Bruyea Reversed: The Canada-U.S. Treaty Does Not Shelter NIIT
The Federal Circuit has closed the principal treaty route for using Canadian income tax to
offset the 3.8% net investment income tax. The decision is important not only for NIIT, but
for how treaty-created credits interact with domestic-law limitations.
Practitioner commentary | September 1, 2026
In one sentence: Canadian income tax cannot be credited against IRC §1411 NIIT because Article XXIV makes the treaty credit subject to U.S. domestic-law limitations, and IRC §§27 and 901 restrict the foreign tax credit to Chapter 1 taxes.
Why this case matters
On August 31, 2026, the U.S. Court of Appeals for the Federal Circuit reversed the Court of Federal Claims in Estate of Paul Bruyea v. United States. The lower court had held that Article XXIV of the Canada-U.S. Income Tax Convention supplied an independent treaty-based foreign tax credit against the net investment income tax (NIIT). The Federal Circuit held the opposite: the Code does not authorize such a credit, and the Treaty does not create credit that escapes the Code’s limitations. Which means a U.S. citizen resident in Canada may pay Canadian income tax and U.S. NIIT on the same Canadian investment income even where Canadian tax exceeds the regular U.S. income tax. Excess Canadian foreign tax credits cannot be moved from the Chapter 1 system to satisfy the
separate Chapter 2A NIIT.
What is interesting is that the court did not hold that NIIT falls outside the Treaty. It accepted that NIIT is a covered U.S. income tax. The credit nevertheless failed because coverage and creditability are separate questions. The key here, is that Article XXIV operates in accordance with, and subject to the limitations of, U.S. law.
The facts and procedural history
Paul Bruyea was a U.S. citizen living in British Columbia. In 2015, he sold Canadian real property and realized a gain taxable in both countries. He paid Canadian income tax and reported U.S. federal income tax, including NIIT under IRC §1411. The IRS disallowed his attempt to use Canadian income tax as a credit against the NIIT, hence he paid the NIIT in full.
Bruyea sued for a refund in the Court of Federal Claims. In December 2024, that court granted partial summary judgment for him. It agreed that the Code itself did not provide the requested credit, but concluded that Article XXIV created a treaty-based credit and that the Treaty’s domestic-law language governed how the credit was computed rather than whether it existed. The government appealed to the Federal Circuit, who reviewed treaty and statutory interpretation and reversed lower court decision.
The statutory problem: NIIT sits outside Chapter 1
The statutory analysis begins with the architecture of the Code. IRC §27 allows foreign taxes as a credit against the tax imposed by Chapter 1, to the extent provided in §901. Section 901(a), in turn, credits qualifying foreign taxes against the tax imposed by Chapter 1 and excludes taxes treated under §26(b) as not imposed by that chapter.
NIIT is imposed by IRC §1411 in Chapter 2A, titled “Unearned Income Medicare Contribution.” It is generally 3.8% of the lesser of net investment income or the excess of modified adjusted gross income over the applicable threshold. Net investment income can include interest, dividends, annuities, royalties, rents, certain passive business income, and net gain from dispositions.
Practical implications for Canada-U.S. files
Current-year compliance
For a U.S. citizen residing in Canada, the return model should treat NIIT as a potential residual U.S. tax cost even where Canadian tax on the relevant investment income exceeds U.S. tax. Form 1116 credits remain relevant to Chapter 1 tax, but they do not migrate to Form 8960 or directly reduce §1411 liability. The exposure is most visible where a client realizes significant Canadian-source capital gains, rental income or portfolio income and has modified adjusted gross income above the NIIT threshold.
Positions taken based on the lower-court decision
Returns, amended returns and refund claims prepared in reliance on the 2024 Court of Federal Claims decision should be identified and reassessed. But the federal circuit decision does not, in itself, creates a universal affirmative filing obligation to amend a previously filed return.
Planning before a realization event
Before a major sale or income event, tax estimates should separately model: (1) Canadian tax, (2) U.S. Chapter 1 tax after foreign tax credits, and (3) NIIT. This is particularly important for high income individuals. Any planning must be tested under both countries’ rules.
Conclusion
Canadian income taxes cannot offset NIIT through either the ordinary Code credit or Article XXIV’s credit mechanism. For Canadian-resident U.S. citizens, NIIT can therefore remain as genuine residual double taxation. The Federal Circuit did not find a conflict between domestic law and the Treaty. In its view, the Treaty itself imposes domestic-law limitations, except where the parties expressly negotiated a departure.
