Where an LLC has a Canadian business, it may be advantageous for U.S. members to hold their membership interests through S Corps

Art. IV(6) of the Canada-U.S. Treaty does not provide Treaty benefits to non-U.S. residents (including Canadians) investing through an LLC. This extends to the situation where the LLC carries on business in Canada but does not have a Canadian permanent establishment, so that only the income allocable to the LLC's U.S. resident members would be exempted under Art. VII. Where U.S. resident individuals invest through an LLC, CRA considers that the pro rata share of branch earnings attributable to them should be subject to branch tax at the statutory 25% rate rather than the Treaty-reduced 5% rate, since the relieving provisions in Art. X(6) are only applicable to corporations. This might be addressed by interposing S Corps (viewed by CRA as Treaty residents notwithstanding their U.S. tax transparency) as the members of the LLC.

Neal Armstrong. Summary of Julie Colden and Éric Lévesque, “An In-Depth Look at the Hybrid Rules in the Fifth Protocol,” 2017 Annual CTF Conference draft paper under Treaties – Income Tax Conventions – Art. 4.