s. 15 , drawing distinction between Canadian citizens, residents who are U.S. persons and those who are not U.S. persons — Whether Impugned Provisions infringing Charter , s. 15 ; if so, whether such limitation of rights constituting reasonable limit that justifiable in free, democratic society within meaning of Charter , s. 1 — Charter , s. 15 aimed at preventing drawing of discriminatory distinctions that impact adversely on members of groups identified by reference to grounds enumerated in s. 15 or to analogous grounds — Having to determine whether Impugned Provisions drawing distinction between U.S. persons, non-U.S. persons based on citizenship or national origin — Impugned Provisions drawing distinction between U.S. persons, non-U.S. persons based, at least in part, on their citizenship, national origin — Nevertheless, any such distinction not discriminatory — Effect of Impugned Provisions to compel U.S. persons in Canada to comply with pre-existing obligations under American tax laws — Charter not requiring Canada to assist persons resident in this country in avoiding their obligations under duly-enacted laws of another democratic state — Impugned Provisions not reinforcing, perpetuating or exacerbating disadvantage nor violating norm of substantive equality in Charter , s. 15(1) ; also not involving oppression or unfair dominance of one group by another — Therefore, not necessary to consider whether breach of s. 15 could be justified by defendants under Charter , s. 1 .

Federal Court Jurisdiction — Action challenging constitutionality of Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act, Income Tax Act , ss. 263 – 269 (collectively Impugned Provisions) whereby Impugned Provisions implementing into Canadian law intergovernmental agreement between Governments of Canada, United States — Main preliminary issue whether Federal Court having jurisdiction to grant relief plaintiffs seeking — Federal Court superior court of record having civil, criminal jurisdiction; having plenary jurisdiction to determine any matter of law arising out of its original jurisdiction including constitutional jurisdiction in matters that are properly before Court — Three-part test espoused in ITO-Int’l Terminal Operators v.

Miida Electronics to determine whether Federal Court having jurisdiction over subject matter of claim applied here — Present matter involving claim for relief against federal Crown; thus falling within jurisdiction conferred on this Court by Federal Courts Act , s. 17 — Body of federal law ( Income Tax Act , Implementation Act) existing that was essential to disposition of case that nourished statutory grant of jurisdiction — Also, no bar to Federal Court considering constitutionality of federal legislation that was subject of present action — Therefore, Federal Court having jurisdiction to grant declaratory relief sought by plaintiffs pursuant to Constitution Act, 1982, s. 52(1) .

This was an action challenging the constitutionality of the Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act (the Implementation Act) and sections 263 to 269 of the Income Tax Act (collectively the Impugned Provisions). The Impugned Provisions implemented into Canadian law an intergovernmental agreement between the Governments of Canada and the

United States in February 2014 called the Agreement between the Government of Canada and the Government of the United States of America to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital (Canada – U.S. IGA). The Canada – U.S. IGA was negotiated given the Canadian government’s concerns resulting from the enactment by the United States of the Foreign Account Tax Compliance Act (FATCA) in 2010 to ensure compliance with the United States taxation system.

FATCA requires that certain persons (including U.S. citizens) provide financial information to the American Internal Revenue Service (IRS). It also requires that non- American financial institutions enter into direct reporting relationships with the IRS and that they provide the IRS with account information for customers who may be subject to American tax laws. Broadly speaking, the Impugned Provisions cause Canada— specifically the Canada Revenue Agency (CRA)—to act as an intermediary between Canadian financial institutions and the IRS.

The plaintiffs are both American citizens as a result of each having been born in the United States, although neither spent more than a few years there as children. Both of them are now Canadian citizens and neither has any real ongoing connection with the United States. Ms. Deegan has never worked in the United States and she does not own any assets or hold any financial accounts in that country. Ms. Highton is an elementary school teacher living in British Columbia, who was born in Michigan to Canadian parents. This action was commenced in 2014.

The plaintiffs asserted in particular that the automatic collection and disclosure of taxpayer information to the IRS as required by the Impugned Provisions is ultra vires the federal legislation that implemented the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital (Canada – U.S. Tax Treaty) and/or

section 241 of the Income Tax Act . In an effort to prevent the communication of financial information relating to U.S. persons to the IRS, the plaintiffs brought a motion seeking a permanent prohibitive injunction preventing the collection and disclosure of taxpayer information to the IRS. The Federal Court concluded on this motion that the collection and automatic disclosure of accountholder information about U.S. Reportable Accounts in accordance with the Canada – U.S. IGA was legally authorized by the Impugned Provisions.

It further found that the collection and automatic disclosure of any such information was not inconsistent with the provisions of the Canada – U.S. Tax Treaty and did not otherwise violate

section 241 of the Income Tax Act . Therefore, the Federal Court dismissed the plaintiffs’ motion. With respect to arguments on the Canadian Charter of Rights and Freedom s , the plaintiffs argued in particular that the Impugned Provisions unjustifiably infringed

section 8 of the Charter , which guarantees the right to be secure against unreasonable searches or seizures. They contended that the Impugned Provisions require that Canadian financial institutions transfer the banking information of an indeterminate number of Canadians to the CRA, without prior judicial authorization or any state oversight, which information will then be handed over to the IRS.

The defendants argued that, while the Impugned Provisions result in the seizure of accountholder information of U.S. persons, the plaintiffs and similarly situated individuals do not have an objectively reasonable expectation of privacy in their banking information and that the seizure of the banking information in question is reasonable.

The main preliminary issue was whether the Court had jurisdiction to grant the relief sought by the plaintiffs while the main issues were whether the Impugned Provisions infringed sections 8 and 15 of the Charter ; and, if so, whether any such limitation of rights was a reasonable limit that was justifiable in a free and democratic society within the meaning of

section 1 of the Charter . Held , the action should be dismissed. The Federal Court is a statutory court created under

section 101 of the Constitution Act, 1867 . The Federal Courts’ plenary powers emanate not from any particular legislative provision in the Federal Courts Act or the Federal Courts Rules but rather from their constitutional status as courts. The Federal Court is neither an inferior court nor an administrative tribunal but rather a superior court of record having civil and criminal jurisdiction. As a superior court, the Federal Court has plenary jurisdiction to determine any matter of law arising out of its original jurisdiction. This includes constitutional jurisdiction in matters that are properly before the Court.

