http://decisions.fct-cf.gc.ca/fc-cf/decisions/en/item/119873/index.do
Hillis v. Canada (Attorney General) (September 16, 2015 – 2015 FC 1082, Martineau J.).
Précis: Ms. Hillis and her co-plaintiff, Ms. Deegan, were dual citizens of Canada and the United States. They were both born in the United States but had not lived there since childhood. In this action they sought:
a declaration that the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act, being section 99 and Schedule 3 of the Economic Action Plan 2014 Act, No. 1, SC 2014, c 20 [IGA Implementation Act], and sections 263 to 269 of the Income Tax Act, RSC 1985, c 1 (5th Suppl) [ITA] – collectively, the “impugned provisions” – are ultra vires or inoperative because the impugned provisions are unconstitutional or otherwise unjustifiably infringe Charter rights [the constitutional issues]. [Para. [1]]
They subsequently amended their claim to include non-constitutional issues:
[3] On October 9, 2014, the plaintiffs filed an amended statement of claim adding non-constitutional arguments, which are examined and disposed of in the present judgment. This summary trial concerns the legality of the disclosure of the personal information of US persons (see paragraphs 17 and 27 below) collected for the year 2014 by Canadian financial institutions for the Canada Revenue Agency [CRA]. This information is scheduled to be disclosed on or around September 30, 2015 by the Minister of National Revenue [Minister] to the US tax authorities.
This case was in effect a form of protest against US taxation based on citizenship irrespective of that citizen’s continued links with the US (or absence thereof) and the Canadian government’s furtherance of that taxation by means of the introduction of the IGA Implementation Act which provides for the transfer of Canadian source information to the US which will assist it in identifying financial information about US expatriate citizens living in Canada.
In a nutshell the Court held that the IGA Implementation Act was legal under current Canadian law and declined to issue an injunction prohibiting the exchange of information objected to by Ms. Hillis and Ms. Duggan. The Court however left the constitutional and Charter issues on the table to be determined in a subsequent proceeding.
Decision: The Court examined the background of the impugned legislation:
[35] The conclusion of the IGA between the Government of Canada and the US was announced to the public on February 5, 2014, along with a call for comments on the detailed draft legislative proposals and accompanying explanatory notes in respect of changes to the Income Tax Act to implement the IGA. The deadline for comments was March 10, 2014. The IGA Implementation Act was included as part of Bill C-31 (publicly announced by the Government of Canada as the "Harper Government Creating Jobs & Growth While Returning to Balanced Budgets With Economic Action Plan 2014 Act, No. 1") – an omnibus budget bill of some 360 pages. The first reading of Bill C-31 in the House of Commons occurred on March 28, 2014, and the bill received royal assent on June 19, 2014.
[36] The wisdom of the impugned provisions was questioned by the opposition and a number of players – including citizen groups, prominent legal scholars, and affected individuals – who made their objections or reservations public at the time Bill C-31 was debated in Parliament. Many expressed concern that the impugned provisions would unduly harm the privacy rights and interests of all Canadians; unduly raise compliance costs to all Canadian financial institutions and Canadian taxpayers; impede Canada’s efforts to enforce its own tax laws; and violate the spirit and potentially the letter of a number of Canadian laws and international treaties. Opposition party members also called for the IGA Implementation Act to be removed from the omnibus budget bill to allow for greater scrutiny.
[37] On the other hand, the Canadian Bankers Association – who acts on behalf of 60 domestic banks, foreign bank subsidiaries and foreign bank branches operating in Canada – supported the policy choice made by the Government of Canada to sign the IGA and pass federal implementing legislation allowing financial institutions to legally collect taxpayer information in Canada to comply with [US Foreign Account Tax Compliance Act [FATCA]] requirements. Their motivation was simple. Many Canadian financial institutions (not only federal banks but also credit unions and other provincial institutions) were potentially facing various legal impediments in Canada to disclosing their client information to the IRS. Accordingly, those institutions were at risk of breaching Canadian domestic law in order to comply with FATCA and avoid the thirty percent withholding tax on any US source income and the sale of any US source investments (including Canadian source income due to so-called “foreign pass-through payments” provisions).
It also looked at the extent of the application of the impugned provisions to Canadians:
[39] But what about Canadian taxpayers? How many have been or will be affected by the impugned provisions? An official figure has not been provided by the defendants and much depends on the extent of information being collected by Canadian financial institutions. How will Canadian financial institutions verify in practice if an individual account holder is a US citizen? Will they ask for proof of birth (showing birthplace), in addition to asking for proof of actual residency (like a driver’s licence or other reliable evidence of permanent residence)? Under the IGA and Part XVIII of the ITA, there is no express requirement for a Canadian financial institution to provide notice to its consumers that this information is being collected on US persons for eventual sharing by the CRA with US tax authorities. Each Canadian financial institution has its own policies and procedures with respect to the collection and disclosure of personal information. Will they allow account holders to have access to the personal information that has been reported under the due diligence procedure outlined in the IGA? While we have no answers to these questions, Canadians will have a better idea of the impact of the impugned provisions after September 30, 2015. Before the Senate, a figure of 1 million potentially-impacted individuals was invoked in 2014. According to the cross-examination of Professor Christians (July 23, 2015), there are between 750,000 and 2 million individuals falling within the definition of “US persons” currently present in Canada who could be affected by the impugned provisions. As the plaintiffs note, the impugned provisions also capture those persons who are “accidental Americans”, “snowbirds”, “green card holders”, and those who hold joint accounts with their US spouses.
After a very thorough review of the various arguments the Court concluded that the impugned exchange of information was in accordance with current Canadian law:
[65] All these arguments are unfounded in law or otherwise unconvincing in light of the evidence on record. I agree with the defendants that the plaintiffs misread the IGA and the Canada-US Tax Treaty in a way that frustrates the intention of the parties. It is manifest that the authority to exchange automatically on an annual basis the information obtained by Canada pursuant to the terms of the IGA indeed derives from Article XXVII of the Canada-US Tax Treaty, which does not expressly prohibit such disclosure. The provisions of the IGA are clear. The IGA has force of law in Canada. Sections 266 to 269 of the ITA are compulsory. While all information exchanged is protected by the confidentiality provisions of the Canada-Tax Convention and the ITA, the exceptions created under subsection 241(4) of the ITA are applicable to the impugned provisions and the IGA.
[66] The Canada-US Tax Treaty cannot be interpreted in a vacuum: the fact is that Canada and the US entered into an Intergovernmental Agreement in 2014, purportedly under the authority of the Canada-US Tax Treaty. “In interpreting a treaty, the paramount goal is to find the meaning of the words in question. This involves looking at the language used and the intentions of the parties” (Crown Forest Industries, above at page 814). In the present case, the words used by the parties to the IGA are explicit and the intention of the contracting governments is clear: 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.
If the matter were to be challenged further it would have to be in the constitutional and Charter arguments raised by the applicants which were matters for another day:
[77] For all these reasons, the declaratory and injunctive relief requested by the plaintiffs in their motion for summary judgment shall be denied by the Court, without prejudice to the plaintiffs’ right to pursue their claim that the impugned provisions are ultra vires or inoperative because they are unconstitutional or otherwise unjustifiably infringe Charter rights. There shall be no costs. This is a case where, in view of the nature of the issues and the public interest involved in clarifying the scope of novel provisions affecting hundreds of thousands of Canadian citizens, no costs should be ordered against the losing parties.