In an article published on October 24, 2023, we canvassed the unsettled landscape for Canadian-resident US citizens to claim foreign tax credit against their US Net Investment Income Tax (the “NIIT”) under the U.S.-Canada Treaty (the “Canada Treaty”). There have been some changes since that article was published. Although the case law is not finally settled, there is currently authority for a foreign tax credit against the NIIT under the Canada Treaty. Given the 10-year statute of limitations for refunds due to foreign tax credit changes, this presents an opportunity for taxpayers to claim a refund for prior NIIT paid and to take the position prospectively on their US tax returns.
To recap the history, the IRS position is that relief is not available under the US-Canada Social Security Totalization Agreement or under a tax treaty. There are court decisions both ways leaving a state of confusion. In Christensen v. United States, 168 Fed. Cl. 263 (2023), the court held that there is an independent credit against the NIIT under Art. 24(2)(b) of the U.S.-France treaty, which is limited to US citizens resident in France.
However, the Christensen court also held that Art. 24(2)(a) of the U.S.-France treaty, the provision equivalent to Art. XXIV(1) of the Canada Treaty, does not allow foreign tax credit against the NIIT. The same conclusion is reached in Toulouse v. Commissioner, 157 T.C. 49 (2021) involving the U.S.-France treaty and Kim v. United States, 664 F. Supp. 3d 1062 (C.D. Cal. 2023) involving the U.S.-South Korea treaty. The United States has appealed the decision in Christensen.
On December 5, 2024, the Court of Federal Claims issued an opinion in Bruyea v. United States, 174 Fed. Cl. 238 (2024), holding that Art. XXIV(1) of the Canada Treaty provides for a foreign tax credit against the NIIT despite the US law limitation clause. The government argued that a credit is only available against taxes within Chapter 1 (income taxes) of the Internal Revenue Code and not those within Chapter 2 where the NIIT is placed. In any case, the government’s view is that the NIIT would override the Canada Treaty because the NIIT was created later in time.
The court rejected both arguments. In the court’s view, the US law limitation clause does not eliminate the availability of a credit under the Canada Treaty. The court noted that Arts. XXIV(1) and XXIV(4) of the Canada Treaty apply to US taxes on income “irrespective of the manner in which they are levied.” The court found support from treaty materials such as the Treasury Department’s Technical Explanation, the Congressional Joint Committee Report, and the Letter of Submittal. The court further stated that the Canada Treaty guarantees that any future amendment to US law will not change the general principle of the Canada Treaty’s goal of eliminating double taxation.
The Court of Federal Claims is a court of nationwide jurisdiction, meaning all taxpayers can rely on its opinions. The Bruyea case provides more than substantial authority for the position that, under the Canada Treaty, Canadian resident US citizens or US residents with Canadian source income can take a foreign tax credit against the NIIT.
The government has appealed Bruyea to the Court of Appeals for the Federal Circuit. On April 15, the Court of Appeals approved the motion to consolidate Bruyea with Christensen, in which the Court of Federal Claims examined the same issue under the US-France treaty and ruled that the treaty does not independently provides a credit. As the language in the relevant provisions of both treaties is substantially similar, both cases will be heard on the merits together as companion cases to determine the common question of whether the treaty provides for an independent foreign tax credit against the NIIT. A hearing on the merits is expected in late fall of 2025 or early 2026 with a decision in both cases likely by mid 2026.
In the interim, a few things are clear:
- The Bruyea decision provides substantial authority to claim a foreign tax credit against the NIIT on Canadian source income under the Canada Treaty. There is a chance the IRS may reject these returns, but the technical basis for them is well founded.
- As outlined in our prior article, there is a good case that there is a credit in Canada for the NIIT imposed on US source income.
- Refunds are possible going back 10 years in the US.