Canada-U.S. dual citizens could be worse off if FATCA lawsuit succeeds

Two women have challenged the constitutionality of a Canada-U.S. agreement to share the tax information of U.S. citizens resident in Canada, with the IRS.

But an expert in U.S. tax law says that these individuals, most of whom consider themselves Canadians, could be worse off if the lawsuit succeeds.

“If the lawsuit is successful these people could find themselves cast out of the relatively genteel walled garden of the IGA (intergovernment agreement) into the stark light of FATCA [foreign account tax compliance act],” says Roy Berg, director, U.S. tax law at Calgary’s Moodys Gartner Tax Law.

U.S. tax law says that all “U.S. persons” are liable for U.S. tax, regardless of where they live in the world. FATCA compels financial institutions from outside the U.S. to collect the financial information of those deemed to be U.S. persons and submit it to U.S. authorities. The law penalizes banks who fail to supply the information.

Under the Canada-U.S. agreement, which was reached in February and which took effect on July 1, the Canada Revenue Agency will provide tax information to the U.S. Internal Revenue Service about the estimated one million Americans and dual U.S.-Canadian citizens who reside in Canada. Canadian financial institutions are required to search their records for accounts held by clients who meet the definition of “U.S. person” under the law, then supply this information to the CRA, which it will pass on to the IRS.

“The plaintiffs seem to think that victory means reversion to a pre-FATCA world,” Mr. Berg says. “Unless the U.S. Congress or the U.S. courts repeal or invalidate the legislation, that’s not what’s going to happen.”