#1BRAZIL - CANADA COMPARATIVE LAW CORPORATE LAW ARTICLE 2 FASKEN MARTINEAU |B Perrotti e Barrueco Advogados Associados#2Introduction Acting internationally is not only offering a good product, adequate price and efficient logistics. The need to have or not a formal company, configured in which model of company, and the possibilities of partnerships, associations or formation of joint ventures are fundamental steps to the beginning of any undertaking. Likewise, not knowing the taxation to which one is subject in the desired country can make a business unfeasible. Brazil and Canada allow different configurations of companies, according to each type of activity, whether for foreign companies to form subsidiaries, local or mixed firms. The procedures to make them official vary. In Brazil, for example, simple companies must be formalized in the Civil Registry Office, and corporations, in the Board of Trade. In Canada, some conditions and processes may be different in certain provinces. Federal and provincial companies are created by registering the articles of association with the appropriate governmental authorities in each case, and the process is fast (24 hours). In terms of taxation to which these ventures are subject, the variants are larger. Both countries have burdens in the different spheres of public administration. In Brazil, attention is needed with the complex tax system. In Canada, it is worth paying attention, for example, to Foreign Tax Credits, instituted with the objective of mitigating the effects of double taxation. At the request of the Legal Affairs Committee of the Chamber of Commerce Brazil-Canada (CCBC), law firms Perrotti e Barrueco Advogados Associados (Brazilian) and Fasken Martineau (Canadian) clarified the main points of the corporate constitution and taxation of their countries.#3CORPORATE LAW PAULO SALVADOR RIBEIRO PERROTTI FERNANDO MAURO BARRUECO BRAZIL - CANADA COMPARATIVE LAW#4CORPORATE LAW BY PAULO SALVADOR RIBEIRO PERROTTI AND FERNANDO MAURO BARRUECO BRAZIL - CANADA COMPARATIVE LAW Forms of Association General Aspects The Brazilian legal structure provides forms of association whereby parties may form corporate entities and other forms of incorporation, which do not imply corporate structure. The latter group includes consortia and other forms of legal businesses whereby parties do not relinquish their status as individuals. Incorporation of a company, on the other hand, entails a written agreement, either private or public, in which the contracting parties express their aims either individually or as a partnership (incorporated companies or unincorporated companies). The latter include common company and special partnership company. Brazilian legislation provides for the following types of companies: simple company, collective name company, limited partnership, private limited company, joint-stock company and joint-stock command company. The law attributes corporate status to such companies upon registration with the competent public registry office, which thus become legal entities, with distinct liability to that of their partners. Brazilian law also provides these status for associations, foundations and co-operatives. Such forms of association are not-for-profit, either due to their charitable nature or in the light of their particular characteristics and aims, thus they are different from commercial organizations, regardless of whether they generate revenues. It should be stressed that all the types of company foreseen under Brazilian legislation, apart from joint-stock company, may function either as simple company or business corporations however, this should be expressed in their articles of incorporation at the time of their founding. Simple company must be registered under the Civil Registry of Corporate Entities, whereas bussiness corporations must register with the board of trade. 1.1. Joint-stock company (S/A) A joint stock company, as described in article 1.088 of Brazilian Civil Code and Law 6,404 of 15 December, 1976, partially amended by Law 9.457 of 5 June, 1997, and by Law 10.303, of 31 October, 2001, is fundamentally a legally constituted business corporation, with capital stock represented by shares. The principal purpose of companies it to generate profits for distribution among the shareholders. Joint-stock company is identified by a name, followed by the words joint-stock company, in full or abridged to S/A; or preceded by the 4#5CORPORATE LAW BY PAULO SALVADOR RIBEIRO PERROTTI AND FERNANDO MAURO BARRUECO BRAZIL - CANADA COMPARATIVE LAW word Companhia, or abridged to Cia. The corporate name may consist of a name (e.g. of the founder or a distinguished forbearer). The corporate name may describe corporate aims or activity, however, such a description is not mandatory. There are two kinds of S/As: publicly traded companies which obtain funds through public offerings and subscriptions and are supervised by the Brazilian Securities Commission (CVM); and a closed capital companies which obtain the shareholders own capital or that of subscribers, in which case the accounting and administration is simpler. Capital stock is represented by securities known as shares. Depending on the nature of the rights or advantages that these conferred upon their holders, shares may be common, preferred or fruition shares. Aside from essential rights, common shares confer upon their bearers voting rights; whereas preferential shares, though they entitle their bearer to special rights, may grant or suppress