This article is for general informational purposes only and does not constitute tax or legal advice. The interaction between U.S. domestic tax law and bilateral treaties is genuinely unsettled ground — a court can reverse a taxpayer-favorable ruling years after the fact, as happened here. Anyone affected by the Net Investment Income Tax as a U.S. citizen resident in Canada should get advice specific to their filing before relying on anything below.
By Lucas Wennersten, CFP® (US & Canada), CFA · 4-minute read
For high-income U.S. citizens living in Canada, the honest answer as of this week is: don’t count on offsetting the Net Investment Income Tax with a foreign tax credit. Two companion rulings from the U.S. Court of Appeals for the Federal Circuit, decided August 31, 2026, shut down the argument that had been working its way through the courts for two years — and the result is that investment income earned by a U.S. citizen resident in Canada can now be taxed at a combined marginal rate north of 57%.
What the NIIT is, and why it stacks so badly on cross-border filers
The Net Investment Income Tax is a 3.8% federal surtax on net investment income — interest, dividends, capital gains, rents, and royalties — for filers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Those thresholds are written into the statute and have never been adjusted for inflation since the tax took effect in 2013.
Because U.S. citizens are taxed on worldwide income regardless of residence, a U.S. citizen living in Canada owes the NIIT on their investment income the same as if they lived in Ohio. The trouble is what happens next: in eight of Canada’s ten provinces, combined federal and provincial tax on investment income already exceeds 50%. Add the 3.8% NIIT on top — uncredited — and the combined rate clears 57%.
The two rulings
Both cases turned on the same question: does a U.S. tax treaty’s double-taxation clause override the domestic-law bar on crediting foreign tax against the NIIT? In Estate of Paul Bruyea v. United States (No. 2025-1563), a U.S. citizen resident in British Columbia sold Canadian real estate in 2015, paid Canadian capital gains tax on it, and was then assessed US$263,523 in NIIT on the same gain. He argued the Canada-United States Tax Convention‘s Article XXIV required a credit for the Canadian tax already paid. The Court of Federal Claims agreed with him in 2024. The government appealed, and on August 31 the Federal Circuit reversed, holding that the treaty’s “subject to the limitations of the law of the United States” language incorporates the domestic-law bar rather than overriding it. A companion case involving a U.S.-France treaty claim was decided the same way, on the same day, by the same panel.
What this changes for a US citizen resident in Canada
Practically, nothing changes about what’s owed today — the government’s position, which the IRS has held since 2013, is now confirmed rather than merely asserted. What changes is that the alternative reading is now foreclosed at the appellate level, absent Supreme Court review or a statutory fix. A pending refund claim built on the treaty argument is materially weaker after this week. Anyone who has been assuming a future refund on prior years’ NIIT, based on the 2024 trial-court win, should revisit that assumption with their preparer now rather than at filing season.
For cross-border tax planning going forward, this reinforces something worth saying plainly: NIIT exposure on Canadian-sourced investment income is a real, uncredited cost for high earners, not a paperwork problem that resolves with the right form. It belongs in the same conversation as PFIC exposure and the choice between registered and non-registered accounts — a structuring question, not a filing question.
Considering how NIIT exposure factors into your cross-border investment structure? Book a complimentary consultation and we’ll walk through where your specific situation stands.
