Introduction and context
I have written numerous posts about the double taxation and the Net Investment Income Tax on my citizenship solutions blog.
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On August 3, 2026 Petros wrote about how the U.S. taxation of the gains on the sale of a principal residence causes Americans abroad to do things that may be contrary to their interest. His post was about an American abroad wishing to avoid U.S. taxation on the sale of her principal residence. An August 31, 2026 ruling from the United States Court of Appeals has made the U.S. taxation of the gains on the sale of a principal residence even more of a problem.
On August 31, 2026 the United States Court of Appeals, per Judge Stark, delivered the long anticipated rulings in the Bruyea (Canada) and the Christensen (France) rulings.
Mr. Bruyea and the Christensen’s are U.S. citizens living outside the United States. As a result, this decision reflects an unusually vicious assault (even by U.S. standards) on the lives of U.S. citizens who are tax residents of another country.
This means pure double taxation on Americans abroad with non-U.S. investments
Specifically the court ruled that the U.S. tax treaties with Canada and with France (and by extension other countries) do NOT prevent the United States from subjecting Americans abroad to double taxation on their “non-U.S. source” investment income. This is accomplished by denying U.S. citizens (wherever they may live) the opportunity to use tax paid in Canada, France (or any other country) as a “foreign tax credit” to offset the 3.8% Obamacare surtax on Net Investment Income (“NIIT”). Note that the “NIIT” is designed to fund Obamacare. In general, Americans abroad cannot participate in Obamacare.
To put it simply, Judge Stark’s ruling means that:
If a U.S. citizen generates “foreign” income subject to the 3.8% “Net Investment Income Tax”,
THEN the individual must pay a 3.8% tax to the United States PLUS any tax payable to the foreign country.
This can reasonably be viewed as a 3.8% tariff on investing on non-U.S. investments!
(Note that the 3.8% Obamacare surtax operates as a separate tax which is in addition to normal capital gains taxes levied on the sale of property. Those normal capital gains taxes payable to the United States CAN be offset by capital gains taxes payable to the foreign country.)
An example of extreme relevance to U.S. citizens residing in Canada – The sale of two pieces of real estate
For the purposes of this example we will assume that 1 USD = 1 CDN.
Example 1 – the sale of a a piece of land that is subject capital gains tax in Canada
Sale of land with a taxable capital gain of 1 million USD that is subject to capital gains tax in both Canada and the USA. The sale is treated as a “long term” (owned for more than on one year) gain in the USA (meaning the gain is subject to a capital gains tax rate of 20%. It is subject to a capital gains rate of approximately 25% in Canada. This means that:
- the capital gains tax owing to the USA = $200,000
- the capital gains tax owing to Canada = $250,000
The $250,000 tax paid to Canada IS usable as a credit against the U.S. tax of $200,000 (mitigating the effects of double taxation). In this case the person has paid $50,000 more in Canadian tax than the U.S. tax owing.
Next the U.S. will be subject the gain to a maximum additional tax of 3.8% (although it will be a bit less) of $38,000.
The Judge Stark ruling means that the additional U.S. tax of $38,000 CANNOT be used to offset the $38,000 U.S. Net investment income tax.
The total tax paid is $250,000 PLUS $38,000 = $288,000.00
That that the $38,000 NIIT is effectively a 3.8% tariff on investing in foreign real estate.
(Had the person invested in U.S. real estate, Canada has made it clear that it WOULD have allowed the $38,000 NIIT to be used to offset the Canadian taxes owing!)
Example 2 – the sale of a principal residence NOT subject to capital gains tax in Canada
Sale of principal residence with a taxable capital gain in the United States of 1 million USD. The home has been owned for many years the sale is treated as a “long term” gain in the USA (meaning the gain is subject to a capital gains tax rate of 20%.
The tax owing to the USA is $200,000. (Because the sale is of a principal residence there is no tax capital gains tax payable in Canada.)
Next the gain will be subject to a maximum additional tax of 3.8% (although it will be a bit less) of $38,000.
This makes the U.S. taxation of the gain on the sale of a principal residence even more punitive!!
How can this be? Surely, you are making this up?
My usual practice is to write long posts explaining the tax rules that lead to this result. In this case, I am going to refrain. I will link to numerous posts I have written on my Citizenship Solutions blog for those who wish to understand the mechanics behind this.
For the average person, understanding what this means is important.
One final warning about the sale/disposition of a principal residence in Canada – Make sure it is reported to the Canada Revenue Agency!
Please remember that Canada requires the reporting of the sale/disposition of a principal residence on your tax return. Penalties aside, there are important reasons to do so. Note that “disposition” means more than outright sale. “Disposition” includes a a gift to a family member including your spouse!!
Sorry to be the bearer of such bad news. But, it is important that you are aware of this!
Those who want to understand the technicalities, how this works and the “why”, please go the Appendixes. For the rest of you, think carefully about what this means in your lives!
Appendix A – The “Bonjour” series of posts where I have written extensively about this issue.
Bonjour Part 7 – Bruyea and Chrisensen Cases Argued March 3, 2026
Bonjour 1 to Bonjour 6 are found in the Appendix to “Bonjour 7” for those interested in understanding all of this from a technical, policy and tax treaty perspective.
Appendix B – Some videos that explain the “architecture” of this.
Appendix C – The problem of real tax on phantom capital gains when a U.S. citizen abroad sells their house
Although not the main point of this post, exchange rate fluctuations can sometimes create the illusion of income where there has been no income.
Post 1 – The general principle explained
Post 2 – An excellent analysis from Dr. Karen Alpert of FixTheTaxTreaty.org
Thank God I renounced my U.S. citizenship two years ago. I still have a deep attachment to the USA, but I have no attachment to the IRS, nor do I wish to have anything to do with them ever again!