Hillis v. Canada (Attorney General)

Hillis v. Canada (Attorney General)
Court (s) Database
Federal Court Decisions
Date
2015-09-16
Neutral citation
2015 FC 1082
File numbers
T-1736-14
Notes
A correction was made on June 6, 2016
Reported Decision
Decision Content
Date: 20150916
Docket: T-1736-14
Citation: 2015 FC 1082
Ottawa, Ontario, September 16, 2015
PRESENT: The Honourable Mr. Justice Martineau
BETWEEN:
VIRGINIA HILLIS AND GWENDOLYN LOUISE DEEGAN
Plaintiffs
and
THE ATTORNEY GENERAL OF CANADA AND THE MINISTER OF NATIONAL REVENUE
Defendants
JUDGMENT AND REASONS
[1] On August 11, 2014, the plaintiffs filed a statement of claim seeking 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].
[2] By the effect of section 3 of the IGA Implementation Act, the Agreement between the Government of Canada and the Government of the United States of America [US] set out in the schedule [Intergovernmental Agreement or IGA] of the IGA Implementation Act is approved and has the force of law in Canada during the period that the Intergovernmental Agreement, by its terms, is in force.
[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.
[4] In this respect, the plaintiffs seek a general declaration and a permanent prohibitive injunction preventing the collection and disclosure of taxpayer information to the US by the Minister where:
(a) the taxpayer information relates to a taxable period in which the taxpayer was a citizen of Canada;
(b) the taxpayer information is not shown to be relevant for carrying out the provisions of the Canada-US Tax Treaty or the domestic tax laws of Canada or the US; or
(c) the collection and disclosure of the taxpayer information subjects US nationals resident in Canada to taxation and requirements connected therewith that are more burdensome than the taxation and requirements connected therewith to which Canadian citizens resident in Canada are subjected.
[5] The plaintiffs generally assert that the automatic collection and disclosure of any such taxpayer information to the US as required by the impugned provisions would be contrary to the provisions of the Convention between the United States and Canada with Respect to Taxes on Income and Capital [Canada-US Tax Treaty] and/or to section 241 of the ITA. The Canada-US Tax Treaty has been approved by Parliament and has the force of law in Canada by the effect of the Canada-United States Tax Convention Act, 1984, SC 1984, c 20 [Tax Convention Act]. The plaintiffs have urged the Court to render its final decision and issue a permanent injunction before the taxpayer information is sent by the CRA to the Internal Revenue Service [IRS], otherwise the present action will become academic and the plaintiffs will suffer irreparable harm. Indeed, it is for this reason that the present motion for summary trial was specially scheduled by the Case Management Judge to be heard at a special sitting in Vancouver on August 4 and 5, 2015.
[6] On the contrary, the defendants submit that the collection of such relevant information is authorized by the IGA, and that its disclosure to the IRS is not inconsistent with the Canada-US Tax Treaty or in violation of section 241 of the ITA. Canada is required to transmit taxpayer information collected under the impugned provisions to the US for the year 2014 by September 30, 2015, and counsel for the defendants have indicated to the Court that to comply with this legal requirement, the CRA will in fact start to send such information to the IRS on or around September 23, 2015. Moreover, defendants’ learned counsel indicated to the Court at the hearing of the present motion for summary trial that he had no instructions from the defendants to consent on a suspension of the contemplated exchange of information pending the time that the matter was in deliberation or that an appeal was pending (in case the Court would refuse the declaratory and injunctive relief requested by the plaintiffs in their motion for summary trial).
[7] I have read the motion records and supplementary motion records filed by the parties, and have considered all relevant and admissible evidence, and all the representations made at the hearing and in the written pleadings, including the relevant legal provisions and case law referred to by counsel. Parties agree that the issues raised by the plaintiffs in their motion are suitable for determination by summary trial and that the constitutional issues raised by the plaintiffs should be decided by the Court at a later date. In view of the urgency of the matter, the Court has accepted to render its final decision prior to September 23, 2015. That being said, measures are taken by the Court to have the present judgment translated in French on an urgent basis as well.
