Nakul Kohli, Jiani Qian, "Canadian Residents Earning Income Through Non-Resident US LLCs", Canadian Tax Focus, Vol. 12, No. 1, February 2022, p. 10

Summary Under
Tax Topics - Treaties - Income Tax Conventions - Article 4

Non-application of US Treaty reduction where Canadians receive dividends from a Canco through an LLC (p. 10)

  • An LLC with US and Canadian shareholders will be subject to 25% withholding tax on dividends received from a Canadian-resident corporation, subject to reduction under the Canada-US Treaty.
  • A US resident shareholder could meet the conditions of Art. IV(6) of the Treaty so that if all other conditions were satisfied (e.g., the limitation-on-benefits requirement of Art. XXIX A), the withholding tax rate generally reduces to either 5% or 15%. (pursuant to Art. X(2)). On the other hand, a Canadian resident could not meet the test in Art. IV(6) because inter alia para. (b) thereof requires that the LLC be treated as fiscally transparent in Canada, which is not the case – so that the 25% withholding tax rate is not reduced.

Look-through treatment where non-Canadian partnership (p. 10)

  • Contrast this with the receipt of the same dividend by a partnership with US and Canadian partners - form NR302 generally provides for look-through treatment of the partnership so that, with proper documentary support, withholding tax may not apply to the portion of the dividend allocated to the Canadian-resident partners.
Summary Under
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1)

Canadian residents generally are better off investing in a portfolio that may include Canadian companies through a partnership rather than an LLC (p. 10)

  • Where an LLC with both Canadian- and US-resident members receives a dividend from a Canadian corporation, the US members may benefit from Art. IV(6) of the Treaty so as to reduce the dividend withholding tax rate to 15% or 5% - but there is no Treaty reduction to the Canadian withholding tax rate regarding the indirect interest in that dividend of the Canadian members.
  • Contrast this with the receipt of the same dividend by a partnership with US and Canadian partners - form NR302 generally provides for look-through treatment of the partnership so that, with proper documentary support, withholding tax may not apply to the portion of the dividend allocated to the Canadian-resident partners.