Section 17 of the Federal Courts Act grants the Federal Court jurisdiction over all cases in which relief is sought against the Crown, which relief includes declaratory relief pursuant to

section

Section 18 of the Federal Courts Act grants exclusive original jurisdiction to the Federal Court to issue injunctions against federal boards, commissions or tribunals, or to hear and determine any proceeding brought against the Attorney General of Canada. The three-part test espoused in ITO-Int’l Terminal Operators v. Miida Electronics to determine whether the Federal Court has jurisdiction over the subject matter of a claim was applied here. This case involved a claim for relief against the federal Crown and thus fell within the jurisdiction conferred on this Court by

section 17 of the Federal Courts Act . There was an existing body of federal law ( Income Tax Act , Implementation Act ) that was essential to the disposition of the case that nourished the statutory grant of jurisdiction. Moreover, there was no bar to the Federal Court considering the constitutionality of the federal legislation that was the subject of this action and the Federal Courts Act specifically contemplates the exercise of constitutional jurisdiction by the Federal Courts (section 52). Therefore, the Federal Court did indeed have jurisdiction to grant the declaratory relief sought by the plaintiffs pursuant to subsection 52(1) of the Constitution Act, 1982 . The purpose of

section 8 of the Charter is to protect individuals’ reasonable expectation of privacy against unwarranted intrusions by the State. This case involved income tax legislation and legislation relating to the exchange of information for income tax purposes. Both the Income Tax Act and the Implementation Act can be described as being of an administrative nature. For

section 8 of the Charter to be engaged, there must first be a search or seizure. Assuming that to be the case, the question then is whether the search or seizure was reasonable and, in this case, whether the seizure of the affected individuals’ banking information was reasonable. To be able to claim the protection of

section 8 of the Charter , an individual must first establish that they have a reasonable expectation of privacy in the subject matter of the search. The fact that the plaintiffs and other U.S. persons have the pre-existing obligation to report their banking information to the IRS under American tax laws suggested that their privacy interest in that information was limited. The seizure of that information herein was reasonable.

Notably, the evidence before the Court was that some 100 countries have entered into intergovernmental agreements with the American government in efforts to mitigate the consequences of FATCA in each of these countries and there was no suggestion that any of these countries were able to negotiate agreements with the American government that were any more advantageous or less intrusive than the Canada – U.S. IGA. Regard was also to be had to the global environment as it relates to the sharing of tax information between countries.

The sharing of taxpayer information between countries has received international acceptance, further suggesting that the sharing of U.S. persons’ accountholder information with the IRS pursuant to the Impugned Provisions is indeed reasonable. This was further confirmed by the fact that the banking information in issue is shared with the IRS in confidence, in accordance with the provisions of the Canada – U.S. Tax Treaty, and is subject to the restrictions on the use that

can be made of information exchanged under the Treaty. As pointed out by the Supreme Court, once the CRA has obtained documents, taxpayers can no longer have any reasonable expectation of privacy in the documents in question. That being the case, the use of the documents by the CRA for domestic income tax purposes will not result in the unreasonable seizure of the information in question contrary to the provisions of

section 8 of the Charter . Therefore, the use by the CRA of account-holder information obtained under the Impugned Provisions for domestic tax purposes does not violate

section 8 of the Charter . The principle purpose underlying the Canada – U.S. IGA and the Impugned Provisions—namely avoiding the consequences of the direct application of FATCA in Canada— was an important one. The method used to collect banking records was minimally intrusive and the information that is shared with the IRS is afforded protection under the Canada – U.S. Tax Treaty. Given the conclusion that the seizure of banking information contemplated by the Impugned Provisions was reasonable and did not violate

section 8 of the Charter , it was unnecessary to consider whether the Impugned Provisions could be justified by the defendants under

section 1 of the Charter . With respect to

section 15 of the Charter , the plaintiffs argued that the Impugned Provisions draw a distinction between citizens and residents of Canada who are U.S. persons and those who are not, based on the individuals’ national origin or citizenship. Subsection 15(1) of the Charter is aimed at preventing the drawing of discriminatory distinctions that impact adversely on members of groups identified by reference to the grounds enumerated in

section 15 or to analogous grounds. It had to be determined whether the Impugned Provisions draw a distinction between U.S. persons and non-U.S. persons based on their citizenship or their national origin. The Impugned Provisions draw a distinction between U.S. persons and non-U.S. persons based, at least in part, on their citizenship and/or their national origin. Nevertheless, any such distinction is not discriminatory. Focussing on the impact of the Impugned Provisions, it was determined that their effect is to compel U.S. persons in Canada to comply with their pre-existing obligations under American tax laws.

The Charter does not require Canada to assist persons resident in this country in avoiding their obligations under duly-enacted laws of another democratic state, nor does it require this country to shelter those living in Canada from the reach of foreign laws. A review of some affidavit evidence filed by the plaintiffs in this case disclosed that much of the affiants’ concern was with the reporting requirements of FATCA and their unhappiness with the fact that the American government seeks to tax its non-resident citizens.

However, this was a policy choice made by the American government that was not open to challenge here. The decision of the Canadian government to share these individuals’ banking information with the IRS because their American citizenship or national origin makes them subject to American tax laws did not devalue their worth as individuals. Nor did it send the message that U.S. persons are less capable or less worthy of recognition as human beings or as members of Canadian society. It was thus not discriminatory.

Therefore, the Impugned Provisions did not reinforce, perpetuate or exacerbate disadvantage nor did they violate the norm of substantive equality in subsection 15(1) of the Charter . Moreover, the Impugned Provisions did not involve the oppression or unfair dominance of one group by another or a denial to one group of protections that are basic or necessary for full participation in Canadian society. It was therefore not necessary to consider whether a breach of

section 15 could be justified by the defendants under

section 1 of the Charter . STATUTES AND REGULATIONS CITED Access to Basic Banking Services Regulations , SOR/2003-184 . Bank Secrecy Act , Pub. L. No. 91-508, 84 Stat. 1114 (1970). Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act , ss. 1, 2, 3, 4, 5, 6, being

Part V of the Economic Action Plan 2014 Act, No. 1 , S.C. 2014, c. 20, s. 99 . Canada–United States Tax Convention Act, 1984 , S.C. 1984, c. 20 . Canadian Charter of Rights and Freedoms , being

Part I of the Constitution Act, 1982 ,

Schedule B, Canada Act 1982 , 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44], ss. 1, 8, 15 , 24. Constitution Act, 1867 , 30 & 31 Vict., c. 3 (U.K.) (as am. by Canada Act 1982 , 1982, c. 11 (U.K.),

Schedule to the Constitution Act, 1982 , Item 1) [R.S.C., 1985, Appendix II, No. 5], s. 101 . Constitution Act, 1982 ,

Schedule B, Canada Act 1982 , 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44], s. 52. Federal Courts Act , R.S.C., 1985, c. F-7, ss. 2 “relief”, 4, 17, 18, 57. Federal Courts Rules , SOR/98-106 . Hiring Incentives to Restore Employment Act of 2010 , Pub. L. No. 111-147, 124 Stat. 71 (2010). Income Tax Act , R.S.C., 1985 (5th Supp.), c. 1, ss. 230 , 233 , 233.3 , 241 , 263 “agreement”, “electronic filing”, “listed financial institution”, “non-reporting Canadian financial institution”, “U.S. reportable account”, 264, 265, 268, 269, 270–281. Internal Revenue Code , 26 U.S.C. § 1.