[8] In the event of any inconsistency between the provisions of the Tax Convention Act, or the Canada-US Tax Treaty, and the provisions of any other law, subsection 3(2) of the Tax Convention Act provides that the provisions of the Tax Convention Act and the Canada-US Tax Treaty prevail to the extent of the inconsistency. Moreover, in the event of any inconsistency between the provisions of the IGA Implementation Act or the IGA and the provisions of any other law (other than Part XVIII of the ITA), subsection 4(1) of the IGA Implementation Act provides that the provisions of the IGA Implementation Act and the IGA prevail to the extent of the inconsistency.
[9] I have concluded that the collection and automatic disclosure of account holder information about US reportable accounts (see paragraphs 28 to 34 below) contemplated by Articles 2 and 3 of the IGA is legally authorized in Canada by the provisions of the IGA Implementation Act and Part XVIII of the ITA. Moreover, contrary to the assertions made by the plaintiffs, I find that the collection and automatic disclosure of any such information is not inconsistent with the provisions of the Canada-US Tax Treaty, and does not otherwise violate section 241 of the ITA. Basically, I endorse the general reasoning and the legal arguments submitted by the defendants in their written submissions and reasserted at the hearing by counsel.
Tax compliance and tax liability [10] In every country and for every state, taxation fulfills its utilitarian and distributive purposes: to transfer money from the taxpayer’s pocket to the public treasury, which will in turn satisfy the budgetary needs of the nation. Whether you see yourself as a conservative, a liberal or a libertarian, all taxpayers – natural or legal – must annually compute their income and declare it to the tax authorities. This is the law of the land: inescapable, inevitable and obligatory. But what is the scope of one’s fiscal liability, legally and practically speaking? Suppose no income is received during a particular year: is the taxpayer relieved of any statutory obligation to produce a declaration? What about persons having dual citizenship or multiple residences in different countries?
[11] The list of questions is endless as the particular situation of each taxpayer is infinitely variable. Not surprisingly, the answers will vary from one jurisdiction to another. It is all a matter of statutory construction and application. In a globalized world, practical reality, as well as political and economic considerations, will encourage countries to sign tax treaties.
[12] For example, whether a taxpayer can avail itself of a double taxation exception is a matter to be settled between the countries that have entered into a tax treaty. Indeed, Article XXIV of the Canada-US Tax Treaty exists for this specific purpose. At the time the Canada-US Tax Treaty was negotiated by the parties, it was deemed important to spare from double taxation a number of Canadian individuals working in the US (or vice versa), and Canadian companies operating in the US (or vice versa). As noted in 1995 by the Supreme Court of Canada (citing the US Senate (Foreign Relations Committee), Tax Convention and Proposed Protocols with Canada, at page 2): “The principal purposes of the proposed income tax treaty between the United States and Canada are to reduce or eliminate double taxation of income earned by citizens and residents of either country from sources within the other country, and to prevent avoidance or evasion of income taxes in the two countries”. See Crown Forest Industries v Canada, [1995] 2 SCR 802 at page 823 [Crown Forest Industries].
[13] The Christians expert report provides examples of “Tax Treaty Gaps” with respect to the differential treatment accorded in Canada and in the US to the sale of a principal residence, lottery winnings or strike pay, passive income losses, non-US corporations, and non-US trusts, which can lead to “timing issues”, as well as certain other taxes that may not be eligible for offset by foreign taxes via credit (Christians expert report, pages 7-10). Be that as it may, while gaps or differences in the treatment of certain situations by the US and Canadian tax authorities have been raised by the parties, it is not a matter that needs to be addressed in this summary trial. In exercising its competent authority power to exchange taxpayer information with a treaty partner, the Minister – in practice the CRA – does not consider whether a Canadian taxpayer whose information is subject to exchange (whether automatic or otherwise) would have an impact on a tax liability in the receiving state (Murray affidavit, paragraph 18).
