Co-authored with Sunita Doobay, a partner at Blaney McMurtry LLP in Toronto

I. Introduction

The common law revenue rule is a judicial doctrine that prevents courts in one country from being used by a foreign government as a tool to collect lost tax revenue of any kind. As explained by one commentator:

The revenue rule, a common law doctrine with origins in the eighteenth century, is a battleground in the twenty-first century. . . . In its modern form the revenue rule generally allows courts to decline entertaining suits or enforcing foreign tax judgments or foreign revenue laws.1

In a 2005 decision, the Supreme Court described the revenue rule in the following language:

Since the late 19th and early 20th century, courts have treated the common-law revenue rule as a corollary of the rule that, as Chief Justice Marshall put it, "[t]he Courts of no country execute the penal laws of another." . . . The rule against the enforcement of foreign penal statutes, in turn, tracked the common-law principle that crimes could only be prosecuted in the country in which they were committed. The basis for inferring the revenue rule from the rule against foreign penal enforcement was an analogy between foreign revenue laws and penal laws.2 [Citations omitted.]

The revenue rule can be overridden by treaty, and when it has been, U.S. and Canadian tax authorities have collected the taxes due in the other country.

This report explores various ways in which the tax authorities and courts may or may not cooperate in reviewing cross-border transactions, with an emphasis on Canada-U.S. transactions. It covers:

  • the general development of the revenue rule in the United Kingdom, the United States, Canada, and other common law countries;
  • the validity of a conviction for violating U.S. wire fraud criminal statutes resulting from the placement of an interstate telephone call incident to smuggling liquor into Canada;
  • the cum-ex litigation involving allegedly fraudulent dividend refund claims in cases brought by the Danish tax authority (SKAT) before courts in the United States and the United Kingdom;
  • the applicable provisions of the Canada-U.S. income tax treaty allowing for assistance in collection of taxes and exchanges of information;
  • the OECD's Multilateral Convention on Mutual Administrative Assistance in Tax Matters;
  • cases in the United States challenging treatybased summonses issued at the request of a treaty partner;
  • cases in Canada challenging the exchange of financial information with the United States;
  • Canadian rules for assistance in collecting foreign taxes; and
  • S. experience in collecting taxes on behalf of Canada.

II. Development of the Common Law Rule

1. English Common Law

A leading treatise on conflicts of law3 states the revenue rule as follows:

"English courts have no jurisdiction to entertain an action: (1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State; or (2) founded upon an act of state."

A. Early cases.

This concept, which later became known as Dicey Rule 3, was initially enunciated in an 18th century case, Holman4:

There are a great many cases which every country says shall be determined by the laws of foreign countries where they arise. But I do not see how the principles on which that doctrine obtains are applicable to the present case. For no country ever takes notice of the revenue laws of another.

In a 19th century case, James,5 the court expressed a similar view: "In a British court we cannot take notice of the revenue laws of a foreign State."

That view was adopted in two early 20th century cases. The first was Brostron,6 in which the court stated: It is perfectly elementary that a foreign government cannot come here - nor will the courts of other countries allow our Government to go there - and sue a person found in that jurisdiction for taxes levied and which he is declared to be liable in the country to which he belongs. That was followed in In re Visser,7 in which the court stated: My own opinion is that there is a wellrecognized rule, which has been enforced for at least 200 years or thereabouts, under which these courts will not collect the taxes of foreign States for the benefit of the sovereigns of those foreign States; and this is one of those actions which these courts will not entertain.

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Footnotes

1 Brena Mallinak, "The Revenue Rule: A Common Law Doctrine for the Twenty-First Century," 16 Duke J. Comp. & Int'l L. 79 (2006).

2 Pasquantino v. United States, 544 U.S. 349 (2005).

3 Dicey, Morris, and Collins on the Conflict of Laws, para. SR-019 (2012). This treatise has been described as the gold standard in terms of academic writing on the subject and as the foremost authority on private international law.

4 Holman v. Johnson (1775) 1 Cowp 341, 343; 98 E.R. 1120, 1122.

5 James v. Catherwood (1823) 3 Dow & Ry KB 190, 191.

6 King of the Hellenes v. Brostron (1923) 16 LI. L.Rep. 190, 193.

7 In re Visser, H.M. The Queen of Holland v. Drukker (1928) Ch. 877, 884; 44 T.L.R. 692.

Reprinted from Tax Notes Federal, April 18, 2022, p. 359

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.