TREATIES AND OTHER INSTRUMENTS CITED Agreement between the Government of Canada and the Government of the United States of America to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital , 5 February 2014, [2014] Can. T.S. No. 16, Arts. 2, 3, 4, 5, Annex I, II. Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital , [1984] Can. T.S. No. 15, Art. XXVII. United States. Foreign Account Tax Compliance Act (FATCA), 2010.

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ACTION challenging the enactment of the Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act and sections 263 to 269 of the Income Tax Act which implemented into Canadian law an intergovernmental agreement ( Agreement between the Government of Canada and the Government of the United States of America to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital ) between the Governments of Canada and the United States in February 2014.

Action dismissed. APPEARANCES Joseph J. Arvay, O.C., Q.C and Arden M. Beddoes for plaintiffs. Donnaree Nygard and Michael Taylor for defendants. SOLICITORS OF RECORD Arvay Finlay LLP, Vancouver, for plaintiffs. Deputy Attorney General of Canada for defendants. The following are the reasons for judgment and judgment rendered in English by Mactavish J.: Table of Contents Paragraph I. Background A. The American Income Tax System 8 B. The Enactment of FATCA 20 C. The Concerns for Canada Resulting from the Enactment of FATCA 31 D. The Negotiations with the Government of the United States 40 E. The Canada – U.S.

Intergovernmental Agreement and the Impugned Provisions 56 F. The Purpose of the Impugned Provisions 69 G. The Advantages of the Canada – U.S. IGA and the Impugned Provisions over the Requirements of FATCA 90 II. The Plaintiffs’ Situation 108 III. The Evidence of Other Affected Individuals 126 IV. The History of this Litigation 167 V. Issues 173 VI. Do the Plaintiffs have Standing to Bring this Action? 176 A. Does this Case Raise a Serious Justiciable Issue? 198 B. Do the Plaintiffs have a Genuine Interest in this Proceeding? 199 C.

Is Granting Public Interest Standing to the Plaintiffs a Reasonable and Effective Way to Bring these Issues Before the Court? 201 VII. Is this Case Appropriate for Determination by Way of a

Summary Trial? 209 VIII. Does this Court have Jurisdiction to Grant the Relief Sought by the Plaintiffs? 212 IX. Do the Impugned Provisions Violate

Section 8 of the Charter ? 241 A. The Plaintiffs’ Arguments 243 B. Analysis 254

(1) The Role of the Courts in Reviewing Government Policy Choices 254

(2) The

Section 8 Analytical Framework 259

(3) Do the Plaintiffs and Other Affected Individuals have a Reasonable Expectation of Privacy in Their Banking Information? 286

(4) Is the Seizure of Information under the Impugned Provisions Reasonable? 314

(5) Conclusion with Respect to the Plaintiffs’

Section 8 Claim 353 X. Do the Impugned Provisions Violate

Section 15 of the Charter ? 356 A. The Plaintiffs’ Arguments 359 B. The Defendants’ Arguments 381 C. Analysis 394

(1) The Law Governing

Section 15 Claims 397

(2) Do the Impugned Provisions Draw a Distinction between U.S. Persons and non-U.S. Persons Based on their Citizenship or National Origin? 416

(3) Is any Distinction Drawn by the Impugned Provisions between U.S. Persons and non-U.S. Persons Discriminatory? 426

(4) Conclusion with Respect to the Plaintiffs’

Section 15 Claim 440 XI. Conclusion 442 XII. Costs 443 Appendix Paragraph [ 1 ] Unlike Canada, which taxes only those individuals who are resident in this country, the United States imposes tax on the worldwide income of its citizens, regardless of where they may reside. [ 2 ] To help ensure compliance with this system, the United States enacted the Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA requires that certain persons (including U.S. citizens) provide financial information to the American Internal Revenue Service (IRS).

FATCA further requires that non-American financial institutions enter into direct reporting relationships with the IRS, and that they provide the IRS with account information for customers who may be subject to American tax laws.

Financial institutions that do not enter into such agreements or who otherwise fail to comply with FATCA’s reporting obligations will be subject to a 30 percent withholding tax on a variety of types of payments received from U.S. sources. [ 3 ] The enactment of FATCA led to concerns on the part of the Canadian government as to the potential negative consequences for the Canadian financial sector, its customers and investors, and the Canadian economy as a whole, if Canadian financial institutions were unwilling to comply with the requirements of FATCA.

There were, moreover, concerns with respect to the ability of Canadian financial institutions to comply with FATCA, in light of Canadian banking and privacy laws. [ 4 ] As a result of these and other concerns, the Canadian government entered into negotiations with the American government in an effort to mitigate the impact of FATCA in this country. These discussions culminated in the conclusion of an intergovernmental agreement between the Governments of Canada and the United States in 2014.

This agreement was subsequently implemented into Canadian law through the enactment of the Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act [being

Part V of the Economic Action Plan 2014 Act, No.1 ], S.C. 2014, c. 20,

section 99 (the Implementation Act) and sections 263 to 269 of the Income Tax Act , R.S.C., 1985 (5th Supp.), c. 1 (collectively the Impugned Provisions), the relevant provisions of which are attached as an appendix to these reasons. [ 5 ] Broadly speaking, the Impugned Provisions cause Canada—specifically the Canada Revenue Agency (CRA)—to act as an intermediary between Canadian financial institutions and the IRS.

Canadian financial institutions are now statutorily required to provide the CRA with certain information concerning financial accounts belonging to customers whose account information suggests that they may be “U.S. persons”. The CRA then provides that information to the IRS. [ 6 ] By this action, the plaintiffs challenge the constitutionality of the Impugned Provisions, asserting that they result in the unreasonable seizure of financial information belonging to U.S. persons in Canada, contrary to

section 8 of the Canadian Charter of Rights and Freedoms , being

Part I of the Constitution Act, 1982 ,

Schedule B, Canada Act 1982 , 1982, c. 11 (U.K.) [R.C.S., 1985, Appendix II, No. 44 (Charter)]. The plaintiffs further assert that the Impugned Provisions impose a burden on such persons because of their citizenship or their national or ethnic origin, contrary to

section 15 of the Charter . Finally, the plaintiffs say that these violations do not constitute reasonable limitations on the privacy and equality rights of affected individuals, as contemplated by

section 1 of the Charter . [ 7 ] For the reasons that follow, I have concluded that while the Impugned Provisions allow for the seizure of account information, seizures carried out pursuant to the Impugned Provisions are not unreasonable and thus do not violate

section 8 of the Charter . I have further concluded that although the Impugned Provisions 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

section 15 of the Charter . Consequently, the plaintiffs’ action will be dismissed. I. Background A. The American Income Tax System [ 8 ] The vast majority of countries’ income tax systems are based on the residency of taxpayers. Only the United States and Eritrea utilize a citizenship-based taxation system. [ 9 ] Like Canada, the United States generally automatically grants citizenship to individuals born within its jurisdiction.

