High-income US citizens in Canada could face effective marginal tax rates above 57% on investment income. This will happen after a U.S. appeals court rejected foreign tax credits against a 3.8% federal surtax.
The U.S. Court of Appeals for the Federal Circuit ruled on August 31 that foreign taxes cannot be credited against the Net Investment Income Tax, or NIIT, under the tax treaties examined in two cases.
The NIIT has applied since 2013 to certain investment income, including interest, dividends and capital gains. For single U.S. tax filers, the surtax applies above annual income of USD 200,000..
U.S. citizens generally must report worldwide income regardless of where they live. Canadian residents can normally use foreign tax credits to reduce overlapping U.S. income tax. However, U.S. domestic law does not allow those credits to be applied against the NIIT.
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One case involved Paul Bruyea, a U.S. citizen who lived in British Columbia. After selling Canadian real estate in 2015, he paid Canadian capital gains tax and an additional USD 263,523 in U.S.
NIIT on the same gain; according to court details, a lower court ruled in 2024 that the Canada-U.S. tax treaty allowed Bruyea to claim a credit against the NIIT.
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The Federal Circuit reversed that decision, finding that treaty benefits remained subject to limitations under U.S. law. The court reached a similar conclusion in a separate case involving U.S. citizens living in France.
Kevyn Nightingale, a Canada- and U.S.-certified accountant at Levy Salis LLP, said he was surprised and disappointed by the decisions. He added that U.S. officials had not considered the foreign-tax-credit issue when lawmakers drafted the NIIT legislation.
