Virginia Hillis, Gwendolyn Deegan sue Ottawa over new FATCA tax rules

Two women in Ontario are suing the federal government for complying with a new U.S. law that forces banks to turn over financial information of Canadian citizens to the IRS upon request.

The women areAmerican-born dual citizens of Canada and the U.S who left the states in childhood and have lived in Canada for decades. Theyargue the recently enactedForeign Account Tax Compliance Act violates their rights as Canadians under the Charter Of Rights And Freedoms.

Windsor, Ont., residentVirginia Hillis, 68, and TorontonianGwendolyn Louise Deegan, 52, stepped up as the figureheads of a fight that has hundreds of thousands of Canadian residents fuming.

Both women were born in the U.S. but have never worked south of the border,and as such have never paid or filed U.S. taxes. Indeed, neither has ever had or used a U.S. passport.

"Gwen has travelled to the United States in the past and has been questioned by a border officer as to why she, a person with a United States birthplace, does not have a United States passport to travel into and out of the United States, to which she always replies: 'Because I am a Canadian,'" the pair's statement of claim reads.

Nonetheless, under the agreement that Ottawa agreed to comply with in February, Canadian banks are now obliged to hand over names and account numbers to the IRS of any clients that Uncle Sam suspects are U.S citizens.

As part of FATCA, foreign banks are subject to a stiff 30 per cent tax penalty on their U.S. investments which would collectively be in the hundreds ofbillions of dollars if they don't comply with IRS requests.

• FATCA facts: What Canadians need to know

Generally speaking, U.S. citizens abroad are exempt from paying tax on their first $95,000 of income if they pay foreign taxes on it. But because of a law dating back to theCivil War, the U.S. is one of few countriesthat requires expat citizens to file domestic taxes, even if they didn't earn or spend any money in the U.S., and even if they have already filed and paid taxes where they live.

The new law makes law-abiding Canadian residents vulnerable to huge U.S. tax bills for things the Canadian government says aren't warranted.

"For example, when U.S. persons resident in Canada realize capital gains on a personal residence (which is not a taxable event in Canada, but is a taxable event in the United States subject to certain exceptions), they can be exposed to very significant tax liability to the United States," the pair's statement of claim reads.

• Your view: FATCA deal angers Canadians

Americans in Canadacan also be subjected to double taxation whenU.S. law does not provide a credit for taxes paid in Canada, for example, on gains shelteredin Tax-Free Savings Accounts, which the U.S. government doesn't recognize as being genuine registered accounts.

Many renouncing citizenship

According to official U.S. data,as many as six million U.S. citizens currently liveoutside the U.S. Conservative estimates based on Canadian data suggest at least hundreds of thousands of them live in Canada.

Official U.S. data shows a record number of Americans have started renouncing their citizenship in recent months, possibly in anticipation of having to pay taxes on decades worth of foreign income.

"If a person considered by the United States to be a citizen or resident is established to havewilfullyfailed to file a return, to provide required information or to pay tax, she or he can be subject to criminal sanction, including imprisonment," the lawsuit says.

The lawsuit allegesFATCA is against Canadianlaw by violating Sections 7 and 8 of Canada's charter which protects "life, liberty and security of the person"and forbids unreasonable search or seizure and section 15, which prohibits "discrimination based on race, national or ethnic origin."

The case has a docket number of F173614 and was filed in the Federal Court of Canada in Vancouver.