Other circumstances, such as parentage, can also lead to a person being deemed to be an American citizen by the United States Government, even if the individual was born outside the United States. Indeed, some individuals may be considered to be U.S. citizens by the American Government despite the person never having had any substantive connection to that country. [ 10 ] The United States deems all American citizens to be permanent tax residents in the United States for federal income tax

purposes, taxing the worldwide income of “specified U.S. persons” regardless of whether they live, work, or earn income in the United States.

The term “specified U.S. persons” is defined under FATCA and relates to persons who are subject to U.S. tax laws. [1] In addition to American citizens, “U.S. persons” subject to U.S. tax laws include other categories of persons who reside in the United States, such as “Green Card” holders. [ 11 ] The result of this is that every Canadian resident who is an American citizen is subject to U.S. federal taxation on all of their income from all sources, wherever that income may be derived, even if he or she is also a Canadian citizen.

These individuals are generally required to register for a “taxpayer identification number” (or TIN) and file U.S. income tax returns on an annual basis. [ 12 ] Like the Canadian income tax system, the American income tax system is largely based on self-reporting by taxpayers.

The U.S. requires that taxpayers, including non-resident U.S. citizens, file income tax returns, regardless of whether they actually owe any taxes, as long as their income for the taxation year in question meets a specified threshold. [ 13 ] According to the evidence of Professor Allison Christians, a professor of international and comparative tax law at McGill University, Canada has never been considered by Americans to be a “tax haven”, as it has its own comprehensive and well-regulated income tax system that is fundamentally similar to the tax system in the United States.

Professor Christians states that Canada is also a highly cooperative member of the international community on matters involving tax and information sharing and, in her opinion, individuals seeking to evade taxes would be more likely to hide their assets in jurisdictions with bank secrecy laws. Such individuals would thus not consider Canada to be a favourable destination. Canada and the United States have, moreover, had a deep and long- standing cooperative relationship in tax compliance and enforcement.

In Professor Christians’ opinion, individuals seeking to thwart American tax compliance and enforcement efforts would not seek assistance in this effort by moving their assets to Canada. [ 14 ] Indeed, the U.S. government estimates that fewer than 10% of all individuals who file American tax returns from a “tax home” located outside the United States ultimately owe any taxes to the American Government. Regardless of whether any tax is due, however, U.S. law requires extensive financial and asset reporting.

Failure to comply with these requirements potentially attracts significant penalties. [ 15 ] The Canada – U.S. Tax Treaty allows U.S. persons who are resident in Canada to receive credit for some taxes paid to the federal and provincial governments in Canada that would otherwise have been owed to the IRS: Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital , 26 September 1980, [1984] Can. T.S. No. 15 (as implemented by the Canada – United States Tax Convention Act, 1984 , S.C. 1984, c. 20 ) (the Canada – U.S.

Tax Treaty). [ 16 ] U.S. persons are, however, subject to taxation in the United States for certain events that are not taxable in Canada, even if the event in question takes place in Canada. For example, when U.S. persons resident in Canada realize a capital gain on the sale of their personal residence (an event that is not taxable in Canada, but is generally taxable in the United States), they can be exposed to significant tax liability to the IRS.

Other examples of matters that are taxable in the United States, but not in Canada, include lottery winnings and strike pay. [ 17 ] Penalties (which can, in some cases, be substantial) may be imposed for failure to comply with the reporting requirements of the U.S. Internal Revenue Code , 26 U.S.C. § 1. That said, taxpayers may have defences where there is a reasonable explanation for their failure to file and it is not due to wilful neglect.

There are, moreover, various amnesty programs available to allow taxpayers to become compliant with their U.S. tax obligations with reduced or no penalties. [ 18 ] In addition to the obligations imposed on citizens under American income tax legislation, the U.S. Bank Secrecy Act , Pub. L. No. 91-508, 84 Stat. 1114 (1970) requires that American citizens file “Form 114” reports with the Financial Crimes Enforcement Network of the U.S. Treasury Department with respect to financial accounts held outside the U.S. that exceed $10 000 (USD) in aggregate.

These reporting obligations pre-date FATCA. “Form 114” reports are known as Foreign Bank Account Reports or “FBARs”. [ 19 ] Requiring that individuals file reports with tax authorities with respect to property held outside the jurisdiction in question is not unusual. As noted above, the United States has its requirement that American citizens file FBAR reports with respect to financial accounts held outside the U.S. that exceed $10 000. Similarly,

section 233 of the Canadian Income Tax Act states that individuals subject to Canadian tax law are required to file “T1135” reports identifying property held in foreign jurisdictions, including bank accounts, foreign trusts and corporations, where the total value of the property in question exceeds $100 000. As is the case where individuals fail to file FBAR reports, penalties can be imposed by Canadian tax authorities for failure to file T1135 reports with respect to foreign property. B.

The Enactment of FATCA [ 20 ] To help ensure compliance with its income tax system, in 2010 the United States enacted FATCA, as part of the Hiring Incentives to Restore Employment Act of 2010 , Pub. L. No. 111-147, 124 Stat. 71. FATCA now comprises

Chapter 4 of Subtitle A [§§ 1471–1474] of the Internal Revenue Code . [ 21 ] This Court has previously found that the purpose of FATCA was “to improve US tax compliance”, and that “[t]he American authorities were particularly concerned in 2010 with the issue of tax evasion”: Hillis v. Canada (Attorney General) , 2015 FC 1082 , [2016] 2 F.C.R. 235 [ Hillis ], at paragraph 50 . [2] [ 22 ] In an effort to thwart tax evasion through the use of off-shore bank accounts, FATCA imposed new reporting requirements on certain persons, including U.S. citizens, with respect to financial assets held outside the U.S.

These require that affected individuals report the name, address and identifying number for the financial institutions where their accounts are located to the IRS, along with information concerning the account type and number, and the maximum value of the account during the year. These reporting obligations apply to U.S. persons who are resident in Canada, including those who also hold Canadian citizenship, and are in addition to the pre-existing obligation under the U.S. Bank Secrecy Act to report foreign financial accounts to the U.S. Treasury Department through the mechanism of FBAR reports.

[ 23 ] The definition of a “U.S. person” under FATCA is intended to capture individuals who are subject to U.S. tax laws. FATCA establishes a series of criteria or indicia that suggest that account holders may be subject to American tax laws.

These include the account holder: • Being identified as a U.S. citizen or resident; • Having been born in the United States; • Having a current U.S. residence or mailing address (including a U.S. post office box); • Having a current American telephone number as the only telephone number on file; • Having both a current American telephone number and a non-American telephone number on file; • Having provided standing instructions to wire funds to an account maintained in the United States; • Having a currently effective power of attorney or signatory authority granted to a person with a U.S. address; and • Having provided an “in-care-of” or “hold mail” address as the sole address on file for the account holder. [ 24 ] Reporting is required for all U.S. persons with assets outside of the United States whose value exceeds certain thresholds based on the individuals’ residency and filing status.

