in the situation where a Canadian unlimited liability company ("ULC"), which is a disregarded entity for US tax purposes, pays an excessive management fee to its US parent (Xco) that is deemed to be a dividend under s. 214(4)(a) and Xco is an LLC that has two qualifying persons (ACo and BCo) as its members, Art. IV, para. 6 of the Canada-US Convention would not apply to treat the management fee as being derived by ACO and BCO because such amounts would be disregarded under the Code in this situation. Similarly, if XCo were a partnership with two partners, ACo and BCo, who were qualifying persons, Article IV(7)(b) would apply because they would be treated under the Code as deriving a management fee or shareholder benefit if ULC were not a disregarded entity, whereas such amounts would be disregarded if ULC were disregarded.
If XCo is an S-Corp, although CRA has taken the position that any Canadian source income received by an S-Corp may be considered to be derived instead by its shareholders pursuant to Art. IV, para. 6, the S Corp will continue to be ordinarily accepted by CRA as being itself a resident of the US, so that the S Corp may benefit from the reduced 5% dividend withholding rate on the (deemed) dividend on the basis that it owns more than 10% of the ULC.