voting rights. Fruition shares confer the bearer the right to continue participating in the corporate profits of ordinary or preferential shares, even upon their amortization, without reduction in capital. By means of a Shareholder's Agreement, the shareholders may decide issues relating to purchase and sale of their shares, establish preferential acquisition rights, or exercise voting rights. All obligations set forth in Shareholders Agreement are binding, and must be respected by the Company. A S/A may be managed by its Board of Directors and Administrative Council, or exclusively by a Board of Directors, as determined in Law or in its Bylaws. An Administrative Council is a collegiate decision-making body. Such councils are optional for closed-capital corporations, and mandatory for open-capital or authorized-capital corporations. The Administrative Council must be comprised of at least three members, who must be individual shareholders, resident or nonresident in Brazil. The Board of Directors is the executive body of a S/A. It is responsible for representing the company and ensuring its regular operation. The Board is composed of no less than two directors, that may or may not be shareholders, who must be individuals residing in Brazil, elected for a maximum term of three years. The shareholders may supervise corporate management by means of the Fiscal Council. The principal purpose of the Fiscal Council is to oversee the company's accounts and management. Such supervision may be permanent or periodic. Installation of a Fiscal Council reflects the desire of the shareholders to 5#6CORPORATE LAW BY PAULO SALVADOR RIBEIRO PERROTTI AND FERNANDO MAURO BARRUECO BRAZIL - CANADA COMPARATIVE LAW ensure more stringent control over corporate management. It should comprise no less than three and no more than five members, each with a substitute, who may or not be shareholders, elected by the General Meeting. In certain cases, members of a Fiscal Council represent specific categories of shareholders. 1.2. Private Limited Company (LTDA.) Articles 1.052 to 1.087 of the Civil Code provide for private limited company. These may take the form of a simple company or a business corporation, depending upon their corporate aims, and type of business. A LTDA. is organized through the Articles of Association and has limited liability partners. Since every partner has its responsibility limited to the value of their shares, all of them are jointly liable for the payment of the capital stock. Under the New Civil Code, the structure of companies must include the Meeting of Shareholders, the Management, and an Audit Committee as established by the partners in the articles of association. The meeting of shareholders is the main decision-making body of a corporate organization, which meets whenever the law or the articles so require. The management is carried out by one or more individuals, who may or not be shareholders, nominated in the articles of association which also specifies their terms of office. The capital stock is divided into shares. Each share represents an amount in money, credits, rights or assets which a shareholder contributes toward the formation of the company's capital. Shares must be registered and are not represented by securities. As the ownership and the number of shares are written in the Articles of Association, any transfer of such shares requires an amendment. At the meetings of shareholders, changes resulting in modification to the articles of association or reorganization company's Bylaws require favorable votes representing at least three-fourths (3/4), of the capital stock. Rules Common to Both S/As and LTDAS. Corporate operations involving transformation, mergers, consolidation or split up may be formalized either by S/As or by LTDAS., under the terms of Articles 1.113 to 1.122 of Law 10.406, of 10 January, 2002 (Civil Code), and articles 220 to 234 of Special Law 6.404, of 15 December, 1976 (the S/A Law). Transformation is an operation whereby a given company, without dissolving, changes its corporate classification. In this process, the company must observe a form corresponding to the new classification. Incorporation is an operation whereby one or more companies are absorbed by another, which then assumes all in all their assets and liabilities. 6#7CORPORATE LAW BY PAULO SALVADOR RIBEIRO PERROTTI AND FERNANDO MAURO BARRUECO BRAZIL - CANADA COMPARATIVE LAW Merger is an operation whereby two or more companies amalgamate, with the aim of forming a new company which then assumes all in all their assets and liabilities of the now extinct former companies. A demerger is an operation whereby a company transfers parts all its net equity to one or more existing or specially formed companies, resulting in the extinction of the parent company in the event that it has transferred all its net equity, or reducing of its capital, if it transferred on only part of its net equity. Tax System 1. General Features The Brazilian Federal Constitution, promulgated on October 5, 1988, confers upon the Federal Union, the States, and the Municipalities power to levy taxation. In Brazil taxation may take the form of taxes, fees, betterment fees, other contributions, and compulsory loans. Taxation may be instituted by any of the three levels of government, in accordance with specific powers conferred under the Constitution. Fees collected at the three levels, are used to fund services such as law enforcement, and other collective public services