For U.S. persons living abroad, including those individuals residing in Canada, reporting is required if an individual files as “single” or “married filing separately” and has specified foreign financial assets in excess of $200 000 (USD) on the last day of the tax year, or $300 000 at any point during the year.

For U.S. persons living abroad who file a joint tax return (a return that reports the income of both spouses and carries joint and several liability for both spouses), the thresholds are $400 000 (USD) on the last day of the year, or $600 000 (USD) at any point during the year. [ 25 ] Individuals who are not U.S. persons may be affected by the reporting requirements of FATCA, including the non-American spouses of U.S. persons who hold accounts jointly with their spouses.

Canadian businesses that have U.S. persons with signing authority on financial accounts may also be subject to FATCA’s reporting requirements. [ 26 ] FATCA also imposes reporting requirements on non-U.S. financial institutions.

These include entities that: accept deposits in the ordinary course of a banking or similar business; hold financial assets for the account of others as a substantial portion of their business; or are engaged (or hold themselves out as being engaged) primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or have any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities. [ 27 ] FATCA requires that foreign financial institutions (FFIs) disclose the identity of U.S. persons who are beneficial owners of foreign financial accounts.

Reporting FFIs are required to follow prescribed procedures in order to determine whether or not an account holder is in fact a U.S. person.

These procedures may differ slightly, depending on whether the account is owned by a natural person or a legal person or “entity” such as a corporation or a trust, and whether the account was opened prior to or after FATCA coming into force. [ 28 ] Once a FFI ascertains that an account holder’s documentation indicates that the individual satisfies one or more of the “U.S. person” criteria, FATCA requires that FFIs contact the account holder in question in order to determine whether or not the individual is in fact a “U.S. person” for the purpose of the Act. [ 29 ] FATCA gives foreign banks the choice of opting in or out of the FATCA regime.

Financial institutions that decline to opt into the FATCA regime will be subject to the 30 percent withholding tax that will be imposed on U.S. source payments. “U.S. source payments” include U.S. source interest payments, dividends, royalties, fixed and determinable annual or periodic payments, and gross proceeds from the sale of any property that produced any U.S. source interest or dividends. [ 30 ] FFIs that opt into the FATCA regime will be required to register with the U.S. authorities and to employ prescribed procedures in order to determine whether account holders qualify as “U.S. persons”.

As a general rule, these financial institutions will not be subject to the 30 percent withholding tax imposed on the U.S. source payments that they receive. They will, however, be required to impose the 30 percent withholding tax on U.S. source payments that they make to account holders who refuse to provide information regarding their status as U.S. persons (recalcitrant account holders) or to financial institutions that have opted out of the FATCA regime (pass-through payments). C.

The Concerns for Canada Resulting from the Enactment of FATCA [ 31 ] The enactment of FATCA led to concerns on the part of the Government of Canada with respect to the risks that the legislation posed for the Canadian financial sector, its customers and investors, and the Canadian economy as a whole. [ 32 ] Evidence with respect to these concerns was provided by Kevin Shoom. Mr. Shoom is the Director of International Taxation within the Business Income Tax Division of the Department of Finance. He was involved in the negotiations with the U.S.

Government that followed the enactment of FATCA. [3] [ 33 ] According to Mr. Shoom, the Department of Finance was concerned that a broad application of FATCA would have serious negative consequences for the Canadian financial system and for the Canadians who rely upon it.

Although FATCA applies to financial institutions around the globe (as long as those financial institutions do business in the U.S.), the Department of Finance determined that Canada likely faced the highest level of exposure to the negative consequences of FATCA as a result of the very high degree of interconnection between the Canadian economy and that of the United States. [ 34 ] Mr. Shoom states that the 30 percent withholding requirements of FATCA “put at risk all Canadian and Canadian financial

institution (FI) participation in US markets of all types”. He notes that according to information provided by the Canadian Bankers’ Association, in 2008, Canadians held $322 billion (CDN) worth of U.S. securities and received U.S. source income of $27 billion (USD) that would be subject to the 30 percent withholding tax if Canadian financial institutions did not comply with FATCA’s reporting requirements. [ 35 ] Mr.

Shoom says that this could have caused “serious instability in the financial system and therefore to all Canadians who had investments in the US, who relied on pensions which invest in the US, or who borrowed money from or otherwise had financial relationships with Canadian FIs”.

He further estimates that the negative impact of FATCA on the Canadian financial system and economy “would be severe and long lasting”. [ 36 ] Concerns also arose as to whether Canadian financial institutions’ compliance with FATCA’s reporting requirements would bring them into conflict with Canadian law. [ 37 ] In particular, the Government of Canada was concerned that Canadian privacy legislation may have prohibited the direct reporting of accountholder information to the IRS by Canadian financial institutions, absent the consent of the accountholders. [ 38 ] A further concern arose out of Canadian banking legislation.

In order to remain compliant with FATCA, Canadian financial institutions would, in some circumstances, be required to close the accounts of recalcitrant accountholders who refused to co-operate in providing the information necessary to determine whether or not they were “U.S. persons”. However, Canadians have a right to basic banking services under the Access to Basic Banking Services Regulations , SOR/2003-184 .

These regulations require that Canadian banks provide retail depository accounts to individuals who can provide identification in all but exceptional cases (where, for example, the account is to be used for illegal or fraudulent purposes, misrepresentation, or danger to other customers or employees). [ 39 ] Despite these concerns, Mr. Shoom says that the Department of Finance recognized that “an enhanced exchange of information regime” could also potentially offer benefits for the Canadian tax system.

Consequently, representatives of the Canadian government decided to enter into negotiations with their American counterparts, in the hope of mitigating the effect of FATCA on the Canadian economy and Canadians. D. The Negotiations with the Government of the United States [ 40 ] The Hiring Incentives to Restore Employment Act of 2010 (of which FATCA was a part) was signed into law in 2010.

While the provisions of FATCA were initially not scheduled to come into effect until 2013, the effective date for FATCA was subsequently pushed back to 2014. [ 41 ] After determining that there was no appetite for a co-ordinated international response to the American legislation, the Department of Finance decided to work as closely as possible with its American counterparts in an effort to reduce, to the extent possible, the risk posed by FATCA to Canadians, the Canadian financial system, and the Canadian economy. [ 42 ] Numerous meetings and telephone calls took place between Canadian and American officials in the years between 2010 and 2014.

In light of the long and mutually beneficial history of the automatic exchange of tax information between the CRA and the IRS, Canada initially attempted to mitigate the impact of FATCA by negotiating a “carve out” or blanket exemption for Canadian residents. American officials were, however, unwilling to entertain the possibility of creating any such an exemption on the basis that citizenship- based taxation was part of American tax legislation, and the U.S.

