Credit for foreign tax: the curious case of Paul Bruyea

The principal purpose of tax treaties is the avoidance  of double taxation.  Outcomes that result in double taxation inherently run contrary to that purpose. That appears to be the case in the recent decision of the United States Court of Appeals, Federal Circuit in  Estate of Paul Bruyea v. United States, No. 25-1563, decided on 31 August 2026.  The first instance decision by the US Court of Claims was examined in my blog last year: Credit where credit is due.   (The taxpayer appears to have died between the hearings.)

The case concerns the taxation of a United States citizen resident in Canada who realised a capital gain on Canadian situated property. He was liable to tax on worldwide income and gains as a resident of Canada and also in the United States as a citizen.

Foreign tax credit provisions in US tax treaties contain two rules that are not in the OECD or UN Models: First, provision is made for the United States to grant credit to its citizens who are resident in the other contracting states on income and gains arising in the other contracting state.

Second,  the grant of credit for foreign tax is “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)” . That qualification is “without changing the general principle hereof”. This language is found in other countries treaty practice.1

US Domestic law

An “Unearned Income Medicare Contribution” (the NIIT) is imposed as income tax under the United States Internal Revenue Code (the Code) on individuals, in addition to any other tax, of broadly  3.8 percent of net investment income. Foreign tax credits are contained in Chapter 1 of the Code while the NIIT was is in Chapter 2A.

It was not in dispute that US domestic law only granted credit for taxes imposed by Chapter 1 of the Code with result that there was no domestic credit for the NIIT imposed by Chapter 2A.

Canada- US tax treaty

The taxpayer argued that Article 24(1) and (2)(4)(b) of the Canada- US tax treaty independently granted credit for Canadian tax paid against the US  NIIT liability. The Court of Appeals overturned the Court of Claims decision and ruled that the treaty credit was subject to the Code provisions that do not provide for the credit.

The court rejected the taxpayer’s argument that “in accordance with the provisions and subject to the limitations of the law of the United States”  suggests a meaning restricted to computation-related “provisions” and “limitations” of the Code. The court considered the language to be unambiguous in only providing whatever credit was on offer under domestic law.

While it was accepted that the “general principle hereof” was the avoidance of double taxation, the court reasoned that the ineligibility of the NIIT for the credit under domestic law was not contrary to this principle on the basis that the treaty does not entirely “eliminate” double taxation (the title of Article 24) but only seeks to “avoid” double taxation. Neither term was construed by the court.

Treaty interpretation

In my view, the court, in treating each element of article 24(1) and (2)(4) as separate “clauses”, fell into error. By adopting a mechanical, clause by clause approach to interpreting the provision, the court failed to construe the various parts of the article together in context. How the principle of avoiding double taxation qualifies the reference to domestic law is the essential issue in this case.2

This approach is somewhat surprising, given the court’s accurate formulation of the key principle of treaty interpretation. The courts said “In construing a treaty, the terms thereof are given their ordinary meaning in the context of the treaty and are interpreted, in accordance with that meaning, in the way that best fulfils the purposes of the treaty.” This corresponds with Article 31(1) of the Vienna Convention of the Law of Treaties. An apparently narrow understanding of “avoid” does not do justice to the purpose of the treaty.

The court also referred to the principle of avoiding an absurd and unreasonable interpretation of treaties (an element of good faith in Article 31(1) of the Vienna Convention). However, the court’s example of anomalous treatment between a US citizen resident in Canada qualifying for  credit against Canadian tax on Canadian source income when a US resident US citizen would not, seems erroneous itself. Similarly, contrary to the court’s view, there should be no double benefit where the same income is exempt and qualifies for a credit: there is no tax against which the foreign tax can be offset in such a case.

Treaty conflict with domestic law

The court considered that its interpretation of the treaty did not result in any conflict. between the Convention and the Code. This reasoning is however circular. Whether the absence of a credit for income tax levied under Part 2A of the Code, in not providing for credit infringed the treaty is  at the heart of the interpretative exercise. Furthermore, the principle that “statutes should not be interpreted to conflict with international obligations” applies to the construction of domestic statutes. It does not apply to interpret treaties in accordance with domestic law to secure consistency.

Concluding observations

In my previous blog on the case I noted that how far domestic law can encroach on the relief but while remaining consistent with the general principle remains to be determined. The Federal Circuit court did not address this. Instead, the logical conclusion of the decision is that Article 24(1) and (2)(4)(b)(b) of the Canada- US tax treaty is a dead letter as entitlement to a foreign tax credit is only a matter of domestic law. That is a surprising result for a carefully drafted provision.

• 1See Schwarz on Tax Treaties, Chapter 15, §15.02 for the United Kingdom analysis of this language.
• 2In a parallel decision given at the same time, Christensen v. United States, No. 24-1284, https://www.cafc.uscourts.gov/opinions-orders/24-1284.OPINION.8-31-2026_2747783.pdf  the court referred to the  “whole-text canon” “‘ which considers the entire text, in view of its structure and of the physical and logical relation of its many parts. In my view, the court did not do full justice to the principle in its analysis in that case.