Deal that sends Canadian bank records to IRS is 'illegal,' lawyer tells U.S. committee

An agreement that has resulted in hundreds of thousands of Canadian banking records being sent to the U.S. Internal Revenue Service could violate the U.S. constitution, a congressional subcommittee heard Wednesday.

Testifying before a subcommittee of the House Committee on Oversight and Government Reform, Senator Rand Paul said the intergovernmental agreements (IGAs) negotiated by the U.S. with various countries after it adopted the Foreign Account Tax Compliance Act (FATCA) did not get the proper authorization.

The controversial legislation,adopted by the U.S. in 2010, requires financial institutions outside the U.S. to report to the Internal Revenue Serviceon bank and financial accounts held by those subject to U.S. tax law.

While it was designed to ferret out offshore tax cheats, thousands of Canadian residents who have dual citizenship orvarious connectionsto the U.S.have also been subject toFATCA.

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"These bilateral agreements, these IGA's, have not received any Senate certification, no vote, no vote in the House no congressional authority at all," said Paul, a Republican from Kentucky who has tabled legislation to repeal FATCA.

"They are just done by the administration with no authority. Their constitutionality is currently being challenged in court."

Lawyer James Bopp, who represents Republicans Overseas and is challenging FATCA in a U.S. court, said FATCA is "draconian" and the IGA agreements with other countries are "illegal."

"The Obama administration has negotiated illegal intergovernmental agreements which provide in most cases that the banks, instead of reporting to the IRS, report to the foreign government," he said.

That information is then reported by the foreign government to the IRS, he said.

"These agreements have not been approved and are unconstitutional."

Chloe Luciani-Girouard, spokesperson for Revenue Minister Diane Lebouthillier, said the Canada Revenue Agency intends to respect the intergovernmental agreement and continue to ship bank record information from Canadian banks to the IRS.

"The CRA is required to administer all of Canada's tax agreements, including the Canada-U.S. Intergovernmental Agreement (IGA), in good faith. In so doing, the CRA is supporting our government's tax co-operation efforts, and ensuring that Canada continues to be viewed as a reliable treaty partner."

Over the past two years, information on half a million Canadian banking records has been shared with the IRS,either directly or through the intergovernmental agreement negotiated between Canada and the United States.

The Republican Party campaigned last year in favor of scrapping FATCA while the Democrats have generally defended it.

Wednesday, those divisions were in clear view with Republican members of the subcommittee and several of the witnesses calling for FATCA to be repealed. Democrats like Representative Carolyn Maloney from New York stressed the need to fight offshore tax evasion and terrorist financing and proposed an alternative which would exempt Americans with bank accounts outside the U.S. from FATCA reporting if they lived in the country where the bank account was located.

Republican Representative Mark Meadows, chairman of the subcommittee, said FATCA is putting an unreasonable burden on some of the U.S.'s biggest allies and it is costly for banks to comply.

Witnesses, one of them in tears, talked about the difficulty they have had since FATCA was adopted with everything from banking to their careers. Many banks incountries like Switzerlandare refusing to let Americans open bank accounts because they don't want the hassle of having to report to the IRS.

In some cases the witnesses said FATCA has led to so many problems that they have renounced their U.S. citizenship.

Paul said FATCA treats an estimated 9 million Americans living outside the U.S. as guilty until proven innocent.

"It presumes that every American with money overseas is a criminal with no proof or even suspicion of criminal activity."

Elise Bean, who helped draft FATCA and who worked for years on the question of Americans using offshore tax havens to evade taxes, admitted FATCA is flawed and was not intended to target ordinary Americans living abroad.

However, she said it is a valuable tool in fighting offshore tax evasion and repealing it would be "a tragic mistake."

Elizabeth Thompson can be reached at elizabeth.thompson@cbc.ca