[14] The issue to be considered in this summary trial is notably whether the information exchanged under the IGA is “foreseeably relevant”. Under paragraph 1 of Article XXVII of the Canada-US Tax Treaty, “information may be exchanged for use in all phases of the taxation process including assessment, collection, enforcement or the determination of appeals”. See the technical explanation to the Fifth Protocol, dated September 21, 2007, article 23, page 47. According to the evidence submitted by the defendants, financial information from a foreign jurisdiction about individuals who are, or who display indicia of being, tax residents is useful to a tax administrator even if the information does not lead to increased tax liabilities in the receiving State for all taxpayers identified. Information that the CRA receives from treaty partners assists the CRA with its offshore compliance work, risk assessment, workload development, trend analysis and other matters relevant to ensuring compliance with Canada’s tax laws (Murray affidavit, paragraph 21).
[15] Determining the relevance of information exchanged under the Canada-US Tax Treaty is an administrative matter usually left to the discretion of the tax authorities themselves. From a practical point of view, relevance is mostly related to the identification of various “income sources” in the competent jurisdiction. Residency indicia (which may include citizenship status in the US) will be searched by the tax authorities (cross-examination of Sue Murray at pages 191 and following). The automatic exchange of information is valuable because of its usefulness in conducting risk assessment and in identifying taxpayers with potential compliance issues, and it is increasingly being used worldwide, as illustrated by the evidence submitted with the Smith affidavit. In the present case, the Court has been advised that IRS officials have communicated to CRA officials that the information that Canada will exchange with the US pursuant to the IGA will be highly relevant to the administration of US domestic tax laws for similar reasons (Murray affidavit, paragraph 22). Given the CRA’s experience exchanging information with treaty partners, the Director of the Competent Authority Services Division of the CRA has sworn that she has no reason to doubt this IRS Assertion (Murray affidavit, paragraph 22).
Taxpayers’ obligations under Canada and US Tax laws [16] Under the ITA, an income tax shall be paid, as required by that Act, on the taxable income for each taxation year of every person resident in Canada at any time of year (subsection 2(1) of the ITA). Moreover, a non-resident person in Canada who was employed in Canada, carried on a business in Canada, or disposed of a taxable Canadian property at any time in the year or a previous year, will pay tax on the taxable income determined in accordance with the particular rules found in Division D of the ITA. That being said, notwithstanding any provision of the ITA, where the Minister and another person have, under a provision contained in a tax convention or agreement with another country that has the force of law in Canada, entered into an agreement with respect to the taxation of that other person, all determinations made in accordance with the terms and conditions of the agreement shall be deemed in accordance with the ITA (subsection 115.1(1) of the ITA).
[17] On the other hand, under US domestic law, all US citizens are deemed to be permanent tax residents in the US for federal income tax purposes – regardless of whether or not they actually reside in the US. “US persons” who are subject to US tax laws also include other categories of persons who reside in the US such as green card holders. Accordingly, every Canadian resident who is a US citizen, even if he or she is also a Canadian citizen, is subject to US federal taxation on all of their income from all sources, wherever derived. US persons are also subject to various tax reporting obligations, which include registering for a taxpayer identification number [TIN], filing annual tax returns, reporting income and computing US tax payable. Under US tax laws, the obligation to file income tax returns and to comply with reporting requirements is not always dependent on the existence of an actual tax liability for a particular year.
[18] The IRS uses offshore voluntary disclosure programs targeting presumed hidden offshore wealth held by US residents as a soft administrative approach to combat tax evasion, but such programs may be ineffective in many cases. Should some type of “dragnet” approach be taken to combat tax evasion instead? Obviously, the US Congress has investigated this direction in recent years. The Foreign Account Tax Compliance Act [FATCA], passed in 2010 as part of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, 124 Stat. 71, and codified in pertinent part as I.R.C. §6038D, imposes reporting obligations both on US persons directly, and on foreign financial institutions at which US persons hold certain types of accounts. More particularly, FATCA imposes a thirty percent withholding tax on foreign financial institutions that do not meet the reporting requirements.
