CRA indicates that the Art. XXIX-A(3) Canada-US LOB clause exclusion would be unavailable to income derived by a Canadian subsidiary from an offshore connected-business FA

Canco (which is purely a holding company for a foreign affiliate carrying on business in a third country) pays a dividend to USco, which is owned by individuals resident in a non-treaty country but which is engaged in the active conduct of a trade or business in the U.S. FA is in the same business as USco and its activities are all connected to USco’s business. Would Art. XXIX-A(3) of the Canada-US Treaty be available respecting such dividend, so that it would be subject to the Treaty-reduced rate of 5%?

No. CRA indicated that of the three tests set out in Art. XXIX A(3), the connected test would not be satisfied, i.e., the dividend income would not be considered to be derived in Canada in connection with, or incidental to, the USco trade or business (including any such income derived directly or indirectly by USco through one or more other Canadian residents).

CRA went on to indicate that to the extent that this denial is not considered appropriate in the circumstances, the taxpayer may request special relief through the CRA competent authority under Art. XXIX-A(6).

Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.8 under Treaties – Income Tax Conventions - Art. 29A.