I think the 'was' modifies 'a sloth,' not 'fossiles', a sloth that was... but even if the 'was' part is right, C is still incorrect because it states that the sloth was found in 1991, but its fossile was dated some million years ago.
强烈支持D,理由有四:A、该句主要结构:fossiles made it sth..it无指代。B、they found in...,they无指代,如果指代fossils,应该为they were founded in....C、making this sth.,this 不能单独使用指代某物.E、该句主要结构:fossils of the arm of the sloth which made the sloth sth.,句子结构不完整,没有谓语动词。