A hybrid trust must withhold at non-Treaty rates on its distributions of dividends received from its ULC subsidiary

If a Canadian-resident trust, which is fiscally transparent for U.S. purposes and which is the sole shareholder of a ULC, distributes its dividends from the ULC to its beneficiary, who is a U.S.-resident individual, CRA considers that the anti-hybrid rule in Art. IV, subpara. 7(b) will apply, so that the distribution will be subject to full withholding of 25%.  The U.S. treatment (of the U.S. beneficiary as carrying on a Canadian branch business) is quite different from what it would be if the trust were not fiscally transparent (distributions taxed on a cash basis).  Furthermore, doing a two-step at the ULC level (i.e., increasing PUC, then distributing it) would make no difference.

CRA did not address the situation where the trust subsidiary is an ordinary business corporation.

Neal Armstrong.  Summary of 12 February 2014 T.I. 2013-0486931E5 under Treaties – Art. 4.