Canadian Lawyer

w w w . C A N A D I A N L a w y e r m a g . c o m J A N U A R Y 2 0 1 6 47 n a time when it is not uncom- mon for governments to introduce legislation with long-winded names that are often short on clarity, a tax-related bill enacted last year was no exception. The Canada-United States Enhanced Tax Information Exchange Agreement Implementa- tion Act was also s. 99 of an omnibus bill called the Economic Action Plan 2014 Act, No. 1. What the titles do not reveal is the potential long-term impact of the legislation, which could affect the tax obligations of as many as two mil- lion Canadian residents who are also American citizens. The enactments have already been subject to a challenge in the Federal Court of Canada — which to date has been unsuccessful — although a second stage, focused on whether they are con- stitutional, will be heard later this year. There is also likely to be pressure put on the new government of Justin Trudeau to negotiate a deal with the U.S. to limit the scope of the measures. In the meantime, there continues to be uncertainty as to exactly what the Internal Revenue Service will do with its new powers as it pertains to Canadian residents and citizens who are also con- sidered "U.S. persons" for tax purposes. "Right now, it is anybody's guess," says David Gruber, a partner at Farris LLP in Vancouver and co-counsel in the ongoing court challenge. The impetus for the 2014 agreement was the Foreign Account Tax Compli- ance Act, passed by the U.S. Congress four years earlier, to try to crack down on offshore tax evasion by U.S. resi- dents. The provisions require non-U.S. financial institutions to report relevant information to the IRS about accounts held by "U.S. persons." Failure to do so allows the IRS to impose a 30-per-cent withholding tax on payments made to the banks in the U.S. or its clients. Financial institutions in Canada could not comply with these require- ments without violating privacy laws in this country before the changes. The potential impact "was a massive compli- ance burden for financial institutions," says Roy Berg, director of the U.S. tax law group at Moodys Gartner Tax Law LLP in Calgary. "They were pushing for an intergovernment agreement." It is the potential impact on individu- als that sparked the court challenge. All U.S. citizens are considered permanent tax residents, even if they do not live in the country. Canadians who also have U.S. citizenship would continue to have tax reporting obligations in that country. These filing requirements are not new and go back almost to the time of the U.S. civil war, says Max Reed, a cross-border tax lawyer at SKL Tax in Vancouver. "FATCA is an IRS enforce- ment tool. It increases the risk of not being compliant," says Reed, co-author of A Tax Guide for American Citizens in Canada. "What the IRS is going to do about it, I don't know. They have not issued any guidance," says Reed. The only information that has been made public was in an affidavit filed in Feder- al Court by a Canada Revenue Agency official that indicated the IRS was not willing to grant Canada an extension L E G A L R E P O RT \ TA X ALEXI VELLA Facts on FATCA unclear Court cases challenging law for U.S. to get tax info enter their second stage. By Shannon Kari I

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