Category Archives: Net Investment Income Tax

Bonjour Part 8 – Interpreting The Tax Treaty To Create Double Taxation Instead Of Eliminating Double Taxation

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John Richardson – TaxResidentAbroad.com

March 10, 2026

Introduction

This is part 8 in a series of posts detailing the evolution of the “Elimination Of Double Taxation” clause in U.S. tax treaties. Some of the posts also discuss the Bruyea and Christensen cases which result in the double taxation of non-U.S. source investment income under the Internal Revenue Code. The first seven posts are found in Appendix D of this post.

U.S. Tax Treaties and the erosion of double taxation relief using a restrictive view of the “Elimination Of Double Taxation” article

This particular article examines the legal disputes surrounding how U.S. tax treaties should be applied to citizens living abroad, specifically focusing on the Bruyea and Christensen court cases. At the heart of the conflict is whether the Net Investment Income Tax (NIIT) can be offset by foreign tax credits, as the government currently argues that domestic law can limit treaty benefits. The author contends that the primary objective of these international agreements is the elimination of double taxation, a principle currently threatened by restrictive federal interpretations. If the government prevails in these appeals, it could establish a dangerous precedent allowing the U.S. to disallow tax credits on various types of foreign income by simply altering domestic tax classifications. Consequently, the outcome of these cases represents a critical turning point for the financial rights of Americans residing in Canada and France. This source serves as a technical overview for expatriates and legal professionals navigating the complexities of cross-border fiscal policy.

About The Net Investment Income Tax: The U.S. Net Investment Income Tax found in 1411 of the Internal Revenue Code IS and income tax within the meaning of the treaty

See Appendix A of this this post. The NIIT is an “income tax” as defined by the treaty!

“Can’t see the forest, but for the trees”

The Bruyea and Christensen cases have been argued. Interested parties await the decision. What follows are podcasts featuring:

The oral argument in the Bruyea appeal:

The oral argument in the Christensen appeal:

An AI generated podcast based on an “X Spaces” discussion about the appeals:

The “X Spaces” discussion about the Bruyea and Christensen appeals:

A PDF of the transcript of of the “X Spaces discussion”:

Discussion About Bruyea and Christensen-1

Interpreting legislation

Domestic tax legislation is difficult. Tax treaties are even more difficult. Combining domestic tax legislation with tax treaties is exponentially more difficult. In fact, understanding how how treaties impact the application of domestic law can be so difficult that tax preparers, accountants and lawyers become overwhelmed. They are often unable to understand the implications of an interpretation of a law and/or treaty provision in a broader context. The failure to understand the implications of of treaty interpretation meat that:

They “Can’t see the forest, but for the trees”!

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Bonjour Part 7 – Bruyea and Chrisensen Cases Argued March 3, 2026

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Introduction

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Today March 3, 2026 the Christensen (France) and Bruyea (Canada) appeals were argued. The issue is whether FTCs can be used to offset the 3.8% NIIT. The NIIT is found in Chapter 2A of the Internal Revenue Code instead of Chapter 1 which has the the FTC rules. Of course, FTCs (foreign tax credits) are available only as a credit against foreign taxes paid on foreign source income. In the context of the NIIT, it appears well settled (under the provisions of the Internal Revenue Code) that because the NIIT is found in Chapter 2A, that foreign tax credits cannot be used as a credit against U.S. tax owing. To put it simply, in enacting the NIIT, Congress imposed pure double taxation on “foreign” net investment income. Think of it (like PFIC) as a “tariff” on investing in foreign financial assets. This is a huge problem for Americans abroad because their assets (and income streams) are more likely to be foreign. Hence, it is no surprise that this litigation arises from the circumstances of American citizens living outside the United States. Both Mr. Bruyea and the Christensens are Americans abroad.

Hence, the issue in both Bruyea and Christensen is whether the tax treaties provide a foreign tax credit, where the Internal Revenue Code does not.

Do tax treaties create a foreign tax credit under circumstances where the U.S. Internal Revenue Code would NOT allow a foreign tax credit?