Government was obliged to administer its domestic tax laws as drafted. [ 43 ] Having determined that a blanket exemption from the reporting requirements of FATCA was simply not possible, Canadian officials then decided to explore whether the Americans would be amenable to building on existing government-to-government arrangements for the exchange of tax information, rather than having Canadian financial institutions enter into direct reporting relationships with the IRS, as required under FATCA.

The Department of Finance was of the view that a government-to-government approach would be less burdensome for Canadian financial institutions and financial consumers than full compliance with FATCA. A government-to-government approach would also avoid the potential conflict with Canadian privacy laws. [ 44 ] The Department of Finance was also concerned that as a result of FATCA’s reporting requirements, the IRS could become aware of taxpayers residing in Canada who had not previously been filing tax returns with the IRS, who could then face potentially onerous penalties for their failure to file.

To address this concern, the Department of Finance sought to broaden its negotiations with the U.S. Government to include discussions with respect to the possible expansion of voluntary disclosure programs to provide potential relief from IRS penalties for these taxpayers. [ 45 ] In early 2012, while discussions between Canadian and American officials were ongoing, the United States announced that it was negotiating intergovernmental agreements with the United Kingdom, France, Germany, Italy and Spain.

These proposed agreements (which became known as “Model I” agreements) contemplated government-to-government reporting relationships along the lines that had been proposed by Canadian negotiators. [ 46 ] In mid-2012, the U.S. Treasury released a draft template Model I agreement. Under this type of agreement, financial institutions would report accountholders whose banking records included U.S. Person Indicia to the tax authority in the country where the taxpayer was resident. The domestic tax authority would then forward this information to the IRS under exchange of information arrangements between the U.S.

Government and the country in question. [ 47 ] Once the draft template Model I agreement had been developed, Department of Finance officials began discussions with officials from the U.S. Treasury Department with respect to the specific text of a Canada-U.S. intergovernmental agreement. [ 48 ] At the same time, the Department of Finance sought input from the public with respect to these matters, and Mr. Shoom was the individual tasked with dealing with the public.

He states that many of the comments that he received related to concerns with respect to the impact that U.S. tax laws and filing requirements would have for the affected individuals. Frustration was also expressed with respect to the additional tax that these individuals may have to pay, as well as the high cost of retaining advisors who could assist affected

individuals in complying with their U.S. tax obligations. Concerns were also expressed with respect to the challenges that affected individuals would face in making use of tax-deferral plans such as tax-free savings accounts (TFSAs) and Registered Disability Savings Plans (RDSPs). [ 49 ] In early 2013, the IRS released the final version of the FATCA regulations. According to Mr.

Shoom, Canada’s input was reflected in some of the regulations, resulting in the removal of the requirement that documentation be provided under penalty of perjury, and modifications being made to the requirement that documentation with respect to accounts had to be updated every three years. [ 50 ] The FATCA regulations would govern financial institutions in countries that had not concluded intergovernmental agreements with the United States.

However, it was expected that in countries that had negotiated intergovernmental agreements with the U.S., the terms of the intergovernmental agreement in question would largely supplant the requirements of the FATCA regulations. [ 51 ] According to Mr. Shoom, the promulgation of the FATCA regulations gave Canadian negotiators a “clear picture of the bottom line application of the FATCA provisions”.

Once that “bottom line” had been established, Canadian negotiators could continue pushing to have a better arrangement for Canada incorporated into an intergovernmental agreement. [ 52 ] These negotiations culminated in the conclusion of a Canada – U.S. intergovernmental agreement on February 5, 2014: Agreement between the Government of Canada and the Government of the United States of America to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital , 5 February 2014, [2014] Can.

T.S. No. 16 (the Canada – U.S. IGA). [ 53 ] Like the intergovernmental agreements negotiated between the United States and the United Kingdom, France, Germany, Italy and Spain, the Canada – U.S. IGA involves a government-to-government approach, which Mr. Shoom describes as “the most crucial achievement of Canada and the international community”. At this point, approximately 100 other countries have entered into intergovernmental agreements with the U.S., which agreements are similar to the Canada – U.S. IGA. [ 54 ] The conclusion of the Canada – U.S. IGA was announced to the public on February 5, 2014.

This announcement was accompanied by a call for comments on the detailed draft legislative proposals and accompanying explanatory notes in respect of proposed changes to the Income Tax Act that would implement the agreement. The deadline for comments was March 10, 2014. [ 55 ] As was noted earlier, the Canada – U.S. IGA was subsequently implemented into Canadian law through the Impugned Provisions. Canadian financial institutions are bound to comply with the requirements of the agreement, and cannot choose to opt out of the IGA regime. With the Canada – U.S.

IGA in place, Canadian financial institutions are deemed to be compliant with the requirements of FATCA if they comply with the provisions of the agreement: Implementation Act,

section 99,

Schedule 3; Canada – U.S. IGA,

Article 4. E. The Canada – U.S. Intergovernmental Agreement and the Impugned Provisions [ 56 ] Mr. Shoom states that “[t]o the greatest extent possible in the circumstances”, the Canada – U.S. IGA “improved the position of Canada, Canadian [financial institutions] and their customers”. He further asserts that “[c]rucially, the [ Canada – U.S. IGA ] put in place a system that reduced the likelihood that withholding taxes would be applied, thereby mitigating the worst of the risks to the Canadian economy”. [ 57 ] Insofar as individual taxpayers are concerned, generally speaking, the Canada – U.S.

IGA and the Impugned Provisions require that the CRA collect information about some types of accounts maintained by certain Canadian financial institutions that are held by one or more individuals where the financial institution has specific types of information linking the accountholder to the United States. The types of information in question are set out in the Canada – U.S. IGA, and are referred to as “U.S. Person Indicia”. [ 58 ] Similar to the requirements of FATCA, “U.S.

Person Indicia” include any of the following information when it appears in a record relating to an account held by an individual at a Canadian financial institution: identification of the accountholder as a United States citizen or resident; unambiguous identification of a place of birth in the United States; current United States mailing or residence address; current United States telephone number; standing instructions to transfer funds to an account maintained in the United States; currently effective power of attorney or signatory authority granted to a person with a United States address; or an “in-care-of” or “hold mail” address that is the sole address relating to the account. [ 59 ] The Canada – U.S.

IGA and the Impugned Provisions also require the reporting of accounts that are held by a legal arrangement or legal person (such as a corporation or a trust) that is controlled by one or more U.S. Persons. [ 60 ] With respect to each account that is required to be reported (U.S. Reportable Accounts), the information that the CRA must collect from Canadian financial institutions includes: a. the name and address of each U.S. Person that is an account holder; b. the taxpayer identifying number (TIN) of each U.S.

Person, or if the TIN is not in the records of the Canadian financial institution, the accountholder’s birth date; c. the name and identifying number of the Canadian financial institution; d. the account number and balance and/or value of the account; and e. the gross amount of interest, dividends, and other income generated by the account or the assets held in the account, including the gross proceeds from the sale or redemption of any property held in the accounts. (collectively, the Accountholder Information).

