Court Case Update: U.S. Citizens with Canadian Income Get A Foreign Tax Credit Against the NIIT!

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The Net Investment Income Tax (NIIT) introduced under the Affordable Care Act of 2013, imposes a 3.8% tax on investment income for individuals with adjusted gross incomes exceeding $200,000 (single) or $250,000 (joint). This tax applies to income such as capital gains, dividends, interest, rents, and royalties, as well as income from passive business activities from sources both within and outside the United States.

This tax has been contested many times by US tax residents, US Citizens, and Green Card holders. Those who live outside the United States and have to pay this tax find it especially burdensome.

Court Case: Bruyea v. United States

In a landmark decision on December 5, 2024, the U.S. Court of Federal Claims ruled in favor of a dual Canadian-U.S. citizen, allowing a treaty-based foreign tax credit (FTC) to be applied against the Net Investment Income Tax (NIIT).

This ruling, stemming from the case Bruyea v. United States (No. 23-766T), has significant implications for U.S. citizens with Canadian income.

Story Behind The Case

Mr. Bruyea was a resident of the province of British Columbia, Canada in 2014. He paid nearly 2 million CAD in taxes to Canada and claimed a foreign tax credit of nearly 1.39 million USD to the IRS. This did not include a foreign tax credit against the NIIT. He then filed an amended return for tax year 2015 claiming a foreign tax credit of $263,523 to apply towards the NIIT, under Article XXIV, Clause 4 of the U.S.-Canada Tax Treaty.


The government argued that the Internal Revenue Code (I.R.C) placed the NIIT in Chapter 2A of the I.R.C. whereas a foreign tax credit can only be claimed against income tax imposed by foreign countries under Chapter 1. It claimed that this was why the foreign tax credit was not allowed against the NIIT.

The Court's Decision

Article XXIV of the treaty addresses Elimination of Double Taxation. This Article is extensively discussed and analyzed by the Case.

The court's decision hinged on the interpretation of the U.S.-Canada tax treaty, which like any treaty, aims to prevent double taxation. The court found that the treaty should be interpreted to allow a credit for income taxes paid to Canada, and this credit extends to the NIIT.

Implications of the Ruling

This ruling is significant because it aligns with the court's previous decision in Christensen v. United States, which allowed U.S. citizens living abroad to claim an FTC against their NIIT under the U.S.-France tax treaty. However, it contrasts with the Tax Court's decision in Toulouse v. Commissioner, which did not allow such a credit.

The ruling provides a potential avenue for U.S. taxpayers with Canadian income to reduce their NIIT liability, thereby mitigating the double tax burden. It also highlights the ongoing split between the Tax Court and the Court of Federal Claims on this issue, which may lead to further legal developments.

We need to wait and watch if there will be rulings on tax treaties the United States has with other countries.

What This Means for Taxpayers

For U.S. citizens with Canadian income, this ruling offers a new strategy to manage their tax liabilities. Taxpayers who have paid Canadian taxes on income subject to the NIIT should consider filing for a refund or adjusting their tax filings to claim the FTC.

This can be accomplished by filing Amended Tax Returns with a completed Form 1116, "Foreign Tax Credit (Individual, Estate, or Trust)," to claim the credit. You may also consider carry-backs or carry-forwards of the FTC if it cannot be used in full in the year of filing. 

Gather all your documents and be ready for filing. 

However, it's important to note that the IRS may appeal this decision, and the processing of refund claims could be delayed until the appeals process is complete. 

The recent court ruling is a significant step towards fairer tax treatment for U.S. citizens with foreign income. By allowing the FTC against the NIIT, the court has reinforced the principle of preventing double taxation and provided relief to affected taxpayers. 

If this blog post has helped you as an individual or a small business owner about what to do if you are a U.S. Citizen/ Green Card holder with Canadian income which may be subject to the NIIT, or if you are a finance professional looking for a tax advisor for your client, please contact us. 

You can also subscribe to our Newsletter to get the blogs delivered to your Inbox & never miss a post! 

As always, taxpayers should consult with an experienced cross-border tax professional to understand how this ruling may impact their specific situation.

Related Blog Posts That Might Interest You

Final Regs On The 3.8% Net Investment Income Tax

The 3.8% Tax On Net Investment Income De-Mystified!

The Christensen's Case: A Foreign Tax Credit Against the NIIT { AKA "Obamacare" Tax}

Bibliography: Bruyea v. United States; Net Investment Income Tax Act; Christensen v. United States (168 Fed. Cl. 263, 297);
US- Canada Tax Treaty; Toulouse v. Commissioner, 157 TC 49 - Tax Court 2021;
Another Interesting Court Case Reg. NIIT Paul Young Kim v. United States


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