In a significant development for cross-border taxpayers, the US Court of Federal Claims has ruled that a US citizen residing in Canada may use the US-Canada Income Tax Treaty to claim a foreign tax credit (FTC) against the Net Investment Income Tax (NIIT). This decision may have broader implications for taxpayers in other countries with US tax treaties.
In the case of Paul Bruyea v. United States, the court ruled that Bruyea, a US citizen living in British Columbia, was entitled to offset the NIIT liability on capital gains with Canadian taxes paid on the same income. Bruyea had reported $7 million in capital gains from selling Canadian real estate in 2015 and paid $2 million in Canadian taxes. While he initially claimed an FTC against regular US income tax, he later amended his return to seek a refund of $263,523 in NIIT, arguing the US-Canada tax treaty allowed such a credit.
The IRS denied Bruyea’s refund, citing that the treaty does not support an FTC against NIIT, which falls under Chapter 2A of the Internal Revenue Code, not Chapter 1 where FTCs are typically applied. Bruyea pursued resolution through competent authority proceedings and then filed a legal claim with the Claims Court, which ruled in his favor.
The court analyzed Article 24 of the US-Canada Income Tax Treaty, which provides relief from double taxation by allowing a tax credit for Canadian taxes paid. The court emphasized the treaty’s purpose to avoid double taxation and determined that the “US Law Limitation” does not prevent applying the credit against NIIT.
The court rejected the IRS’s argument that NIIT is ineligible for FTC treatment simply because it resides in a different part of the Code (Chapter 2A).
It found that the treaty takes precedence unless a later-enacted US law directly conflicts with the treaty.
The court concluded the NIIT qualifies as a “United States tax”, meaning it falls under the scope of the treaty.
The Bruyea decision differs from the Toulouse v. Commissioner ruling, where the US Tax Court denied a similar claim under the US-France Income Tax Treaty, citing that the NIIT is separate from Chapter 1 taxes. The Bruyea court, however, found broader treaty-based relief and emphasized that a tax’s location in the Code should not determine FTC eligibility.
In contrast, Christensen v. United States had also supported a treaty-based FTC under the French treaty, though using a different treaty provision not limited by US law.
This decision opens the door for US citizens living in other treaty countries to consider using similar treaty provisions to offset NIIT, although practical challenges remain. Taxpayers should be aware that:
IRS resistance is likely, especially given prior rulings like Toulouse and Kim (regarding the US-South Korea treaty).
The IRS and Treasury have not updated Form 8960 (NIIT) or Form 1116 (FTC) to accommodate treaty-based credits against NIIT.
Protective refund claims may be advisable for taxpayers seeking to preserve their rights during ongoing litigation or appeals.
The Bruyea case provides a new legal basis for offsetting NIIT with foreign tax credits under US tax treaties. While the ruling is favorable to taxpayers, IRS enforcement remains strict, and administrative remedies may be limited. Taxpayers should:
Consult a qualified cross-border tax advisor
Carefully assess treaty language relevant to their residence country
Monitor for appeals or regulatory updates following the Bruyea ruling
To read the court ruling see https://drive.google.com/file/d/19uq7XNZ1t9s_Mbx2JFARN4QNnTFkSS3E/view?usp=sharing