[ 61 ] Whether or not an account is a “U.S. Reportable Account” is determined by Canadian financial institutions by following the due diligence procedures set out in an Annex to the Canada – U.S. IGA and in the Impugned Provisions (the Due Diligence Procedures). Certain kinds of accounts (such as TFSAs, Registered Retirement Savings Plans (RRSPs), and Registered Education Savings Plans (RESPs) are excluded from the operation of the Canada – U.S. IGA and are not considered to be “U.S.

Reportable Accounts” under the IGA and the Impugned Provisions. [ 62 ] Different Due Diligence Procedures apply to accounts opened before and after June 30, 2014, and to Low Value Accounts (accounts with a balance or value of less than $50 000 USD, or a cash value insurance contract or annuity contract with a value of less than $250 000 USD), Lower Value Accounts (an account with a value of between $50 000 USD and $1 000 000 USD, or a cash value insurance contract or annuity contract with a value between $250 000 USD and $1 000 000 USD), and High Value Accounts (an account with a value of more than $1 000 000 USD). [ 63 ] In accordance with the Canada – U.S.

IGA and the Impugned Provisions, the Due Diligence Procedures to be followed by Canadian financial institutions with respect to pre-existing individual accounts requires them to search their records for accountholders with U.S. Person Indicia. If a Canadian financial institution does not detect any U.S. Person Indicia associated with an account, it need not take any other steps with respect to that account unless and until there is a change of circumstances that results in one or more U.S.

Person Indicia being associated with the account. [ 64 ] For pre-existing accounts that were not previously reportable, the Impugned Provisions only mandate ongoing review and reporting if the account balance exceeds $1 million (USD) at a later date.

FATCA has an additional requirement that no longer applies in Canada: namely that such accounts also be reviewed for changes in circumstance which may indicate the accountholder is a U.S. person. [ 65 ] In addition, customers opening accounts at a new bank (other than those financial institutions that are exempted from FATCA’s reporting requirements under the Canada – U.S. IGA) will now have to certify their tax residency, both for the purpose of the Common Reporting Standard (which will be discussed further on in these reasons) and for the purpose of the Canada – U.S. IGA.

This requirement does not, however, apply to customers who simply want to open a new account at their existing bank. [ 66 ] Low Value Accounts do not have to be reviewed, identified or reported as U.S. reportable accounts, but financial institutions have the discretion to elect to treat these accounts as U.S. Reportable Accounts. Indeed, certain individuals with Low Value Accounts have had their accounts frozen, and have been told that their accounts will not be reopened unless and until they present a Certificate of Loss of Nationality. [ 67 ] If a financial institution discovers U.S.

Person Indicia associated with a Lower Value or High Value Account, it must attempt to obtain or review information and documents that would clarify whether or not the accountholder is in fact a U.S. Person. If the Canadian financial institution cannot obtain or review the necessary information for an account associated with U.S. Person Indicia, the Canadian financial institution must treat the account as a U.S. Reportable Account. [ 68 ]

Article 2 of the Canada – U.S. IGA requires Canada to collect Accountholder Information about U.S. Reportable Accounts from Canadian financial institutions and then provide that information to the United States.

Article 2 of the Canada – U.S. IGA further provides that Canada’s disclosure of the Accountholder Information is to occur annually and on an automatic basis pursuant to the provisions of

Article XXVII of the Canada – U.S. Tax Treaty. F. The Purpose of the Impugned Provisions [ 69 ] It is necessary to identify the purpose of the Impugned Provisions in order to assess the reasonableness of seizures of accountholder information carried out in accordance with the Impugned Provisions, and whether they violate

section 8 of the Charter . [ 70 ] As the plaintiffs observe, the Supreme Court has stated that in identifying the purpose of legislation, “courts should be cautious to articulate the legislative objective in a way that is firmly anchored in the legislative text, considered in its full context”: R. v.

Moriarty , 2015 SCC 55 , [2015] 3 S.C.R. 485, at paragraph 32 . [ 71 ] In identifying the purpose of the Impugned Provisions, the starting point must be the rationale underlying the enactment of FATCA itself. [ 72 ] I agree with the defendants that while the American government was undoubtedly concerned with the issue of tax evasion, the purpose underlying the enactment of FATCA was its desire to improve U.S. tax compliance.

Indeed, Justice Martineau found that “the stated purpose of FATCA is to improve U.S. tax compliance by obtaining information from foreign financial institutions about accounts maintained by U.S. taxpayers, directly or through intermediary entities”: Hillis , above, at paragraph 50 . [ 73 ] Insofar as the purpose of the Canada — U.S. IGA is concerned, Justice Martineau found that the Canada – U.S. IGA was concluded “for the purpose of implementing the obligations to obtain and exchange information with respect to reportable accounts”: Hillis , above, at paragraph 27 .

He further found that the intention of the two governments was clear from the wording of the Canada — U.S. IGA: namely that “they agree to obtain and exchange annually on an automatic basis all relevant information respecting reportable accounts subject to the confidentiality and other provisions of the Canada – US Tax Treaty”: Hillis , above, at paragraph 66 . [ 74 ] While the purposes identified by Justice Martineau may be true as far as they go, the plaintiffs and the defendants have each identified other purposes for the Canada – U.S. IGA. [ 75 ] Referring to the recitals in the Canada – U.S.

IGA, the plaintiffs submit that the purpose of the Impugned Provisions is to assist the American government in implementing FATCA and finding American tax evaders and cheats. The plaintiffs further contend that assisting the United States in catching tax cheats can hardly be considered to be a pressing and substantial issue for the Canadian Government, or for Canadians themselves, submitting that the scheme envisaged by the Canada – U.S. IGA is nothing more than a fishing expedition.

[ 76 ] The defendants contend that it is an oversimplification to say that the purpose of the Impugned Provisions is simply to assist the American government in finding “tax evaders and cheats”. [ 77 ] According to the defendants, Canada’s purposes in entering into the Canada – U.S. IGA, and in implementing it through the Impugned Provisions were distinct from those of the U.S. From Canada’s perspective, the primary purpose of both the Canada – U.S.

IGA and the Impugned Provisions was to avoid the potentially catastrophic impact of FATCA on Canadian financial institutions, their customers and the Canadian economy as a whole. [ 78 ] The defendants identify Canada’s secondary purposes for entering into the Canada – U.S. IGA and for implementing it through the Impugned Provisions as including the lessening of the burden on Canadian financial institutions and their customers that would have been imposed by the direct application of FATCA.

Another such secondary purpose was to achieve the automatic exchange of information from the U.S. to Canada for Canadian taxation purposes in exchange for assisting with the application of FATCA in Canada. [ 79 ] The defendants submit that it is clear from the evidence of Mr. Shoom that there were serious concerns with respect to the potential impact of FATCA on Canadian financial institutions, their customers and the Canadian economy in general. As a consequence, the goal of avoiding this impact was an extremely important one.