delivered or provided to the taxpayer. Betterment fees (though as yet not commonly levied) may be collected from the property owners that benefit from execution of public works. Contributions can only be levied by the Federal Government. There are social contributions (payroll charges); contributions to intervene in the economic domain, contributions in the interest of professional or economic categories, and contributions to finance social security. Compulsory loans can be instituted only by the Federal Government, to defray urgent public investment of relevant national interest, or extraordinary expenses resulting from public calamity or foreign wars. Unless otherwise expressly stated in the Constitution, the imposition and collection of taxation must comply with certain fundamental constitutional rules, including: • the principle of legality (whereby taxation may only be levied or increased by enacted law); ⚫ the rule of equality (whereby taxpayers in equivalent situations must receive identical tax treatment); ⚫ the principle of non-retroactivity (whereby taxation cannot be levied on events that occurred prior to entering into force of the law that created a new tax or which increased rates or the base of computation of existing ones); 7#8CORPORATE LAW BY PAULO SALVADOR RIBEIRO PERROTTI AND FERNANDO MAURO BARRUECO BRAZIL - CANADA COMPARATIVE LAW • ⚫ the principle of precedence (whereby taxes cannot be collected in the same fiscal year in which the law that created them or increased their rates was published, nor prior to ninety days of said publication. Contributions, on the other hand, can be collected in the same fiscal year, but must respect the ninety-day deadline); ⚫the principle of non-confiscation (whereby taxation cannot be confiscatory). 2. Federal Taxes Only the Federal Government may levy the following taxes: Import Duties (II); Export Duties (EI); Income and Capital Gains Tax (IR); Taxes on Industrialized Products (IPI); Tax on Credit, Exchange and Insurance, or on Securities Transactions (IOF); Tax on Rural Land (ITR). 2.1. Income Tax Income tax is assessed on income and wealth increases of resident individuals from domestic or foreign sources at rates of 15% and 27.5% (depending on the income bracket), and on capital gains of corporate entities at the rate of 15%; Corporate income tax is assessed on profits and capital gains generated by operations in Brazil or abroad. It is normally assessed on net profits of the company (other applicable basis are assumed profit and arbitrated profit). Taxable. income is equal to net profits (ascertained in quarterly or annual balance sheets) adjusted for additions and deductions set forth in income tax legislation. Corporations taxed on the basis of net profit may choose to pay tax in monthly installments, on the basis of estimates, provided they observe certain conditions established in income tax legislation. The current corporate income tax rate is 15%, whether calculated on net profit, assumed profit, or arbitrated profit, whatever company's business. A 10% supplementary tax is applicable to the portion of net profits which exceeds R$ 20,000 per month. Profits or dividends assessed as of January 1, 1996, paid out or credited to individuals or corporations domiciled in Brazil or abroad, are no longer subject to income tax (either withheld at source or due on taxpayer's return) regardless of whether assessed on the basis of net profit, assumed profit, or arbitrated profit. Withheld income tax (withholding tax) is due on income paid, credited, remitted, or delivered to non-residents, at the rate of 15% or 25% depending upon the beneficiary's country of residence and the nature of the income. As of January 1, 2001, a 'Contribution of Intervention in the Economic Domain' is due, at the rate of 10%, upon remittances of royalties or compensation deriving from technology transfers, in cases where the withheld income tax rate is 15%. This does not apply 8#9CORPORATE LAW BY PAULO SALVADOR RIBEIRO PERROTTI AND FERNANDO MAURO BARRUECO BRAZIL - CANADA COMPARATIVE LAW to profits and dividends, which are exempt from withheld income tax. As of January 1, 1997 new rules were introduced in income tax law to regulate transfer pricing in business transacted by resident individuals or corporations with non-resident parties for import and export, and interest payments abroad. These rules apply in the following situations: (1) when a corporation domiciled in Brazil conducts business with non-domiciled related parties; (II) when a domiciled individual or corporation carries out business with a related or unrelated party domiciled in a country where income tax is not charged or is assessed at a rate lower than 20%, or where the domestic legislation maintains secrecy with regard to equity participation or corporate ownership. 2.2. Taxes on Industrialized Products The taxes on industrialized products is levied on output and on the importation of industrialized goods. Taxes on industrialized products is noncumulative and thus tax due may be offset by credits arising from the purchase of raw materials, intermediary products, and packaging materials. However, no credits are granted for goods that become fixed assets. The rates at which taxes on industrialized products is charged on the value of industrialized goods, as they are imported or dispatched from domestic plants, varies in accordance with the nature of the goods. The average rate is 10%. Export goods are exempted from taxes on industrialized products. 