A Canadian-resident unlimited liability company (ULC) pays dividends to its two shareholders, which are each disregarded U.S.-resident Delaware limited liability companies (LLC1 and LLC2) which, in turn, are held by USCo1 and USCo2, who are qualifying persons for the purposes of Art. XXIX-A of the Canada-U.S. Treaty and are regarded entities. Are the dividends (which are treated as partnership distributions for U.S. purposes) eligible for Treaty benefits? CRA stated:
[Under] Article IV(6) ... dividends paid by the ULC ... would be considered as being paid to USCo1 and USCo2.
Nevertheless, since the ULC is treated as fiscally transparent under the laws of the U.S., pursuant to Article IV(7)(b) of the Treaty, amounts of dividends paid by the ULC shall be considered not to be paid to or derived by a person who is a resident of the U.S. because, by reason of the ULC being treated as fiscally transparent under the laws of the U.S., the treatment of the amount under the taxation law of the U.S. (i.e. as a partnership distribution) is not the same as its treatment would be if the ULC were not treated as fiscally transparent under the laws of the U.S (i.e. as a dividend).
Therefore, pursuant to the application of Article IV(7)(b) of the Treaty, dividends paid by the ULC to LLC1 and LLC2 would be considered not to be paid to or derived by a U.S. resident. Therefore, the reduced treaty rate for dividends would not apply... .