On August 20, 2015 BNA published an article on the Alliance For The Defence of Canadian Sovereignty that took place earlier this month. The article was posted by Stephen Kish at the Isaac Brock Society. As expected the article generated a large number of comments. The BNA article included the thoughts (and only the thoughts) of a number of Canadian tax practitioners.
Early Brock commentary on the Vancouver trial noted the presence of lawyers from Moodys Gartner. The BNA article included commentary from Moody’s lawyer Roy Berg. In an article published on August 24 by Tax Notes, Mr. Berg expands on his views of the issues raised in the Vancouver trial.
Mr. Berg’s article is reproduced on this blog with the permission of Tax Notes on the following terms:
“… effective immediately, I am pleased to grant permission for you to post on the blog as noted below Roy A. Berg’s article, “Decision in Canadian Challenge to FATCA Expected Soon,” Tax Notes International, Aug. 24, 2015, pp. 635-639. Permission is for this one use and is contingent on properly crediting the article to the respective authors and to Tax Analysts as the original publisher. Using the PDF attached above covers proper attribution. Any other requests would need to be addressed separately. Thank you for your interest in this material. If you have any questions or need anything else, please don’t hesitate to contact me.”
I credit the article to Mr. Berg and note that Tax Analysts is the original publisher. The complete article appears in the PDF below.
A “report” on Mr. Berg’s Report …
The article, which is really a “report” of the trial, attempts three things:
First – to identify the issues raised in the Vancouver Trial
Second – to distinguish the issues raised in the Vancouver trial from the issues that are likely to be raised in the “full Charter trial”
Third – to provide his own commentary on how the issues should be resolved.
I recommend that you read this “report” in conjunction with the BNA article referenced above.
It’s about the interaction between the Canada U.S. FATCA IGA and the Canada U.S. Tax Treaty …
The question is simple:
Do the provisions of the Canada U.S. FATCA IGA provide the conditions that would allow for the transfer of information that the FATCA IGA contemplates?
The answer is difficult:
The plaintiffs say NO and the Government says YES.
How is the question to be answered?
Well, we look at what the Treaty says. We look at what the IGA says. We then compare them. Mr. Berg notes specifically that the Court considered the following three articles of the Canada U.S. Tax Treaty:
Article XXV: Non-Discrimination
1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected. This provision shall also apply to individuals who are not residents of one or both of the Contracting States.
2. In determining the taxable income or tax payable of an individual who is a resident of a Contracting State, there shall be allowed as a deduction in respect of any other person who is a resident of the other Contracting State and who is dependent on the individual for support the amount that would be so allowed if that other person were a resident of the first-mentioned State.
3. Where a married individual who is a resident of Canada and not a citizen of the United States has income that is taxable in the United States pursuant to Article XV (Income from Employment), the United States tax with respect to such income shall not exceed such proportion of the total United States tax that would be payable for the taxable year if both the individual and his spouse were United States citizens as the individual’s taxable income determined without regard to this paragraph bears to the amount that would be the total taxable income of the individual and his spouse. For the purposes of this paragraph,
(a) the “total United States tax” shall be determined as if all the income of the individual and his spouse arose in the United States; and
(b) a deficit of the spouse shall not be taken into account in determining taxable income.
4. Any company which is a resident of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar companies of the first-mentioned State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of a third State, are or may be subjected.
5. Notwithstanding the provisions of Article XXIV (Elimination of Double Taxation), the taxation on a permanent establishment which a resident of a Contracting State has in the other Contracting State shall not be less favourably levied in the other State than the taxation levied on residents of the other State carrying on the same activities. This paragraph shall not be construed as obliging a Contracting State:
(a) to grant to a resident of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents; or
(b) to grant to a company which is a resident of the other Contracting State the same tax relief that it provides to a company which is a resident of the first-mentioned State with respect to dividends received by it from a company.
6. Except where the provisions of paragraph 1 of Article IX (Related Persons), paragraph 7 of Article XI (Interest) or paragraph 7 of Article XII (Royalties) apply, interest, royalties and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable capital of the first-mentioned resident, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State.