2.3. Tax on Financial Transactions The tax on financial transactions, insurance and securities is due on bank loans and similar transactions, on foreign currency transactions, on insurance premiums, and on securities traded. The rate varies depending on the type of operation. 2.4. Wealth Tax (IGF) The wealth tax has not yet been instituted. 3. State (and Federal District) Taxes The States and the Federal District are empowered to levy the following taxes: inheritance and gift tax (ITD); tax on circulation of goods, interstate and inter-municipal transport, and communications (ICMS); tax on ownership of motor vehicles (IPVA). The Tax on Circulation of Goods and Services (ICMS) is the main State tax, and is due on operations involving circulation of goods (including manufacturing, marketing, and imports) and on interstate and inter- municipal transport and communications services. ICMS is non- 9#10CORPORATE LAW BY PAULO SALVADOR RIBEIRO PERROTTI AND FERNANDO MAURO BARRUECO BRAZIL - CANADA COMPARATIVE LAW cumulative, and thus tax due maybe offset by credits arising from the purchase of raw materials, intermediary products, and packaging materials. Which allows the taxpayer to record input tax credits from the ICMS paid on the purchase of raw materials, intermediary products, packaging materials. Tax credits for goods destined to become fixed assets may be accepted, subject to certain restrictions. Intrastate rates normally vary from 7% to 25% (the average rate in the states of RJ, SP, MG and RS is 18%, whereas for other states and the DF it is 17%). Rates applied to interstate commerce are 7% or 12%, depending on the destination. Export goods are exempted from ICMS. 4. Municipal Taxes Municipalities and the Federal District are empowered to levy the following taxes: - urban property tax (IPTU); - tax on real estate transfers (ITBI); services tax (ISS). Services tax (ISS) is levied on certain services listed in federal law, and the average rate is 5%. 5. Social Charges The Federal Government may levy the following charges (or social contributions) to fund social programs: • Social contribution on corporate profits (CSL): levied on pre-tax profits, assessed in accordance with commercial law, with adjustment s and exceptions set forth in law. The current rate is 9%; • Social contribution for funding Social Security (COFINS): levied monthly on the gross income. Current rates are 3% and 7.6%, the former being cumulative and the latter non-cumulative, in accordance with criteria set forth in law. Export goods are exempted from COFINS. Contribution toward the Social Integration Program (PIS): levied monthly on the gross income of corporate entities. Current rates are 0.65% and 1.65%, the former being cumulative and the latter non- cumulative, in accordance with criteria set forth in law; Export goods are exempted from PIS. Contribution toward the Social Integration Program (PIS) and Social contribution for funding Social Security (COFINS), levied on imports, assessed on the customs value of goods or the price paid for services, including applicable taxes. The general rates are 1.65% for PIS/PASEP, and 7.6% for COFINS, aside from other specific rates; . Payroll charges for Social security contributions (CINSS): employers must withhold this charge on behalf of their employees, at the rate 10#11CORPORATE LAW BY PAULO SALVADOR RIBEIRO PERROTTI AND FERNANDO MAURO BARRUECO BRAZIL - CANADA COMPARATIVE LAW • of 11%, whereas self-employed workers pay 20%. In both cases, the basis for calculation of this charge is limited to R$ 2.400,00 (adjusted monthly as of January 2004). Corporations pay CINSS at the rate of 20% on payments to individuals for services performed, with no ceiling. Rate of 2% on gross revenue exclusively for companies that provide information technology (IT), information technology and communication (ICT), call centers and companies in the hospitality industry and construction industry. Contribution to intervene in the economic domain (CIDE): (I) CIDE/ Fuel is due at specific rates on import and trade in the domestic fuel market; and (II) CIDE/Remittances is due on remittances to foreign individuals for royalties or technology transfers. The rate is 10%. Alternative Tax Regime There are three options for tax assessment in Brazil: Actual profit: This is the general (or default) format to assess and pay taxes in Brazil. It goes along the basic lines of taxation in other countries. The main taxes to be paid by companies are: Taxes applied when an invoice is issued (PIS and COFINS) and taxes that are applied on the net income such as IRPJ (tax over net income) and CSLL (social contribution over net income). In addition there are taxes over the payroll that concern the employer's part of social security (public health services and pension programs). Assumed Profit: This is a simplified form of assessing taxes and bookkeeping which can be applied by companies. Simplified Taxation System: Intended for small companies, with just a single tax (called simplified taxation system). It applies to companies with less than R$ 3.6 M in revenues. ■ 11#12CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW#13CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW Types of entities and tax system in Canada 1. Types of Entities Several different vehicles are available in Canada for conducting a business. Foreign businesses can operate directly through a branch office or establish a separate Canadian vehicle. Corporations are the most common business entity, but sole proprietorships and partnerships can also be used to accomplish similar objectives. Joint ventures, franchises and cooperatives are less common, but appropriate for some types of enterprise. 