Paragraph 1 of Article XXIV of the Canada/U.S. Tax Treaty reads as follows:

Elimination of Double Taxation

1. In the case of the United States, subject to the provisions of paragraphs 4, 5 and 6, double taxation shall be avoided as follows: In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States, or to a company electing to be treated as a domestic corporation, as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada; and, in the case of a company which is a resident of the United States owning at least 10 per cent of the voting stock of a company which is a resident of Canada from which it receives dividends in any taxable year, the United States shall allow as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada by that company with respect to the profits out of which such dividends are paid.

The France U.S. tax treaty has a similar provision which INCLUDES as follows:

ARTICLE 24

Relief From Double Taxation

1. (a) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or a resident of the United States as a credit against the United States income tax:
(i) the French income tax paid by or on behalf of such citizen or resident;

U.S. Treasury position’s is that the language in italics In accordance with the provisions and subject to the limitations of the law of the United States allows the United States to DENY a foreign tax credit if a foreign tax credit is not allowed under the Internal Revenue Code. Obviously this interpretation would make Article XXIV meaningless. Why would it be needed? In fact, it would turn Article XXIV, which purports to be a vehicle for the “Elimination of Double Taxation”, into an Article which would guarantee double taxation. Nevertheless, that is the Orwellian position of U.S. Treasury.

On March 3, 2026 the United States Court of Appeals heard the appeals from BOTH Bruyea (Canada) and Christensen (France). The decisions of the courts of first instance (which conflicted on this question) were:

Bruyea (Canada)– The words In accordance with the provisions and subject to the limitations of the law of the United States should NOT be read to allow the United States to deny a foreign tax credit; and

Christensen (France) – The words In accordance with the provisions and subject to the limitations of the law of the United States SHOULD be read to allow the United States to deny a foreign tax credit. (The Christensen’s were successful based on arguing that a second section of the “double taxation” clause created an independent treaty based foreign tax credit.)

In accordance with the provisions and subject to the limitations of the law of
the United States

The meaning of those words is what the court has been asked to resolve. Specifically, do treaties create a foreign tax credit that extends beyond what is allowed under the IRC. If you are interested in this issue, I think you will find the oral arguments in Bruyea and Christensen interesting. They were heard back to back.

The cases are huge and the stakes are very high! If Bruyea and/or Christensen lose, I would think think that the terms of the treaty would allow the USA to deny a foreign tax credit by simply keeping a tax out of Chapter 1.

Interested to hear your thoughts on the prognosis and/or how you handle the issue of the NIIT payable on non-U.S. source income now.
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Bonjour Part 5 – U.S. Treasury Appeals The Bruyea And Christensen Cases – Can A Tax Treaty Provide A Credit Independent Of The Internal Revenue Code?

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Introduction

This is the fifth in a series of posts about “treaty based” foreign tax credits. Previous posts have discussed how the Bruyea and Christensen cases resulted in court rulings that U.S. tax treaties can create a foreign tax credit that is separate from and independent from tax credits allowed under the Internal Revenue Code. Of course, this depends on the terms of the treaty.

The facts as described in the Bruyea breif – filed September 2, 2025

STATEMENT OF THE ISSUES

Whether the Court of Federal Claims correctly determined that the income tax treaty between the United States and Canada (the “Canada Treaty”)1 allows a U.S. citizen resident in Canada to claim a treaty-based foreign tax credit against the net investment income tax (the “NIIT”) imposed by Section 1411 of the Internal Revenue Code of 1986 (26 U.S.C. — the “Code”).

SUMMARY OF ARGUMENT

For over 80 years, Canada and the United States have had income tax treaties in place, with the primary goal of preventing double taxation of the same income. Article XXIV of the Canada Treaty, entitled “Elimination from Double Taxation,” advances this purpose by providing that certain taxes imposed by each country are eligible for a foreign tax credit — a “treaty-based foreign tax credit” — even if otherwise not permitted under the internal laws of either country.