7. The provisions of paragraph 7 shall not affect the operation of any provision of the taxation laws of a Contracting State:
(a) relating to the deductibility of interest and which is in force on the date of signature of this Convention (including any subsequent modification of such provisions that does not change the general nature thereof); or
(b) adopted after such date by a Contracting State and which is designed to ensure that a person who is not a resident of that State does not enjoy, under the laws of that State, a tax treatment that is more favorable than that enjoyed by residents of that State.
8. Expenses incurred by a citizen or resident of a Contracting State with respect to any convention (including any seminar, meeting, congress or other function of a similar nature) held in the other Contracting State shall, for the purposes of taxation in the first-mentioned State, be deductible to the same extent that such expenses would be deductible if the convention were held in the first-mentioned State.
9. Notwithstanding the provisions of Article II (Taxes Covered), this Article shall apply to all taxes imposed by a Contracting State.
(John Richardson observation: S. 1 appears to say that U.S. citizens in Canada should not be subjected to more onerous requirements than Canadian citizens would be. This is an interesting and difficult argument. At the trial, Justice Martineau suggested that Article XXV did NOT contemplate dual citizenship. (In any case, this whole argument reminds me of Tussman and Tenbroek’s 1949 Equal Protection of Law” article. Equal protection ensures that those who are “similarly situated with respect to the purpose of the law” are similarly treated.)
Article XXVI-A: Assistance in Collection
1. The Contracting States undertake to lend assistance to each other in the collection of taxes referred to in paragraph 9, together with interest, costs, additions to such taxes and civil penalties, referred to in this Article as a “revenue claim”.
2. An application for assistance in the collection of a revenue claim shall include a certification by the competent authority of the applicant State that, under the laws of that State, the revenue claim has been finally determined. For the purposes of this Article, a revenue claim is finally determined when the applicant State has the right under its internal law to collect the revenue claim and all administrative and judicial rights of the taxpayer to restrain collection in the applicant State have lapsed or been exhausted.
3. A revenue claim of the applicant State that has been finally determined may be accepted for collection by the competent authority of the requested State and, subject to the provisions of paragraph 7, if accepted shall be collected by the requested State as though such revenue claim were the requested State’s own revenue claim finally determined in accordance with the laws applicable to the collection of the requested State’s own taxes.
4. Where an application for collection of a revenue claim in respect of a taxpayer is accepted
(a) by the United States, the revenue claim shall be treated by the United States as an assessment under United States laws against the taxpayer as of the time the application is received; and
(b) by Canada, the revenue claim shall be treated by Canada as an amount payable under the Income Tax Act, the collection of which is not subject to any restriction.
5. Nothing in this Article shall be construed as creating or providing any rights of administrative or judicial review of the applicant State’s finally determined revenue claim by the requested State, based on any such rights that may be available under the laws of either Contracting State. If, at any time pending execution of a request for assistance under this Article, the applicant State loses the right under its internal law to collect the revenue claim, the competent authority of the applicant State shall promptly withdraw the request for assistance in collection.
6. Subject to this paragraph, amounts collected by the requested State pursuant to this Article shall be forwarded to the competent authority of the applicant State. Unless the competent authorities of the Contracting States otherwise agree, the ordinary costs incurred in providing collection assistance shall be borne by the requested State and any extraordinary costs so incurred shall be borne by the applicant State.
7. A revenue claim of an applicant State accepted for collection shall not have in the requested State any priority accorded to the revenue claims of the requested State.
8. No assistance shall be provided under this Article for a revenue claim in respect of a taxpayer to the extent that the taxpayer can demonstrate that
(a) where the taxpayer is an individual, the revenue claim relates either to a taxable period in which the taxpayer was a citizen of the requested State or, if the taxpayer became a citizen of the requested State at any time before November 9, 1995 and is such a citizen at the time the applicant State applies for collection of the claim, to a taxable period that ended before November 9, 1995; and
(b) where the taxpayer is an entity that is a company, estate or trust, the revenue claim relates to a taxable period in which the taxpayer derived its status as such an entity from the laws in force in the requested State.
