CRA indicates that the Treaty anti-hybrid rule (Art. 7(b)) applies to dividends paid by a ULC to two LLCs held by U.S. C-Corps

A Canadian-resident unlimited liability company (ULC) pays dividends to its two (disregarded) LLC shareholders, which are each held by a U.S. C-Corp. Are the dividends eligible for Treaty benefits?

CRA indicated that because ULC is fiscally transparent, the payment from ULC of a dividend is viewed as a partnership distribution, so that the same result in the two jurisdictions is not being obtained. Accordingly, the application of the anti-hybrid rule in para. 7(b) of Article IV of the Treaty would apply, so that the LLCs (which in the absence of the 7(b) rule, would qualify under para. 6 of Art. IV for Treaty benefits) would be subject to 25% Canadian withholding tax on the dividends.

Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.11 under Treaties – Articles of Treaties - Art. 4.