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Sending bank customer info to U.S. avoided potentially 'catastrophic effects': Canada

OTTAWA — The federal government is telling an appeal court it had to provide U.S. authorities with customer information from Canadian banks to avoid possibly "catastrophic effects" on Canada's economy. The U.S.

OTTAWA — The federal government is telling an appeal court it had to provide U.S. authorities with customer information from Canadian banks to avoid possibly "catastrophic effects" on Canada's economy.

The U.S. Foreign Account Tax Compliance Act, known as FATCA, requires banks and other institutions in countries outside the United States to report information about accounts held by U.S. individuals, including Canadians with dual citizenship.

Among the information from Canada being shared with the U.S. are the names and addresses of account holders, account numbers, account balances, and details such as interest, dividends and other income.

In a newly filed submission to the Federal Court of Appeal, the Canadian government says failure to comply would have had serious effects on Canada's financial sector, its customers and the broader economy.

Two U.S.-born women who now live in Canada, Gwendolyn Louise Deegan and Kazia Highton, challenged the constitutionality of Canadian provisions implementing the 2014 agreement between the countries that makes the information-sharing possible.

The two unsuccessfully argued in Federal Court that the provisions breach the Charter of Rights and Freedoms guarantee preventing unreasonable seizure, and they now want the Court of Appeal to overturn the ruling.

The appeal court will weigh the merits of their case in a coming hearing.

In her July 2019 decision, Federal Court Justice Anne Mactavish concluded that although the provisions do result in the seizure of the banking information of Americans in Canada, the affected people have only "a limited expectation of privacy" in their data.

Under the tax arrangements, Canadian financial institutions are legally required to provide the Canada Revenue Agency with data concerning accounts belonging to customers whose information suggests they might have American citizenship. The revenue agency then hands the information to the U.S. Internal Revenue Service. 

Nearly all countries levy income taxes based on residency, while the U.S. system is based on citizenship. 

The U.S. considers 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. 

However, Mactavish noted, the U.S. government estimates less than 10 per cent of all people who file American tax returns from outside the United States ultimately owe any taxes to Washington.

In their submission to the Court of Appeal, Deegan and Highton say the banks provide a "dragnet function" in collecting and turning over the information, which the U.S. revenue service can use in accordance with American law, including criminal prosecution.

"Further, once the information has been delivered to the United States, Canada no longer has any legal authority to dictate or limit how the information might be used."

The Canadian government argues the system implemented under the provisions is regulatory, not criminal, in nature.

Financial institutions that do not comply with the FATCA reporting obligations are subject to a 30 per cent withholding tax on U.S. payments, something the Finance Department felt could cause "serious instability in the Canadian financial system," the federal submission says.

The government also cites an expert report that found if all of Canada’s big banks became non-compliant, the Canadian economy as a whole would likely experience significant economic effects, including a decline in income and wealth of Canadians.

"Avoiding the possibility of such catastrophic effects as a decline in GDP, labour income, employment, a depreciation of the Canadian dollar and a lowering of the standard of living of Canadians, is certainly sufficiently pressing and substantial to justify any minimal limitation on rights (as a result of the provisions)," the submission says.

This report by The Canadian Press was first published March 2, 2021.

Jim Bronskill, The Canadian Press

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