[19] US citizens are required to report information regarding foreign bank and financial institution accounts in various forms. According to the expert report of John P. Steines, US persons are required to file an annual income tax return (Form 1040, as well as supporting schedules and forms), which includes the taxpayer’s name, address, taxpayer identification number, items of income, deduction and credit, and resulting tax liability (Steines expert report, page 5). Schedule B of Form 1040 also requires the disclosure of information pertaining to foreign bank accounts, including: whether the taxpayer has a financial interest or signature authority over a financial account located in a foreign country; whether a taxpayer is required to file a Report of Foreign Bank and Financial Accounts – or Form 114 [FBAR]; the name of the country in which the foreign account is located; and other information related to foreign trusts. Schedule B of Form 1040 is an obligation that pre-dates FATCA (Steines expert report, pages 5‑6).
[20] The Steines report also details the requirement for US persons who meet certain reporting thresholds to file Form 8938, created pursuant to FATCA, which also relates to foreign bank account information and must accompany Form 1040 (page 6). This information includes:
• The name, mailing address and identification number of the foreign financial institution;
• The name, address and US taxpayer identification number of the owner of the account;
• The account type and number or other designation;
• Whether the account was opened or closed during the year;
• Whether the account is held jointly with a spouse;
• The maximum account value during the year; and
• Whether a foreign exchange rate was used to convert the account value into US dollars (along with the rate and source of the rate).
[21] The failure to file Form 8938 in a timely manner can result in a financial penalty of $10,000, which is increased by $10,000 for each month the failure to file remains uncured after a 90-day written notice period (up to a maximum of $50,000) (Internal Revenue Code §6038D(d)-(e)).
[22] In addition to the requirement to file annual income tax returns, the Steines report notes that US citizens who hold or have signatory power over a financial account in excess of $10,000 at any time during the year are required to file an FBAR. The FBAR also pre-dates FATCA. The FBAR must be filed to the Financial Crimes Enforcement Network of the US Treasury Department. It must disclose (Steines expert report, page 7):
• The name, mailing address, and identification number of the foreign financial institution;
• The type of filer, name, mailing address, US taxpayer identification number, birthdate, and whether the account is jointly owned;
• Whether the filer has a financial interest in 25 or more financial accounts;
• Whether the filer has signatory power but no financial interest in 25 or more financial accounts;
• The account number or other designation;
• The type of account; and
• The maximum value of the account during the calendar year.
[23] If failure to file an FBAR is willful, the maximum penalty will be the greater of $100,000 or 50% of the account balance that was not disclosed (31 U.S. Code §5321(a)(5)(C)-(D); Steines expert report, footnote 22). In addition, penalties are for each violation, and multiple violations can occur if they involve multiple offices, branches or places of business (31 U.S. Code §5321(a)(1); Steines expert report, footnote 22).
[24] As Professor Christians notes in her expert report, Canadian residents who have US person status and who contribute to or are beneficiaries of certain savings vehicles (including some RESPs, RDSPs and TFSAs) may also be required to file an “Annual Information Return of Foreign Trust with a US Owner” (Form 3520A) or an “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts” (Form 3520), or both (Christians expert report, para 13). Failure to file these forms attracts financial penalties, whether or not any tax is due (IRC §6048(b)(1) and IRC §6677; (Christians expert report, paragraph 13).
[25] Canadian residents who have US person status and who invest in certain Canadian mutual fund companies or who are directly or indirectly controlling shareholders of Canadian corporations (including small business corporations) may also be required to file Form 5471 (IRC §6038, 6046 and regulations thereunder; Christians expert report, paragraph 13). Canadian residents who have US person status and who own interests in certain Canadian mutual funds and other investment vehicles may be required to annually file Form 8621 (IRC §1298(f); Christians expert report, paragraph 13). Finally, Canadian residents with US person status and who own interests in, make transfers to, or receive income, dispose of, or change their interests in certain Canadian partnerships may be required to file Form 8865. Failure to file in each of these cases may lead to financial penalties (IRC §6038; 6038B; 6046A; Christians expert report, paragraph 13).