9. Notwithstanding the provisions of Article II (Taxes Covered), the provisions of this Article shall apply to all categories of taxes collected, and to contributions to social security and employment insurance premiums levied, by or on behalf of the Government of a Contracting State.
10. Nothing in this Article shall be construed as:
(a) limiting the assistance provided for in paragraph 4 of Article XXVI (Mutual Agreement Procedure); or
(b) imposing on either Contracting State the obligation to carry out administrative measures of a different nature from those used in the collection of its own taxes or that would be contrary to its public policy (ordre public).
11. The competent authorities of the Contracting States shall agree upon the mode of application of this Article, including agreement to ensure comparable levels of assistance to each of the Contracting States.
(John Richardson observation: This is a partial abrogation of the Revenue Rule which is/was a principle on international law that one nation’s courts will not enforce the tax claims of another jurisdiction. Some of you may recall Professor Allison Christians suggesting that FATCA IGA meant that Canada was “shining” a light on where U.S. citizens were in Canada (or something to that effect). In any event, she and others take the view that the FATCA IGA is a violation of the Revenue Rule. Of course Article XXVI-A is in itself an abrogation of the Revenue Rule. But, note S. 8 which I have bolded which provides protection to Canadian citizens (whether they are U.S. citizens or not) When I was at the hearing, I had an interesting discussion with a lawyer who noted that Article XXVI-A is only a PARTIAL abrogation of the Revenue Rule. The abrogations are enumerated in Article XXVI-A. The argument means that if the abrogation is NOT listed in Article XXVI-A, that the “Revenue Rule” remains the overriding presumption.)
Article XXVII: Exchange of Information
1. The competent authorities of the Contracting States shall exchange such information as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes to which this Convention applies insofar as the taxation thereunder is not contrary to this Convention. The exchange of information is not restricted by Article I (Personal Scope). Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the taxation laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the administration and enforcement in respect of, or the determination of appeals in relation to the taxes to which this Convention applies or, notwithstanding paragraph 4, in relation to taxes imposed by a political subdivision or local authority of a Contracting State that are substantially similar to the taxes covered by this Convention under Article II (Taxes Covered). Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. The competent authorities may release to an arbitration board established pursuant to paragraph 6 of Article XXVI (Mutual Agreement Procedure) such information as is necessary for carrying out the arbitration procedure; the members of the arbitration board shall be subject to the limitations on disclosure described in this Article.
2. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information because it has no domestic interest in such information.
3. In no case shall the provisions of paragraph 1 and 2 be construed so as to impose on a Contracting State the obligation:
(a) to carry out administrative measures at variance with the laws and administrative practice of that State or of the other Contracting State;
(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that State or of the other Contracting State; or
(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).
4. For the purposes of this Article, this Convention shall apply, notwithstanding the provisions of Article II (Taxes Covered):
(a) to all taxes imposed by a Contracting State; and
(b) to other taxes to which any other provision of this Convention applies, but only to the extent that the information may be relevant for the purposes of the application of that provision.
5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.
6. If specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall provide information under this Article in the form of depositions of witnesses and authenticated copies of unedited original documents (including books, papers, statements, records, accounts, and writings).
7. The requested State shall allow representatives of the requesting State to enter the requested State to interview individuals and examine books and records with the consent of the persons subject to examination.
(John Richardson observation: Note the words “may be relevant”. Establishing that information “may be relevant” to the collection of taxes on income and capital is the factual prerequisite for the operation of Article XXVII. The question is whether the article authorizes a “FATCA Fishing Inquiry” or “FFI” (sorry it’s either early in the morning or late at night).)
Mr Berg’s commentary on these issues …
I encourage you to read his article. There are two areas that I found to be of interest.
First, we all know that Justice Martineaus’s decision will be appealed. If the plaintiff’s win, this means that the Court has ruled that the information cannot be transferred to either the CRA or the IRS. Mr. Berg suggests that:
If the two individual plaintiffs’ information is enjoined from the exchange, then the defendants would likely appeal the ruling, and the appeal and trial on the reserved Canadian constitutional issues would likely be heard later this year or early next year. It is unclear whether such a ruling would result in the IGA not entering into force. If so, however, the U.S. Treasury or the competent authorities would likely intervene to prevent this result. – page 636
Imagine, Obama’s U.S. Treasury “intervening” in a Canadian court to attempt to enforce the right of the U.S. to extract information from Canadian citizen/residents! What a spectacle that would be! (But perhaps not far fetched – see below*).
