In a summary judgment released on September 16, 2015, the Federal Court of Canada examined and disposed of the non-constitutional arguments in the Hillis and Deegan case generally finding that the automatic data collection and disclosure of taxpayer information to the United States by Canada pursuant to the Canada-U.S. Intergovernmental Agreement (IGA) is not inconsistent with the Canada – U.S. Tax Treaty (Tax Treaty) and does not otherwise violate the taxpayer confidentiality provisions in section 241 of the Income Tax Act (Canada) (ITA).
The plaintiffs had originally filed a claim seeking a declaration that the relevant provisions under the Canada – U.S. Tax Information Exchange Agreement Implementation Act (IGA Implementation Act) which implements the IGA are ultra vires or inoperative because the impugned provisions are unconstitutional or otherwise unjustifiably infringe Charter rights. An amended statement of claim was subsequently filed adding the non-constitutional arguments. The plaintiffs sought a permanent prohibitive injunction preventing the collection and automatic disclosure of taxpayer information to the United States by the CRA. A special sitting of the Court was scheduled so that the issues could be disposed of before taxpayer information was to be automatically sent pursuant to the IGA.
The Canadian government’s position was that the collection of taxpayer information is authorized by the IGA and that disclosure to the United States is not inconsistent with the Tax Treaty or in violation of section 241 of the ITA.
In its decision, the Federal Court endorsed the general reasoning and the legal arguments submitted by the government.
Plaintiff Arguments Against Automated Data Collection and Disclosure
The plaintiffs raised four interpretation arguments:
- that Article XXVI A of the Tax Treaty prevents the disclosure of the account holder information because it constitutes “assistance in collection” in respect of Canadian citizens (the plaintiffs were dual Canadian/U.S. citizens) as, under this Article, Canada may not provide the United States with assistance in the collection of revenue claims to the extent that the taxpayer was a citizen of Canada during the taxable period to which the revenue claim relates;
- it is not sufficient that the CRA be satisfied that the account holder information collected by the reporting institution is authorized by the terms of the IGA, but the information must also be shown to be “relevant” as required in Article XXVII of the Tax Treaty;
- in purported violation of Article XXV of the Tax Treaty, the collection and disclosure of taxpayer information contemplated by the IGA subjects U.S. nationals resident in Canada to more burdensome requirements than Canadian citizens are subjected to; and
- the exceptions to the confidentiality rule in subsection 241(4) do not apply to exchange of information collected by Canadian reporting institutions under Part XVIII of the ITA and therefore Canada is prohibited from knowingly providing or allowing to be provided any such taxpayer information to the United States.
Court Ruling on Automated Data Collection and Disclosure
The Federal Court found that all the plaintiffs’ arguments were unfounded in law or otherwise unconvincing based on the evidence on record. The Court held that the provisions of the IGA are clear and that its authority did derive from Article XXVII of the Tax Treaty. The Court was satisfied that the automatic collection and disclosure of the account holder information meets the standard of “may be relevant” under Article XXVII in the sense of relevant for U.S. tax compliance purposes. The Court held that the plaintiff’s reading of the “may be relevant” standard is erroneous because it contains a fundamental misconception about the purpose of the Tax Treaty, the purpose of FATCA and the correct approach to treaty interpretation. The correct approach does not permit the CRA to question the tax policy decisions implemented by the U.S. government.
The Court also noted that the FATCA reporting requirements are similar in principle to Canadian reporting requirements that do not require information indicating tax liability such as the T1135 foreign property reporting forms. Accordingly, the Court noted that it cannot be reasonably argued that similar kinds of information about U.S. taxpayers are not relevant for carrying out the provisions of U.S. tax law in respect of Canadians who are U.S. persons.
The Court rejected the plaintiff’s interpretation of the application of the limitations contained in Article XXVI A, which deals with assistance in the collection of taxes, and confirmed that the Article only applies to cases where the tax liability has been determined and not to the assessment of tax payable, the verification of taxpayer compliance or exchanges of information. Therefore, Article XXVI A has no application to the automated information exchange regime because it does not amount to “assistance in collection”.
With respect to the non-discrimination argument, the Federal Court noted that the burden imposed on U.S. nationals and Canadian nationals are similar and therefore held that Article XXV is not applicable in the present case.
Finally, the Court confirmed that the exceptions in subsection 241(4) to confidentiality provisions under the ITA are applicable to the IGA.
The Federal Court dismissed the claims and denied the declaratory and injunctive relief in the motion for summary judgement. The Court did so without prejudice to the plaintiff’s constitutional arguments which will be heard at a later date.
 Hillis and Deegan v. the Attorney General of Canada and the Minister of National Revenue, 2015 FC 1083.