Two Canadian women with dual US citizenship have launched legal proceedings against the Canadian government for its role in the implementation of the Foreign Account Tax Compliance Act, saying it is unconstitutional and violates their privacy.

Two Canadian women with dual US citizenship have launched legal proceedings against the Canadian government for its role in the implementation of the Foreign Account Tax Compliance Act, saying it is unconstitutional and violates their privacy.

The lawsuit, filed in the Federal Court of Canada on Monday, challenges the constitutionality of the FATCA agreement agreed with the US which came into force on July 1.

The two plaintiffs hope to stop the government from handing over private bank account information from more than one million US residents and their families living in Canada to the US Internal Revenue Service.

FATCA requires all financial institutions outside of the US to regularly submit information on financial accounts held by American citizens and people born in the US, including those with no existing ties to the country, to the US Internal Revenue Service. Those who are not compliant will suffer a 30 per cent withholding tax on income and gross proceeds, as of January 2015.

The two plaintiffs, Virginia Hillis, 68, from Windsor, Ontario and Gwen Deegan, 52, from Toronto, allege that the agreement between Canada and the US to implement the FATCA law violates provisions of the Canadian Charter of Rights and the “principle that Canada will not forfeit its sovereignty to a foreign state.”

Both women were born in the US and as a result have US indicia, requiring their financial data to be passed on to the Internal Revenue Service. However, neither has lived in the US since the age of five, they have never obtained a US passport, worked in the US or filed US tax returns.

“I am a proud Canadian. Why is my government branding me with being a potential US tax evader merely because of my place of birth – and turning my personal information over to a foreign government’s jurisdiction?” Hillis said in statement.

The lawsuit alleges that the legislation has created “a distinction between citizens and residents of Canada who are US Persons and those who are not” and contends that the legislation exposes the plaintiffs “to a deprivation of their liberty and security of the persons.”

It has been suggested that the US crackdown on tax evasion has prompted some Americans living abroad to give up their citizenship.

According to Treasury Department figures published in the Federal Register last year, 3,000 US citizens handed in their passports - three times the average of the past five years. While the Treasury has given no reasons for why they handed back their passports and green cards, many observers believe that the dramatic spike over previous years is due to them wanting to avoid paying taxes as a result of FATCA.

In the first quarter of 2014, 1,001 Americans gave up their passports or green cards, an increase of 47 per cent on the same period last year. It is also expected that a record number of US citizens will give up their passports this year, meaning more than 3,000 are forecast to do so before the end of 2014.