Introduction and summary
In brief some of you may have heard that the United States “Net Investment Income Tax” (“NIIT”) found in Chapter 2A of Subtitle A (Income taxes) of the Internal Revenue Code (Chapter 26) cannot be offset by foreign tax credits based on Canadian taxes paid on the same income. Yes, this does subject some Canadians (and others) to double taxation (at a rate of 3.8%) on investment income.
From the perspective of the average individual “investment income” should be understood to be dividends, interest and capital gains including the capital gain on the sale of a principal residence!
(The “NIIT” is more widely referred to as the Obamacare surtax. Obviously Americans abroad cannot benefit from Obamacare.)
Interestingly, the “Net Investment Income Tax” is:
- a tax in addition to the normal income taxes in the Internal Revenue Code
- operates in a way that is very similar to Eritrea’s citizenship based tax on foreign income
- is one more expression of the U.S. hatred of all things foreign (the Internal Revenue Code punishes all things foreign)
- creates an extra tax (double taxation) on non-U.S. investments (in this way it is similar to the Trump tariffs which is essentially a sales tax on foreign imports)
The question of whether the Canada/U.S. tax treaty obligates the United States to allow a foreign tax credit (minimizing double taxation) is currently being litigated in the Bruyea case.
The purpose of this post is to explain the issue, the litigation and highlight a very important amicus brief written by two U.S. law professors in support of Mr. Bruyea. To better understand the problem, you are invited to read further. For those interesting only in listening to a podcast about the amicus brief, here you go …
An outline of this post is as follows …
Part 1 – Guaranteed double taxation on certain investment income for U.S. Citizens in Canada!!
Part 2 – The Net Investment Income Tax and the Internal Revenue Code denial of foreign tax credits
Part 3 – Does the Canada/U.S. tax treaty provide a tax credit when the Internal Revenue Code does not?
Part 4 – Conclusion
Appendix A – How the Internal Revenue Code is structured and why the Internal Revenue Code does not allow for a foreign tax credit to offset the NIIT
Appendix B – A deeper dive