A U.S. resident citizen is the sole shareholder of a U.S. Subchapter S corporation (S-Corp), which is the sole shareholder of a U.S. LLC (which is fiscally transparent for U.S. purposes) ). US LLC is the sole shareholder of Canco, which is not fiscally transparent. Would the Treaty limit Canada's taxation of a dividend paid by CAnco to US LLC to 5% of its gross amount? CRA responded:
The CRA generally treats an S-Corp as a corporation and a resident of the United States under the Treaty. … Under subparagraph 2(a) [of Article X], the S-Corp would be considered to own the shares of Canco owned by the US LLC. ... The S-Corp will be a qualifying person if it satisfies the ownership and base erosion tests set out in clauses 2(e)(i) and (ii). As 50 percent or more of the aggregate vote and value of the shares of the S-Corp are not owned, directly or indirectly, by persons other than qualifying persons, the ownership test in clause 2(e)(i) [of Article XXIX A] is met. However, whether or not the base erosion test in clause 2(e)(ii) of Article XXIX A is met is a question of fact that can only be determined after an examination of the gross income and the deductible expenses of the S-Corp for the relevant time period.