Foreign tax credits under Canada-U.S. and France-U.S. treaties cannot offset the 3.8% Net Investment Income Tax
A recent court ruling held that foreign tax credits, even under the Canada-U.S. and France-U.S. income tax treaties, cannot be used to offset the 3.8% U.S. net investment income tax (NIIT) under Internal Revenue Code Section 1411.
On August 31, 2026, the U.S. Court of Appeals for the Federal Circuit issued companion decisions in Estate of Paul Bruyea v. United States, No. 2025-1563, and Matthew Christensen and Katherine Kaess Christensen v. United States, No. 2024-1284.
The rulings reverse taxpayer-favorable decisions from the U.S. Court of Federal Claims and substantially close a potential treaty-based path for U.S. citizens abroad to avoid paying the NII on their foreign sourced investment income.
The NIIT imposes an additional 3.8% U.S. tax on investment income earned by high-income U.S. citizens including dual citizens living, often without offset from foreign tax credits.
In both Bruyea and Christensen, the lower courts initially allowed the treaty-based approach to claim a foreign tax credit against the NIIT. The Federal Circuit reversed that decision, ruling that the treaty language allows the foreign tax credits “subject to the limitations” of U.S. law and therefore incorporates the Internal Revenue Code’s limitation on foreign tax credits only applying to Chapter 1 taxes, whereas NIIT is imposed under Chapter 2.
This is a significant development for U.S. citizens residing abroad.
For individual taxpayers, the effect of these decisions will depend on income, residence, source-of-income rules, available credits, filing position, and applicable provincial tax treatment. Taxpayers should seek advice from qualified U.S. cross-border tax professionals before changing filing positions.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
