For Americans who live abroad, the foreign tax credit is the backbone of the whole system. The United States taxes its citizens on worldwide income wherever they live, a rule explained in the Brief's piece on citizen-based taxation; the credit for tax paid to the country of residence is what keeps that from becoming double taxation.
On 31 August 2026 the US Court of Appeals for the Federal Circuit confirmed that there is one tax the credit cannot touch. In Estate of Paul Bruyea v. United States, it held that neither the Internal Revenue Code nor the US-Canada tax treaty allows a US citizen to credit Canadian income tax against the 3.8% net investment income tax. On the same day, in Christensen v. United States, it reached the same result under the US-France treaty. Both decisions reversed judgments of the Court of Federal Claims that had gone the other way.
For Americans in Canada and France, and on the court's reasoning in many other treaty countries, that means the NIIT is a real, additional tax on investment income, on top of whatever the country of residence charges.
The Tax in Question
The net investment income tax, NIIT for short, is found in section 1411 of the Code. Congress created it in 2010 as part of the Health Care and Education Reconciliation Act, and it has applied since 2013. According to the IRS, it is a 3.8% tax on net investment income: interest, dividends, annuities, royalties, rents, passive business income and net gains from selling property.
It applies only above a threshold of modified adjusted gross income: $200,000 for single filers, $250,000 for married couples filing jointly and $125,000 for married individuals filing separately. The IRS points out that these thresholds are not indexed for inflation. The tax is charged on the smaller of two amounts: net investment income, or the amount by which modified adjusted gross income exceeds the threshold. It is computed on Form 8960.
Two further points matter for Americans abroad. First, for NIIT purposes, income excluded under the foreign earned income exclusion is added back into modified adjusted gross income, so the exclusion does not lift anyone below the threshold. Second, nonresident aliens are not subject to the NIIT at all. The tax follows citizenship and US residence, not where the income is earned.
What Happened in Bruyea
Paul Bruyea was a US citizen living in British Columbia. In 2015 he sold property in Canada, paid Canadian tax on the gain, and owed $263,523 in NIIT to the United States on the same income. He claimed a foreign tax credit for the Canadian tax against the NIIT. The IRS disallowed it, he paid, and in 2023 he sued for a refund in the Court of Federal Claims. In 2024 that court agreed with him, holding that Article XXIV of the US-Canada treaty created a credit that could be used against the NIIT. The government appealed. Mr Bruyea died in June 2026, and his estate took over the case in August.
The Federal Circuit's reasoning rests on two propositions, both of which it described as grounded in unambiguous text.
First, the Code does not allow the credit. The foreign tax credit in sections 27 and 901 is allowed against "the tax imposed by this chapter", meaning chapter 1 of the Code, which contains the ordinary income tax. Congress put the NIIT in a separate chapter, chapter 2A, called "Unearned Income Medicare Contribution". Both parties accepted that the Code, on its own terms, gives no foreign tax credit against it. The court treated the placement as deliberate.
Second, the treaty does not override the Code. Article XXIV of the treaty grants the credit "in accordance with the provisions and subject to the limitations of the law of the United States". The court called this the "U.S. Law Limitation" and held that it applies to all of Article XXIV's credit rules, including the special rule for US citizens resident in Canada. Where the treaty drafters wanted to depart from the Code, the court noted, they did so expressly, for instance by re-sourcing certain income so that it counts as Canadian. The treaty says nothing specific about the NIIT, which did not exist when it was negotiated, and the court said it could not "read an amendment into the Convention".
The court also pointed to what it called anomalous results of the taxpayer's reading. A US citizen in Toronto would get a credit against the NIIT that a US citizen in Buffalo, New York could never get, and could in some cases combine it with the foreign earned income exclusion for a double benefit the Code expressly denies.
Finally, the court noted that its conclusion matched every other court to have considered the question: the US Tax Court in Toulouse (2021), dealing with the treaties with France and Italy; a federal district court in California in Kim (2023), under the treaty with South Korea; and the Court of Federal Claims itself in Christensen on one of the two French treaty provisions. To the Federal Circuit's knowledge, the only court to take a different view on the same dispute was the Court of Federal Claims in Bruyea itself.
