The NIIT Treaty Credit Argument Has Been Reversed: What U.S. Expats in Canada and France Need to Know
U.S. citizens living in Canada or France can no longer rely on their respective tax treaties to use Canadian or French income taxes as a foreign tax credit to eliminate the U.S. 3.8% Net Investment Income Tax (NIIT). On August 31, 2026, the U.S. Court of Appeals for the Federal Circuit reversed two taxpayer-favourable Court of Federal Claims decisions in Estate of Paul Bruyea v. United States and Christensen v. United States.
The result is important and unfavorable for affected expats: even where the same investment income or capital gain is taxed in Canada or France, foreign income taxes generally cannot offset the U.S. NIIT.
What the cases decided
The companion cases involved U.S. citizens resident abroad who paid tax locally and were also assessed U.S. NIIT on the same investment gain:
Case | Country of residence | Transaction | Lower-court result | Federal Circuit result |
Estate of Paul Bruyea v. United States | Canada | Sale of Canadian real estate | Taxpayer won an NIIT refund claim | Reversed; Canadian tax could not credit against NIIT |
Christensen v. United States | France | Sale of shares in a French company | Taxpayers won an NIIT refund claim | Reversed; French tax could not credit against NIIT |
Mr. Bruyea, a U.S. citizen resident in British Columbia, was subject to Canadian tax and U.S. NIIT on a Canadian real-estate gain. He sought to apply Canadian income taxes against a $263,523 NIIT liability. The Court of Federal Claims agreed with him in 2024, but the Federal Circuit overturned that result.
The Christensens, U.S. citizens living in Paris, paid French and U.S. tax on a gain from selling French-company shares. Their disputed NIIT amounted to $3,851. They had prevailed in the Court of Federal Claims in 2023, but that judgment was also reversed.
This is not a ruling that Canada or France cannot tax the income. It is a ruling about the U.S. side of the equation: the treaty foreign-tax-credit provisions do not create a credit that can be used against the U.S. NIIT.
Why the court said no
The central technical point is that the normal U.S. foreign tax credit rules—primarily Internal Revenue Code sections 27 and 901—apply to income taxes imposed under Chapter 1 of the Code. The NIIT is imposed under section 1411, located separately in Chapter 2A. The court treated that statutory placement as decisive: a foreign tax credit that is available against regular U.S. income tax is not, by default, available against NIIT.
The taxpayers argued that the treaty provisions solved this problem. The Canada treaty’s Article XXIV and the France treaty’s Article 24 require the United States to allow credits intended to relieve double taxation. The language, on its face, is broad enough to refer to U.S. income taxes that include NIIT.
But the Federal Circuit concluded that the credit clauses must be read together with the treaty language requiring that credits be allowed “in accordance with” and “subject to the limitations of” U.S. law. Because the Internal Revenue Code limits foreign tax credits to Chapter 1 taxes, the court held that the treaties do not independently override that limitation.
Why this matters to expats
For a U.S. citizen resident in Canada or France, regular U.S. income tax on foreign-source investment income can often be reduced by foreign tax credits, subject to the usual sourcing, limitation, basket, and timing rules. The NIIT is different.
The NIIT is a separate 3.8% U.S. tax on net investment income, generally including:
Interest and dividends.
Rents and royalties, subject to applicable rules.
Passive business income.
Net gains from selling shares, real estate, funds, and other property.
Certain distributions and investment income from foreign entities.
The tax applies only if modified adjusted gross income exceeds the applicable threshold—$200,000 for many single filers and heads of household, $250,000 for married couples filing jointly, and $125,000 for married persons filing separately. The key problem for expatriates is that these thresholds are not indexed for inflation and are relatively low for internationally mobile professionals, dual-income households, and anyone realizing a significant capital gain.
A U.S. citizen in Canada who sells a rental property, cottage, investment portfolio, or private-company shares may face Canadian tax and U.S. tax on the same gain. The Canadian income tax may generally be relevant to the regular U.S. income-tax calculation, but after Bruyea, it cannot be claimed as a credit against the separate 3.8% NIIT.
The same is now clearly true for a U.S. citizen resident in France who realizes gains on French shares, funds, real estate, or other investments. Christensen rejects the view that the resident-specific credit language in the U.S.-France treaty produces a separate, treaty-based credit against NIIT.
The practical cost
Consider a simplified example:
A U.S. citizen living in Ontario sells a Canadian investment property and realizes a large capital gain. Canada imposes tax on the gain, and the United States taxes the same gain under its own capital-gain rules. Depending on the facts, Canadian tax may generate a foreign tax credit against regular U.S. income tax.
However, if the taxpayer is above the NIIT threshold, the United States can also impose NIIT at 3.8% on the relevant net investment income. Under Bruyea, the Canadian tax does not produce a foreign tax credit that can reduce that NIIT.
The same structure applies in France. A U.S. citizen living in France may have substantial French tax on a gain, yet still owe a separate U.S. NIIT amount that cannot be eliminated with French income tax credits under the treaty. This creates a real residual U.S. cost—not merely a reporting difference.
The weakness in the assumption many expats have made is understandable: treaties are intended to prevent double taxation. But the Federal Circuit emphasized that the treaties seek to avoid or reduce double taxation; they do not guarantee absolute elimination of every instance of double taxation, particularly where Congress created a tax outside the statutory foreign-tax-credit framework.
Implications for tax planning
This is not a reason to assume every U.S. person in Canada or France owes NIIT. NIIT exposure remains fact-specific. But it is a reason to stop treating treaty-based NIIT relief as an available planning position.
Key planning implications include:
Model NIIT separately. Do not assume that an overall foreign tax credit surplus will eliminate all U.S. exposure. A return can show little or no regular U.S. income tax while still producing NIIT.
Review large anticipated transactions before closing. Sales of Canadian or French real estate, private-company shares, publicly traded securities, investment funds, and other appreciated assets should be modeled in advance. The NIIT may be a genuine incremental U.S. cost.
Pay attention to filing status and timing. The NIIT thresholds are modest, and a one-time realization event can create liability even for taxpayers who do not ordinarily exceed the thresholds.
Separate regular-tax FTC analysis from NIIT analysis. The foreign tax credit rules, source rules, treaty re-sourcing provisions, capital-gain treatment, foreign currency issues, and timing differences may still matter greatly for regular U.S. income tax. They do not, after these decisions, create an NIIT credit.
Be cautious with refund claims. Taxpayers who filed protective claims or refund claims relying on the now-reversed Court of Federal Claims decisions should obtain case-specific advice promptly. The Federal Circuit’s opinions give the IRS a strong appellate authority against those claims.
Do not overread the ruling. The decisions directly address the U.S.-Canada and U.S.-France treaties. Their reasoning may also matter for treaties with materially similar “subject to the limitations of U.S. law” language, but treaty text differs and should be reviewed individually.
The narrow but serious takeaway
The August 31 decisions do not eliminate the foreign tax credit, and they do not make all cross-border investment income subject to full double taxation. They instead draw a sharp distinction between regular U.S. income tax and the NIIT.
For U.S. expats in Canada and France, the operational message is clear: foreign income taxes paid to Canada or France may reduce regular U.S. income tax, but they cannot be used under these treaties to offset the 3.8% NIIT. The taxpayer-friendly lower-court rulings are no longer reliable authority.
For anyone expecting a significant gain, the risk is not theoretical. A transaction that previously appeared likely to be fully sheltered by foreign tax credits may now carry an additional U.S. NIIT cost. That cost should be quantified before—not after—the sale closes.