[26] As can be seen, under US laws, a failure to comply with reporting obligations exposes a US person to penalties. Nor do the filing obligations mentioned above constitute an exhaustive list. Indeed, “[r]egardless of whether any tax is due, the US requires extensive tax and asset reporting documentation, for which noncompliance attracts extensive penalties” (Christians expert report, paragraph 10). The US Government is not a party to the present proceeding. The Court is not in a position at the present time to determine whether the US tax authorities will in fact take action against the plaintiffs or other US persons having dual citizenship or residing in Canada if the taxpayer information mentioned in the IGA is disclosed by the CRA to the IRS. Furthermore, before any collection step is taken, the amount of income tax, penalties or interest due must be first assessed (possibly leading to a particular request for information under the Canada-US Tax Treaty). Accordingly, in the absence of concrete evidence, it is speculative to suggest that the automatic collection and disclosure of taxpayer information mentioned in the IGA is tantamount to providing help to the US authorities in the collection of taxes.
Scope and effect of the impugned provisions [27] Under the Intergovernmental Agreement concluded in 2014 by the governments of Canada and the US, for the purpose of implementing the obligations to obtain and exchange information with respect to reportable accounts, as specified in Article 1 (subparagraph 1(ee)) of the IGA, the term “US person” means:
“The term “U.S. Person” means:
Le terme « personne des États-Unis » désigne :
(1) a U.S. citizen or resident individual,
(1) une personne physique qui est un citoyen ou un résident des États-Unis;
(2) a partnership or corporation organized in the United States or under the laws of the United States or any State thereof,
(2) une société de personnes ou une société constituée aux États-Unis ou selon la législation de ce pays ou d’un de ses États;
(3) a trust if
(3) une fiducie si, à la fois :
(A) a court within the United States would have authority under applicable law to render orders or judgments concerning substantially all issues regarding administration of the trust, and
(A) un tribunal des États-Unis aurait la compétence, selon le droit applicable, de rendre des ordonnances ou des jugements concernant la presque totalité des questions liées à l’administration de la fiducie,
(B) one or more U.S. persons have the authority to control all substantial decisions of the trust, or
(B) une ou plusieurs personnes des États-Unis jouissent d’un droit de contrôle sur toutes les décisions importantes de la fiducie;
(4) an estate of a decedent that is a citizen or resident of the United States.
(4) la succession d’un défunt qui est citoyen ou résident des États-Unis.
This subparagraph 1(ee) shall be interpreted in accordance with the U.S. Internal Revenue Code.
Le présent alinéa ee) est interprété conformément à l’Internal Revenue Code des États-Unis.
[28] Article 2 of the IGA imposes reciprocal obligations on each party, requiring the governments of Canada and the US to collect account holder information about reportable accounts at both Canadian and US reporting financial institutions. On the Canadian side, Part XVIII of the ITA – sections 263 through 269 – imposes obligations on certain Canadian financial institutions [reporting institutions] to implement the due diligence procedures outlined in Annex I of the IGA in order to identify US reportable accounts for the purposes of the IGA. The due diligence procedures followed by Canadian financial institutions require them to search their account records for indications that the account holder is a US person [US person indicia]. US person indicia include a US place of birth or a current US mailing or residential address.
[29] The list of Canadian financial institutions is comprehensive and is defined in Article 1 (paragraph l)) of the IGA as meaning:
(1) any Financial Institution that is resident in Canada, but excluding any branch of such Financial Institution that is located outside Canada, and
(1) toute institution financière qui réside au Canada, à l’exclusion de ses succursales situées à l’extérieur du Canada;
(2) any branch of a Financial Institution that is not resident in Canada, if such branch is located in Canada.
(2) toute succursale, située au Canada, d’une institution financière qui ne réside pas au Canada.