Second, Mr. Berg’s analysis of the distinction between “assessable penalties” and other kinds of penalties. This is interesting and is an argument that is helpful to the plaintiffs. On page 637 he writes:
In most cases, the argument that the disclosure of information is tantamount to assistance in collection falls a bit flat because the IRS’s authority to assess tax and penalties is typically subject to the deficiency procedures found in sections 6211 through 6215 of the code. The deficiency procedures generally assure the taxpayer access to administrative review (namely IRS Appeals) and a prepayment judicial forum (namely the U.S. Tax Court) for reviewing disputed additions to tax and penalties proposed by the IRS.13
However, ‘‘assessable penalties’’14 are ineligible for the procedural safeguards of the deficiency procedures and can be assessed almost immediately by the IRS. Neither party raised the issue of assessable penalties in their submissions, but doing so may have helped the plaintiffs’ argument that disclosure of account holder information is the equivalent of providing assistance in collection. …
Mr. Berg then notes that “information return penalties” (8938, 5471, etc.) are “assessable penalties.
In any event, his article is there (pdf above) for your reading pleasure.
The “Alliance For The Defence of Canadian Sovereignty” and the STOP FATCA movement have had difficulty (so far) in generating media coverage. Mr. Berg’s commentary is an important part of the process in raising awareness of these issues. In addition, the content of the commentary in his article was (in my opinion) fair, balanced and a welcome addition to the “FATCA debate”.
I just received the following message from Mr. Andrew Grossman, which with his permission, I reproduce:
“Imagine, the Obama’s U.S. Treasury “intervening” in a Canadian court to attempt to enforce the right of the U.S. to extract information from Canadian citizen/residents! What a spectacle that would be!”
However, as a diplomat with the State Department I could see “interventions” happening all the time. This will get you samples of amicus briefs by foreign governments in US courts including the Supreme Court: https://www.google.ca/#q=++%22brief+for+the+Government+of%22
Foreign governments hire white-shoe law firms to lobby for them and to argue points before the Legal Advisor at State, and often (as in the delightful Altmann v. Austria) the State Department comes down on the wrong side. Do see the movie “Woman in Gold” with Helen Mirren (I saw it the other day).
It remains to be seen how FATCA and IGAs play out. At this point nobody with influence (that is the members of the US Chamber of Commerce) seems to care. Those complaining about tax treaties seem not to realise that treaties (tax treaties, totalisation agreements) are written for the benefit of trade and industry, not individuals.
But the statistics alone (less than a million foreign filers of US tax, even assuming that every return is a joint return which obviously isn’t so; between 3.5 and 7.6 million Amcits abroad (nobody knows)) proves that most people are oblivious to the issue, or don’t care. It will take many more writs ne exeat republica before expats see a danger. As for me, I see what’s happening in the building of that new data centre in Utah and the massive growth of databases such as TECS. I have reason to know what NSA is capable of: their “reports” only go to cleared senior officers; but these officers can use the information as background to target areas of concern. Of course my experience with anything secret predates the Internet as we know it, but even so: my favourite story is when I saw a report of one of my own conversations with a foreign diplomat.
Congress does not hesitate in legislative override of tax treaties. There’s no reason why Canada can’t do the same. When Congress does it AFAIK there’s no consultation and no apology. But of course it virtually always affects individuals, not the US Chamber’s constituency: AMT, Obamacare 3.8% investment income surcharge.
I wonder (as I noted today in the Brock forum, I’ve looked in over the past few days but won’t be making regular visits) whether the $2,350 which after all is far in excess of the world average annual salary of $1,400, coupled with Expatriation tax (one can be a covered expatriate just out of negligence without having any money, I suppose) — the result can be so exorbitant, draconian, that a human rights issue will arise. The European Court of Human Rights has spoken on a couple of issues, notably imposing penalties on the heirs of a noncompliant taxpayer (the Swiss government lost).