The only way that Canadian financial institutions could avoid these serious consequences was for them to comply with FATCA, or with some less onerous standard to which the American government had agreed. The defendants submit that the Impugned Provisions represent that less onerous standard, and that the Impugned Provisions therefore serve the important purpose of avoiding the serious consequences of FATCA. [ 80 ] The plaintiffs accept that Canada’s motive for entering into the Canada – U.S.

IGA may have been to avoid the negative consequences that FATCA would have on Canadian financial institutions, their customers and the Canadian economy in general. According to the plaintiffs, however, there is a distinction between the motive underlying an agreement, and the purpos e of that agreement. [ 81 ] The plaintiffs note that the recitals to the Canada – U.S. IGA identify the purposes of the Agreement.

Amongst other things, the recitals note that a number of issues had arisen with respect to FATCA, including the concern that Canadian financial institutions may not be able to comply with certain aspects of FATCA due to domestic legal impediments. [ 82 ] The recitals also state that the Governments of both Canada and the United States support the underlying goal of FATCA of improving tax compliance on a reciprocal basis, and that the Government of the United States is committed to exchanging tax information with the Government of Canada at an equivalent level of exchange. The U.S.

Government is further committed to working with Canada over the longer term toward achieving common reporting and due diligence standards for financial institutions. [ 83 ] The recitals to the Canada – U.S. IGA also include the recognition by the U.S. government of the need to coordinate reporting obligations, and of the fact that an intergovernmental approach to FATCA implementation would facilitate compliance by Canadian financial institutions while protecting the ability of Canadians to access financial services.

Also included in the recitals is the statement that the parties desired to conclude an agreement to improve international tax compliance, and to provide for the implementation of FATCA based on domestic reporting and reciprocal automatic exchange of information pursuant to the provisions of the Canada – U.S. Tax Treaty, subject to the confidentiality and other protections provided therein. [ 84 ] The plaintiffs submit that what is notably absent from these recitals is any suggestion that the purpose of the Canada – U.S.

IGA was to avoid the potentially catastrophic impact of FATCA on Canadian financial institutions as a result of a threat posed by the United States government if those institutions did not comply with its terms. [ 85 ] It is clear from the recitals to the Canada – U.S. IGA that the Governments of Canada and the United States had a number of shared goals in negotiating the Agreement.

Both Governments also recognized that there were concerns about the ability of Canadian financial institutions to comply with some of FATCA’s reporting requirements because of domestic legal impediments. [ 86 ] However, as the Supreme Court observed in Moriarty , in articulating a legislative objective, regard must be had to the legislative text, considered in its full context (my emphasis): above, at paragraph 32; see also R. v.

Advance Cutting and Coring Ltd ., 2001 SCC 70 , [2001] 3 S.C.R. 209, at paragraph 255 . [ 87 ] Evidence with respect to the context in which the Canada – U.S IGA was negotiated was provided by Mr. Shoom. It is, moreover, clear from Mr. Shoom’s evidence that there were serious concerns on the part of Canadian officials with respect to the impact that FATCA would have on Canadian bank customers, Canadian financial institutions and the Canadian economy as a whole. These concerns were clearly a primary reason why Canada was prepared to enter into an intergovernmental agreement with the American government.

It is, moreover, evident that, from Canada’s perspective, one of the main purposes of the Agreement was to mitigate the negative impact of FATCA in this country. Indeed, I understand the plaintiffs to concede that these concerns may well have been the reason why Canada entered into the Canada – U.S. IGA. [ 88 ] This then takes us to consider the purpose of the Impugned Provisions. In the narrowest sense, the purpose of the Impugned Provisions was simply to implement the provisions of the Canada – U.S. IGA into Canadian law.

There is, however, more to the purpose of the Impugned Provisions than just that: based on the evidence of Mr.

Shoom, I find that a major purpose for the enactment of the Impugned Provisions was to avoid the potentially catastrophic impact of FATCA on Canadian financial institutions, their customers and the Canadian economy as a whole. [ 89 ] I further agree with the defendants that other objectives underlying the enactment of the Impugned Provisions include the lessening of the burden on Canadian financial institutions and their customers that would have resulted from the direct application of FATCA, and the facilitation of the automatic exchange of information between the U.S. and Canada for Canadian taxation purposes.

G. The Advantages of the Canada – U.S. IGA and the Impugned Provisions over the Requirements of FATCA [ 90 ] According to the evidence of the defendants’ witnesses, a number of advantages have been realized as a result of the conclusion

of the Canada – U.S. IGA. Evidence regarding these advantages was provided by Mr. Shoom and by Katherine T. Johnson. Ms. Johnson is a Senior Manager in the Toronto office of PricewaterhouseCoopers, where she specializes in Global Information Reporting. [ 91 ] As a starting point, the Canada – U.S. IGA is much shorter and more readily comprehensible than FATCA and the regulations enacted thereunder. Moreover, in the interest of improving clarity and consistency, the Canada – U.S. IGA uses Canadian terminology to the extent possible, with few references being made to American law.

In addition, most of the provisions of the Canada – U.S. IGA are to be interpreted in accordance with Canadian domestic law. As a consequence, it is much easier for Canadian financial institutions and individuals to understand their legal obligations as to which accounts have to be reported to the U.S. authorities and which do not. [ 92 ] Because of the government-to-government nature of the reporting scheme envisaged by the Canada – U.S. IGA, the exchange of tax information with the IRS attracts the protection of the Canada-U.S.

Tax Treaty, which imposes confidentiality requirements and restrictions on the use that can be made of the information exchanged under the provisions of the Treaty: Canada – U.S. IGA, Articles 2 and 3(7).

These confidentiality requirements and restrictions would not apply if information was transmitted directly to the IRS by Canadian financial institutions under the provisions of FATCA. [ 93 ] The Department of Finance was also successful in restricting the number of accounts that are shared with the U.S. tax authorities by limiting the number of financial institutions that are subject to FATCA’s reporting requirements. [ 94 ] At the same time, the Department of Finance was able to broaden the category of institutions that were not required to conduct Due Diligence Procedures to include First Nations governance bodies.

Finance was also able to include a set of provisions in the Canada – U.S. IGA which allowed Canadian life insurers to assume that policy beneficiaries were not U.S. persons: Canada – U.S. IGA, Annex I. [ 95 ]

Section II B (3) of Annex I of the Canada – U.S. IGA requires that Canadian financial institutions report accounts to the CRA when they come across listed U.S. Person Indicia. However, in an effort to protect accountholders from over-reporting,

Section II B (4) of Annex I of the Canada – U.S. IGA empowers Canadian financial institutions to first try to “clear” the U.S. Person Indicia. Moreover, subsection 265(5) of the Income Tax Act requires that where any U.S. Person Indicia are discovered, reporting Canadian financial institutions “must seek to obtain

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