In 2010, Congress enacted the net investment income tax, the NIIT, which imposes a 3.8 percent tax on certain investment income generated by U.S. citizens (including those living abroad) and U.S. residents. Code Sec. 1411. For the 2015 tax year at issue, the Appellee, Paul Bruyea (the “Taxpayer”) was subject both to (1) Canadian taxation by virtue of his Canadian tax residency and (2) U.S. taxation by virtue of his U.S. citizenship. In that year, he sold real property located in Canada and paid more Canadian federal and provincial income taxes on that real estate gain than what he would have owed in total U.S. income tax and NIIT. As the Code does not provide a foreign tax credit — a “Code-based foreign tax credit” — against the NIIT, the IRS collected the NIIT on that same investment income on which he paid tax to Canada, resulting in double taxation. Here, the Taxpayer claims entitlement to a treaty-based foreign tax credit under Article XXIV of the Canada Treaty to offset the NIIT.

Framing the issue in the Bruyea case in simple terms:

The argument for allowing the credit: Bruyue argues that one would reasonably interpret the Canada/US tax treaty to allow a U.S. resident or citizen a foreign tax credit in the amount of the Canadian tax paid on that same income taxable, received at that same time, under the Internal Revenue Code.

The argument for denying the credit: U.S. Treasury argues that credit for the Canadian taxes paid on the income taxed by the United States is allowable ONLY to the extent that U.S. internal law (Internal Revenue Code) allows the credit.

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Bonjour Part 3 – From Christensen To Bruyea: Boldly Go Where No Interpretation Of Foreign Tax Credits For The NIIT Has Gone Before!

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Congratulations to Stuart E. Horwich, Horwich Law LLP, London, United Kingdom, and Max Reed,
Polaris Tax Counsel, Vancouver, British Columbia, Canada, for Plaintiff.

Introduction

IRS Medic Presentation – January 20, 2025

The slides are here:

NIIT Tax Credit 2

This is the third in a series of posts about “treaty based” foreign tax credits.

The first post detailed the provisions of the U.S. France tax treaty which created the “three bite rule”. By creating the “three bite rule” the U.S. France treaty was used to create a treaty based foreign tax credit.

Bonjour: Different US Tax Treaties Provide Different US Taxation For Different Groups Of Americans Abroad

Bonjour: Different US Tax Treaties Provide Different US Taxation For Different Groups Of Americans Abroad

The second post (also based on the U.S. France tax treaty) described how the U.S. France tax treaty was used to create an independent treaty based foreign tax credit. The purpose was to allow for a foreign tax credit against the NIIT (“Net Investment Income Tax”). Although a major breakthrough, it’s important to note that this case (Christensen):

1. Found that the treaty should be interpreted to create an a foreign tax credit that was independent of the credits allowed under the Internal Revenue Code;

2. Specifically ruled that the language “subject to the limitations of the law of the United States” (found in the opening paragraph of the double taxation clause) should be interpreted to preclude a foreign tax credit for payment of foreign tax on foreign investment income.

Bonjour Part 2 – US Citizens Living In France Can Use French Tax As A Credit To Offset The Obamacare Surtax!

Bonjour Part 2 – US Citizens Living In France Can Use French Tax As A Credit To Offset The Obamacare Surtax!

This third post continues the “NIIT Tax Treaty Chronicles”. Specifically, this post details how Judge Solomson, in the case of Paul Bruyea, determined that (contrary to Judge Blank’s ruling in Christensen) that the “subject to the limitations of the law of the United States”clause in Article XXIV, Paragraph 1:

1. Does NOT preclude the use of a foreign tax credit to offset the NIIT; and

2. That Article XXIV, Paragraph 1 allows a U.S. citizen or U.S. resident living in Canada to use taxes paid to Canada as a credit against the U.S. NIIT!

Judge Blank in Christensen and Judge Solomson in Bruyea reached opposite conclusions with respect to whether the following clause (as represented in the 2016 U.S. Model Tax Treaty) can be used to create a foreign tax credit which is independent of the foreign tax credit rules in the Internal Revenue Code (Sections 27, 901 and 904).

Article 23

RELIEF FROM DOUBLE TAXATION

1. In the case of __________, double taxation will be relieved as follows:

2. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income applicable to residents and citizens:

a) the income tax paid or accrued to __________ by or on behalf of such resident or citizen; and

Therefore, I expect that this issue has NOT been fully resolved.

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