Court: U.S.-Canada treaty allows foreign tax credit against NIIT

The Court of Federal Claims issued partial summary judgement in Bruyea v. United States (No. 23-766T) on Dec. 5, 2024, holding that a dual Canadian-US citizen is entitled to a treaty-based foreign tax credit (FTC) applied against the Net Investment Income Tax (NIIT).

The NIIT under Section 1411 applies once adjusted gross income exceeds $200,000 (single) or $250,000 (joint). It generally imposes a 3.8% tax on investment income such as capital gains, dividends, interest, rents and royalties, as well as income from a trade or business in which the taxpayer is passive. The tax was created by the Affordable Care Act under a new chapter in the Internal Revenue Code (IRC) and was designed to be equivalent to employment and self-employment taxes imposed on earned income.

The court found that the U.S.-Canada tax treaty requires the United States to allow a credit against United States taxes for income taxes paid or accrued to Canada and defines "United States tax" in a manner that includes the NIIT. The court further held that the treaty is self-executing, meaning the IRC does not need to explicitly implement a treaty-based tax credit for it to exist.

The court rejected the government’s "last-in-time" argument, emphasizing that it is required to harmonize the treaty and the IRC where possible. The court found that the NIIT contains no language expressly inconsistent with the treaty. Additionally, the court observed that the government inconsistently applied the "last-in-time" argument, as it did not invoke it to preclude some provisions in Article XXIV that are incompatible with the IRC. The court further held that interpreting the treaty to allow the credit aligns with its purpose of eliminating or avoiding double taxation.

This ruling aligns with the court’s previous decision in Christensen v. United States, (168 Fed. Cl. 263, 297) in 2023, which held that U.S. citizens living abroad can claim an FTC against their NIIT under the U.S.-France tax treaty. However, in Toulouse v. Commissioner(157 T.C. 49) in 2011, the Tax Court reached the opposite conclusion. For further details on Christensen, refer to our prior article, Court allows FTCs for NII tax under US-France treaty.

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