A legal challenge aimed to stop the Canadian government from exchanging tax information about American citizens living in Canada with the United States, under an inter-governmental agreement (IGA) to implement the U.S. Foreign Account Tax Compliance Act (FATCA), has been denied by the Federal Court of Canada.

“The court concludes that the collection and automatic disclosure of personal and accountholder information relating to U.S. reportable accounts from Canadian financial institutions is legally authorized by the impugned provisions [in the Income Tax Act],” wrote the Judge Luc Martineau in the Federal Court’s ruling issued Wednesday.

“[It] is not inconsistent with the provisions of the Convention between the United States and Canada with Respect to Taxes on Income and Capital, and does not otherwise violate section 241 of the ITA, as alleged by the two plaintiffs who possess dual citizenship and have never worked or filed taxes in the U.S.”

The legal challenge was brought by two dual U.S.-Canada citizens who claimed that the IGA contravened the U.S.-Canada tax treaty.

In its ruling, the court addressed the legality of the IGA, but left open the question of its constitutionality.

“The declaratory and injunctive relief requested by the plaintiffs in their motion for summary judgment is denied, without prejudice to their right to pursue their claim that the impugned provisions are ultra vires or inoperative because they are unconstitutional or otherwise unjustifiably infringe their Charter rights,” the court ruled.

First enacted by the U.S. in 2010, FATCA effectively compels non-U.S. foreign financial services institutions, including those in Canada, to report to the U.S. on their American citizen clients. FATCA is designed to prevent offshore tax evasion by U.S. taxpayers.

In 2014, the Canadian and U.S. governments signed an IGA to implement FATCA. Under the IGA, Canadian firms report information on American accountholders who have an aggregate balance of US$50,000 or more, excluding balances in some tax-sheltered accounts, to the Canada Revenue Agency (CRA), which shares the data with the U.S. government.

With the ruling, the path appears to be clear for the exchange of information between the CRA and the U.S. Internal Revenue Service, which had been set to begin as soon as this month.

The court ruling is being welcomed by the Toronto-based Investment Industry Association of Canada: “IIAC members appreciate having a timely decision that provides certainty around existing procedures,” said Andrea Taylor, managing director with the IIAC. “But we also await the court’s hearing and decision on the constitutional issues.”