1.1 Corporate Entities (A) Canadian Corporations A corporation is an entity with legal status independent of its shareholders. Corporations utilized by foreign investors are usually created by incorporation under the Canada Business Corporations Act ("CBCA") or under similar provincial laws. A corporation can be incorporated by individuals or other corporations. Both federal and provincial corporations are created by filing articles of incorporation with the appropriate government authorities. The process is quick (24 hours) and there is no minimum capital required. The articles must include details of the rights, restrictions, privileges and conditions attached to each class of shares. A federal corporation's articles must also name the first directors, a minimum of 25% of whom must be Canadian residents. While the directors generally exercise management authority on behalf of the shareholders, their power can be restricted through a unanimousshareholder agreement. The corporation, its shareholders or third parties can hold the directors personally liable for certain aspects of their decisions. Provincial incorporation can also be used. The provincial acts governing corporations vary somewhat, and, while many of their provisions are similar to those of the CBCA, there are a number of differences in some of the provinces, including no requirement for a minimum Canadian resident director. Corporations are taxable entities under the Canadian taxation system on their worldwide income. (B) Unlimited Liability Companies The provinces of Alberta, British Columbia and Nova Scotia allow for the incorporation of an "unlimited liability company" as the Canadian 13#14CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW subsidiary of a foreign corporation. This type of corporation may be used as an alternative to a branch, as it may allow for losses incurred by the corporation in Canada to be deductible by the foreign corporation in its jurisdiction (principally in the United States), while still providing the advantages of corporate status in Canada. While an unlimited liability company may be viewed as a disregarded entity in certain foreign jurisdictions (for instance, the United States), it is considered and taxed as any other corporation in Canada. 1.2 Non-Corporate Entities (A) Branches of Foreign Corporations While most foreign investors elect to conduct business in Canada through a Canadian corporation, a foreign entity can carry on a business in Canada directly through a branch operation. The branch must be licensed or registered in each of the provinces in which it will operate. The taxation of branches and subsidiaries varies considerably, and differences exist in the liability of parent companies. (B) Partnerships A partnership is a for-profit business owned by two or more individuals or corporations, based on a contract between them. Partnerships are governed by provincial legislation and generally must be registered with provincial authorities. In addition, partnerships have no distinct legal personality from their partners, and are thus considered flow-through entities for tax purposes. There are two types of partnerships: general and limited. In a general partnership, all partners are subject to unlimited liability. Unless otherwise agreed, the partners have an equal claim on capital and profits, and are equally responsible for all losses, debts and liabilities of the partnership. A limited partnership consists of both one or more general and one or more limited partners. One or more general partners are responsible for managing the business. One or more limited partners contribute capital, and maywork for the firm, but do not participate in its management. Unlike general partners, limited partners are not exposed to unlimited liability unless they take part in the control or management of the business. A partnership itself is not a taxable entity, but it is rather a flow-through entity for Canadian tax purposes. Each partner is taxed directly on its share of the income of the partnership as allocated (but not necessarily distributed) by the partnership agreement. (C) Joint Ventures A joint venture is an association of two or more business entities for 14#15CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW the purpose of carrying on a single enterprise or specific venture. Joint ventures take several forms. They can be set up through a separate corporation, a general or limited partnership, or the joint venturers can simply jointly own business assets. Joint ventures between Canadian and foreign companies are an excellent vehicle for combining the strengths of the participating firms, while reducing the risk of taking on new markets. The joint venturers are liable for the tax on their income earned as participants in the joint venture. (D) Franchises A franchise is a business relationship in which a franchisee contracts for the right to sell proprietary products or services using business names, styles and methods developed by the franchisor. The franchisee generally agrees to comply with performance standards set by the franchisor. In return, the franchisee normally pays an up-front fee as well as ongoing royalties. A simple franchise agreement typically gives the franchisee the right to operate a single outlet at a