[30] In practice, the due diligence and reporting requirements found in the IGA (and correlatively in Part XVIII of the ITA) affect provincially and federally regulated financial institutions. Paragraph 263(1) of the ITA defines a “listed financial institution” as meaning:
“listed financial institution” means a financial institution that is
« institution financière particulière » Institution financière qui est, selon le cas :
(a) an authorized foreign bank within the meaning of section 2 of the Bank Act in respect of its business in Canada, or a bank to which that Act applies;
a) une banque régie par la Loi sur les banques ou une banque étrangère autorisée, au sens de l’article 2 de cette loi, dans le cadre des activités que cette dernière exerce au Canada;
(b) a cooperative credit society, a savings and credit union or a caisse populaire regulated by a provincial Act;
b) une coopérative de crédit, une caisse d’épargne et de crédit ou une caisse populaire régie par une loi provinciale;
(c) an association regulated by the Cooperative Credit Associations Act;
c) une association régie par la Loi sur les associations coopératives de crédit;
(d) a central cooperative credit society, as defined in section 2 of the Cooperative Credit Associations Act, or a credit union central or a federation of credit unions or caisses populaires that is regulated by a provincial Act other than one enacted by the legislature of Quebec;
d) une coopérative de crédit centrale, au sens de l’article 2 de la Loi sur les associations coopératives de crédit, ou une centrale de caisses de crédit ou une fédération de caisses de crédit ou de caisses populaires régie par une loi provinciale autre qu’une loi édictée par la législature du Québec;
(e) a financial services cooperative regulated by An Act respecting financial services cooperatives, R.S.Q., c. C-67.3, or An Act respecting the Mouvement Desjardins, S.Q. 2000, c. 77;
e) une coopérative de services financiers régie par la Loi sur les coopératives de services financiers, L.R.Q., ch. C-67.3, ou la Loi sur le Mouvement Desjardins, L.Q. 2000, ch. 77;
(f) a life company or a foreign life company to which the Insurance Companies Act applies or a life insurance company regulated by a provincial Act;
f) une société d’assurance-vie ou une société d’assurance-vie étrangère régie par la Loi sur les sociétés d’assurances ou une société d’assurance-vie régie par une loi provinciale;
(g) a company to which the Trust and Loan Companies Act applies;
g) une société régie par la Loi sur les sociétés de fiducie et de prêt;
(h) a trust company regulated by a provincial Act;
h) une société de fiducie régie par une loi provinciale;
(i) a loan company regulated by a provincial Act;
i) une société de prêt régie par une loi provinciale;
(j) an entity authorized under provincial legislation to engage in the business of dealing in securities or any other financial instruments, or to provide portfolio management, investment advising, fund administration, or fund management, services;
j) une entité autorisée en vertu de la législation provinciale à se livrer au commerce des valeurs mobilières ou d’autres instruments financiers ou à fournir des services de gestion de portefeuille, de conseils en placement, d’administration de fonds ou de gestion de fonds;
(k) an entity that is represented or promoted to the public as a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund or similar investment vehicle that is established to invest or trade in financial assets and that is managed by an entity referred to in paragraph (j);
k) une entité qui est présentée au public comme étant un mécanisme de placement collectif, un fonds commun de placement, un fonds négocié en bourse, un fonds de capital-investissement, un fonds spéculatif, un fonds de capital-risque, un fonds de rachat d’entreprise par effet de levier ou un mécanisme de placement similaire qui est établi pour faire des investissements dans des actifs financiers, ou le commerce de tels actifs, et qui est géré par une entité visée à l’alinéa j);
(l) an entity that is a clearing house or clearing agency; or
l) une entité qui est une chambre ou une agence de compensation;
(m) a department or an agent of Her Majesty in right of Canada or of a province that is engaged in the business of accepting deposit liabilities.
m) un ministère ou un mandataire de Sa Majesté du chef du Canada ou d’une province qui se livre à l’acceptation de dépôts.
[31] However, some categories of financial institutions have reduced requirements (such as small deposit-taking institutions and those that only serve local clients or only issue credit cards). In addition, very small deposit taking institutions with assets of less than $175 million may be exempted from reporting. See the definition of “non-reporting Canadian financial institution”, paragraph 263(1) of the ITA and Annex II of the IGA.
[32] An account is not reportable if it falls within an exempt category (such as certain government registered plans) or if its value is below certain thresholds. With respect to each US reportable account, the information that Canada must collect under the IGA from Canadian financial institutions includes:
(a) The name and address of each US person or person associated with a US person indicia that is an account holder;
(b) The TIN of each US person or person associated with a US person indicia that is an account holder, or if a TIN is not in the records of the Canadian financial institution, the account holder’s birthdate;
(c) The name and identifying number of the Canadian financial institution;
(d) The account number and balance 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.
