ARTICLE | September 2, 2026

What the Federal Circuit Decided

The Federal Circuit’s principal opinion came in the Bruyea case. A U.S. citizen living in British Columbia sought to offset several hundred thousand dollars in NIIT arising from Canadian-source gains under Article XXIV of the Canada-U.S. tax treaty. The taxpayer argued that Canadian taxes paid on the same income could be credited against the NIIT surtax.

In 2025, the Court of Federal Claims agreed. It reasoned that the treaty created a foreign tax credit (“FTC”) independent of the U.S. tax code and that domestic-law limitations primarily governed the calculation of the credit, rather than whether it was available at all.

The key issue is that the NIIT is not defined as an income tax against which foreign tax credits may be claimed under the U.S. tax code. When Congress enacted the NIIT in 2013, it placed the tax outside the ordinary FTC regime.

The Federal Circuit disagreed with the lower court and reversed its decision. Although the court acknowledged that reducing double taxation is a principal aim of the treaty, it emphasized that treaties do not guarantee relief from every instance of double taxation. The court concluded that nothing in the treaty supports disregarding the U.S. tax code’s substantive limits on the availability of an FTC. In short, the decision confirms that the U.S. tax code can limit treaty-based foreign tax credit claims.

Why This Matters for High-Net-Worth and High-Income Expat Families

The tax rate at issue is 3.8%. On an ordinary investment gain, that may not seem significant. On a major liquidity event, however, the cost can add up quickly.

Consider a U.S. taxpayer living abroad who realizes a $10 million investment gain subject to NIIT. Before considering other limitations, the NIIT alone could result in $380,000 of additional federal tax. Under the appeals court’s decision, even if Canadian income taxes exceed both the regular U.S. income tax and the 3.8% NIIT, the taxpayer cannot use those foreign taxes as a credit against the NIIT.

This issue is especially relevant for clients with concentrated stock positions, foreign business interests, international real estate, or substantial income from interest, dividends, capital gains, and rent. It may also affect families considering a major transaction while living abroad.

Tax treaties remain critically important tools for expats, but this decision reinforces an uncomfortable reality: “Relief from double taxation” does not always mean the complete elimination of double taxation.

This article is for informational purposes only and should not be considered tax or legal advice. The application of tax treaties and U.S. tax rules depends on individual circumstances.