specified location. A master franchise agreement generally provides for multiple outlets within a specified area. 2. TAX SYSTEM 2.1 General Aspects Income tax in Canada is imposed by the federal, provincial and territorial governments. Subject to certain tax treaty concessions, non-residents of Canada are generally subject to Canadian taxation on Canadian source income, such as income from a business carried on in Canada, income from office or employment in Canada and capital gains on the disposition of property known as "taxable Canadian property", which generally includes: . Real property situated in Canada; Assets used in a business carried on in Canada; A share of a private corporation resident in Canada where more than 50% of the fair market value of the share is derived (or was derived at any time in the previous 60-month period) from real property in Canada, Canadian resource properties, timber resource properties and options in respect of any such property; A share of a public corporation (or mutual fund trust) where (i) the holder holds more than 25% of the issued shares and (ii) more than 50% 15#16CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW of the fair market value of the share (or unit) is derived (or was derived at any time in the previous 60-month period) from real property in Canada, Canadian resource properties, timber resource properties; and . Options in respect of any above listed property. Much of the tax payable by non-residents is collected through Canadian withholding taxes on passive income such as royalties and dividends for Canadian payors. Residents of Canada are taxed on their worldwide income. The Canadian tax base is comprehensive, taxing income and specifically including capital gains. All business, property and employment income, whether active or passive, falls within the scope of Canadian taxation. One-half of capital gains are included in income, and accordingly only one-half of capital losses may be off-set. 2.2 Taxation of Individuals Individuals, like corporations, are taxed on the basis of their residency. Residency for individuals is determined on the basis of a person's centre of vital interest, such as the location of the family home, property and place of employment. An individual who sojourns in Canada for 183 days or more during a year will be deemed to be resident in Canada for that entire year. Both federal and provincial income taxes are imposed upon individuals, at graduated rates, and the rate brackets are indexed for inflation. The combined federal and provincial top marginal tax rates for individuals for 2016 for ordinary income vary from 48% to 54%. (1) Death Taxes Neither the federal government nor any provincial government currently impose succession duties, or estate or gift taxes. Instead, individuals at death are usually subject to federal and provincial income taxation on accrued but unrealized income and capital gains, and on income received in the taxation year prior to the date of death. Probate fees may be levied by certain provinces where letters of probate are required to administer an estate. These fees vary from province to province. 2.3 Taxation of Corporations and Other Entities (A) Corporate Income Tax The federal and provincial corporate tax rates vary, depending on the industry and type of corporation involved. Federal income taxation is levied on resident corporations on their worldwide income. For 2016, the combined federal and Ontario rate for non-Canadian 16#17CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW controlled private corporations is 26.5% for general active business income. There are separate rates for general active business income, manufacturing and processing income, investment income and for Canadian-controlled private corporations. A non- resident corporation pays tax on income earned in Canada, subject to certain tax treaty concessions. An abatement is allowed against federal tax in an amount equal to 10% of the corporation's taxable income earned in the Canadian provinces. This abatement is intended to compensate partially for the provincial tax burden. Provincial taxes vary from 11% to 16% (again for general active business income), and generally a corporation is liable to tax in a province only if it has a permanent establishment in that province. Where a corporation has business income attributable to permanent establishments in more than one province, such income is allocated among those permanent establishments and is subject to tax in those provinces in which the permanent establishments are located. In 2016, the combined standard federal-provincial corporate income tax rates on taxable income ranges from 26% to 31% on general active business income for non-CCPCs. The following tables present a snapshot of the applicable tax rates for 2016: Combined Federal and Provincial Income Tax Rates for Income Earned by a Canadian-Controlled Private Corporation (CCPC) Jurisdiction Québec Ontario Alberta British Columbia Small Business Income up to $500,000 General Active Business Income Investment Income 18,5% 26,9% 50,6% 15% 26,5% 50,2% 13,5% 27% 50,7% 13 % 26% 49,7% Combined Federal and Provincial Income Tax Rates for Income Earned by a Corporation other than a CCPC Jurisdiction Québec Ontario Alberta British Columbia General Active Business Income (B) Determination of Residence Investment Income 26,9% 26,9% 26,5% 26,5% 27% 27% 26% 26% A corporation incorporated in Canada after April 26, 1965 is deemed to be resident in Canada. A non-resident corporation may be considered to be resident in Canada if its central management and control is in Canada. 