[33] Every reporting Canadian financial institution is compelled by law to submit itself to the due diligence procedures set out in subsections 265(2) and (3) of the ITA which apply in respect of pre-existing and new individual accounts, and to designate any US reportable account (see sections 264 and 265 of the ITA). Financial institutions already have a legal responsibility to determine where an account holder resides for tax purposes. If a customer has an existing account and there is an indication that they may be a US person, or if they are opening new bank accounts, their financial institution may ask them to provide additional information or documentation to demonstrate that they are not a US person (or to self-certify that they are or are not a US person for tax purposes). Indeed, every reporting Canadian financial institution shall keep, at the institution’s place of business (or at such other place as may be designated by the Minister), records that the institution obtains or creates for the purpose of complying with Part XVIII of the ITA, including self-certifications and records of documentary evidence.
[34] The reporting institutions must annually file with the Minister – that is, with the CRA – prescribed information about each reportable account maintained by the financial institution, as well as prescribed information relating to payments made to non-participating financial institutions that held accounts at the financial institution in the calendar year (for 2015 and 2016 only). The information must be reported in an information return filed for each calendar year by May 2 of the following year (section 266 of the ITA). Apparently, the CRA has not issued a particular form for Canadian financial institutions to use (no such form was produced by the CRA affiants in this proceeding). The CRA will then annually turn the information it collects over to the IRS in bulk “on an automatic basis pursuant to the provisions of Article XXVII of the [US-Canada Tax Convention]” (Article 2, paragraph 1, of the IGA).
Facts directly leading to the present litigation [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 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).
[38] The following excerpts from the Proceedings of the Standing Senate Committee on National Finance illustrate how the IGA was framed by Mr. Ernewein, the General Director, Tax Policy Branch, Department of Finance:
(Issue 10 - Evidence - April 29, 2014)
[Regarding the IGA]
Senator Bellemare: Did financial institutions have a positive reaction to that?
Senator Hervieux-Payette: No.
Senator Bellemare: Were they consulted?
Mr. Ernewein: Yes. I guess the answer is yes, but the reason for my hesitation is that I don't think they love it. I think they like it better than the alternative, that FATCA itself, as I described, would have put them in a difficult if not impossible situation with being required by U.S. law to provide information directly to the IRS that might have been in direct conflict with Canadian privacy laws, if not other laws.
If they were being direct, I think they would probably say they would rather not do this at all, but as between this and the FATCA itself, I think they consider it a much better setup in the sense that it carves out all the registered plans, it excludes the application of the rules to smaller financial institutions, and by virtue of the collection of information by our own Canadian revenue authorities and transmission to the U.S., it overcomes, in our view, some of the legal conflict concerns that would have otherwise existed.
(Issue 10 - Evidence - April 30, 2014)
[Regarding the withholding tax]
Senator Buth: Is it because Canadian banks have U.S. operations that they can do this? I guess I'm having a hard time understanding how a foreign country can regulate what a Canadian bank does.
Mr. Ernewein: As a policy matter, we very much share that question, and certainly former Finance Minister Flaherty was very public about criticizing it on that basis. I guess the second part of that answer is that what we were seeking to do with the intergovernmental agreement was to work around that approach and come at it a different way on exchange of information and not the threat of withholding. The U.S. has always maintained that this is about information exchange and not about trying to collect tax, at least through the withholding tax mechanism. It's an exchange of information and taxpayer compliance, and I think what we've got in this intergovernmental agreement is more consistent with that stated purpose than FATCA itself or the approach FATCA put forward.
Senator Buth: What would have happened if we had not done this agreement, then? Let me ask another question. Are the banks supportive of this legislation?
Mr. Ernewein: Yes. That's my summary answer, and I'll give the same sort of elaboration as I did yesterday, which is that I don't think they're tickled by any of this. I think they believe, even in what we've done, that it will introduce compliance burdens for them and extra obligations for their clientele, but I think they are much more at peace, if I may put it that way, with this intergovernmental agreement and the approach it takes than with FATCA. Again, I'm hesitant to speak for them, but I have some confidence saying that I think they found FATCA essentially unworkable, and this was workable, although perhaps not what they would have designed for themselves.
[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 disclos