The mistake is asking the wrong question. The treaty doesn't care where the LLC was formed. It cares whether the LLC is liable to tax in the United States in a comprehensive way, meaning taxed on worldwide income as a full resident, not merely as a vehicle that happens to be incorporated there.
Most LLCs fail that test, not because of anything unusual about them, but because of how they're taxed by default. A single-member LLC is disregarded for US federal purposes. It files nothing of its own; its income shows up directly on the owner's return. A multi-member LLC is generally taxed as a partnership, which is also a flow-through. Neither entity pays US tax in its own name. CRA's consistent position, and a defensible one, is that an entity that pays no tax of its own can't be a treaty resident of its own, regardless of where it was set up.
Where the Relief Actually Lives
Consider Olivia, a US resident individual who owns 100% of a Delaware LLC. The LLC holds shares of a Canadian private corporation and receives a dividend. The LLC itself isn't a treaty resident, for the reason above. But Olivia might still be, and that's the part people miss.
Article IV(6) of the Canada-US Treaty, added by the Fifth Protocol in 2007, was written for exactly this situation. Where US tax law treats income earned through a fiscally transparent entity as the owner's own income, the treaty treats the owner as having derived that income directly, as if the LLC weren't there at all. Since the dividend is taxed to Olivia personally under US law, she's generally entitled to claim the treaty's 15% individual dividend rate on the same basis as if she'd held the Canadian shares herself.
So the LLC question isn't really an LLC question. It's a look-through question: who is actually paying tax on this income, and does the treaty reach them.
Where It Stops Working
Olivia's case is the easy one: one owner, one country, clean tax treatment on both sides. It gets harder fast.
With multiple members, the look-through has to be done member by member. A US resident co-owner gets the treaty rate on their share. A co-owner resident in a non-treaty country does not, even though they're sitting in the same LLC. The entity doesn't carry a single treaty status that applies to everyone in it.
Classification mismatches are the other common failure point. The Article IV(6) analysis depends on the US and Canada agreeing on how the income is characterized. Where that breaks down, the look-through can fail even with a single US resident owner.
And even where the technical position is sound, it doesn't help without the right paperwork at the Canadian end. A Canadian payer applying a reduced withholding rate at source needs documentation identifying the actual beneficial owner and confirming their treaty entitlement, not just a form showing the LLC's US address. Skip that step and the payer withholds at the full 25% domestic rate by default. The fix at that point isn't a lower rate, it's a refund claim filed after the fact, which costs time and cash flow that proper documentation would have avoided.