@melodylong-ml sorry it took "many" couple of hours. Bottom line is there is no carveout for interest paid from public funds.
Given the amount of interest earned , it would not affect you anyways. I am assuming that all your Canadian active earnings / wages would be exclude by Foreign Earned Income Exclusion ( FEIE ). Thus for US purposes
1. If there is no unexcluded FEI, then the interest income would not create a US tax liability;
2. If there is unexcluded income that both Canada and US tax then obviously this interest earnings ( from US/IRS) would indeed add to the US tax burden. By using form 1116 and using two copies ( one for general category covering the unexcluded & doubly taxed income AND a second for " resourced by treaty " for the interest income ), you would essentially get back to "no or near No" US tax through Foreign Tax Credit.
I did go through the US versions of the Tax treaties, US Technical explanations as also the Canadian version of the Tax Treaty. . Generally interest / div incomes are sourced to the resident state, however because of the "saving clause " US can still tax its citizen/ GreenCard for US sourced income. Thus my conclusion.
Thank you for your patience.
Is there more I can do for you .
pk