Christensen: The Same Answer for France
Matthew and Katherine Christensen were US citizens living in Paris in 2015. They sold shares in a French company, paid French tax on the gain and paid $3,851 in NIIT to the IRS. The Court of Federal Claims rejected their argument under Article 24(2)(a) of the US-France treaty but accepted it under Article 24(2)(b), the provision for US citizens resident in France. The Federal Circuit reversed, holding that the same U.S. Law Limitation governs both paragraphs.
Put together, the two decisions close the door that the Court of Federal Claims had opened for citizens resident in Canada and France.
Why It Reaches Beyond Canada and France
The reasoning turns on a phrase, not on anything peculiar to Canada. The same words appear in the US Treasury's own template for tax treaties: Article 23(2) of the 2016 US Model Income Tax Convention grants the foreign tax credit "in accordance with the provisions and subject to the limitations of the law of the United States". Treaties that follow that language give the same opening for the same argument, and after Bruyea the same answer.
That does not mean every treaty is identical. Each has its own text, and some have special provisions for US citizens resident in the other country. But anyone hoping that their own treaty will yield a different result is now arguing against a precedential decision of the court that hears every appeal from the Court of Federal Claims, and against the Tax Court's reading in Toulouse.
What the NIIT Costs an American Abroad
The effect is easiest to see in a simple case. A married American couple living in Canada or France, filing jointly, with modified adjusted gross income of $400,000, of which $150,000 is investment income. Their income exceeds the $250,000 threshold by $150,000, and their net investment income is also $150,000, so the NIIT applies to $150,000: $5,700. They can still credit their foreign tax against their ordinary US income tax under the normal rules. But the $5,700 is payable on top, whatever they have paid at home.
For larger events, such as the sale of a business or a property, the numbers grow quickly. Mr Bruyea's single property sale produced more than a quarter of a million dollars in NIIT.
What Happens Next
The Federal Circuit entered judgment on 31 August. Because the United States is a party, Rule 40 of the Federal Rules of Appellate Procedure gives the parties 45 days to ask for rehearing by the panel or by the full court, which runs to mid-October 2026. A petition to the Supreme Court is due within 90 days of the judgment, or of any order denying rehearing. As of 8 September, the public docket shows no petition for rehearing, and the Federal Circuit's own guidance notes that it grants few such petitions each year.
The court itself pointed to another route. Even if a treaty violation existed, it said, the remedy might lie in sovereign-to-sovereign relief under the treaty's mutual agreement procedure rather than in a taxpayer's credit. That is a matter for governments, not individual refund suits.
What Americans Abroad Can Do
Plan with the NIIT in the numbers. For any large sale abroad, the US bill now needs to include 3.8% on net investment income above the threshold, without relief for foreign tax. The threshold is fixed and does not rise with inflation.
Watch the filing status. The thresholds differ between joint and separate returns, and a couple in which one spouse is not a US person faces different choices from a couple in which both are. Those choices affect more than the NIIT, so they are worth modelling in full.
Review any refund claim built on the treaty argument. Claims filed on the strength of the Court of Federal Claims' decisions now face a precedential appellate ruling against them, one that binds the Court of Federal Claims.
Keep the records anyway. Whatever happens to rehearing, a clean record of foreign tax paid, dates of sale and cost basis is what makes the ordinary foreign tax credit work, and it is the discipline set out in our piece on proving tax residency.
Bruyea is a narrow decision about one tax, but it carries a broader lesson. Treaties protect against double taxation in general terms; they do not promise that every tax a country invents later will be covered. The same point runs through how double taxation agreements actually work and through the US estate tax rules discussed in The 40% Ghost. For Americans in Canada and elsewhere, and for anyone comparing life abroad with the US tax position at home, the 3.8% is now a fixed part of the arithmetic.
Work with Sebastian
If you are a US citizen abroad planning a sale, a move or a restructuring and want to understand where the NIIT fits into your numbers, book a consultation.