17#18CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW (C) Losses Non-capital losses incurred by either a branch or a subsidiary may generally be carried forward for Canadian income tax purposes for twenty years, and deducted in computing taxable income earned in Canada. There is no statutory authority to permit the consolidation of income or losses of corporations in related groups. Taxable capital losses incurred in a taxation year may be carried back to the three preceding taxation years and may be carried forward indefinitely, but they can only be used to offset taxable capital gains. Further, since only half of capital gains are included in income, and only one-half of capital losses may be off-set. (D) Tax Treaties Canada has an extensive network of international tax treaties, including comprehensive treaties with Brazil and most of its other major trading partners. Canada generally follows the OECD Model Convention for the Avoidance of Double Taxation and the Commentary thereon in negotiating its tax treaties. These treaties generally reduce the rates of withholding taxes applicable to various types of income, and contain other provisions that impact on the tax treatment of non-residents' Canadian-source income. Canada supports most of the OECD BEPS' recommendations and will likely be a party to the Multilateral Convention. The statutory withholding rate in Canada is 25%, which may be lowered pursuant to the applicable treaty. Withholding taxes apply to various sources of income paid to non-residents, including certain interest (generally only interest paid to related parties or "participating interest"), rent, royalties and dividends, and reflect the source country's right to be first in taxing a stream of income. (E) Branch Tax The purpose of the branch tax is to achieve tax neutrality between carrying on business in Canada through a branch or a subsidiary. To the extent that branch profits are repatriated, they are subject to a tax comparable to the dividend withholding rate under the applicable treaty. (F) Thin Capitalization Rules Generally, interest paid by a corporation is a deductible expense. However, the thin capitalization rules impose a limit on the amount of interest paid to certain non-residents that may be deducted in computing the income of a Canadian corporation. The acceptable ratio of debt to equity is 1.5 to 1. If the average amount of a subsidiary's outstanding debt exceeds one and a half times its equity, a prorated portion of the interest paid or payable in the year to certain non-residents will not be deductible in computing the income of the Canadian corporation subsidiary and will be treated as a dividend paid. 18#19CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW (G) Foreign Tax Credits To alleviate the effect of double taxation, Canada provides a mechanism of foreign tax credit. Foreign tax credits reduce tax by allowing resident taxpayers to claim a credit for the amount of foreign taxes paid on foreign- source income. The credit allowed is generally the amount of tax actually paid up to the amount of Canadian tax payable on the foreign-source income, and is available as a reduction of Canadian tax. (H) Goods and Service Tax Harmonized Sales Tax The Canadian Goods and Services Tax (GST) / Harmonized Sales Tax (HST) is a value added tax that is levied on the supply of most property or services at each stage in the production and distribution chain. Although GST/HST is a multi-stage tax, imposed on purchasers of taxable property or services at all levels of the production and distribution chain, the ultimate tax liability is intended to be borne entirely by the final consumer. To achieve this result, businesses that purchase taxable property or services that are consumed, used or supplied in the course of their commercial activities are permitted to claim a refund of the GST/ HST they paid on the property or services they consume. This credit, referred to as an "input tax credit", is available to qualifying GST/HST registrants (those persons either required to registered or those who have registered voluntarily). The ultimate consumers of the property or services are not entitled to claim input tax credits and, accordingly, must bear the full GST/HST liability. The application of GST/HST can be contrasted with the single stage provincial retail sales taxes (as described below in the section entitled Provincial Sales Taxes) that are levied only at one stage in the production/ distribution chain (generally at the retail level). The federal GST is levied at a rate of 5% in those provinces and territories that either do not have a provincial sales tax or have not fully harmonized their sales tax with the federal GST. These provinces and territories are British Columbia, Alberta, Manitoba, Saskatchewan, Québec, Yukon, Northwest Territories and Nunavut. The remaining Canadian provinces are referred to as "participating provinces" as each has entered into an agreement with the Federal Government regarding the harmonization of their provincial sales taxes with the federal GST. Pursuant to these agreements the Canada Revenue Agency collects HST at the rate of 13% in Ontario and 15% in New Brunswick, Newfoundland and Labrador, Nova-Scotia and Prince-Edward Island (i.e. 5% federal GST harmonized with a 8% or 10% provincial tax component). The GST/HST is levied on nearly all supplies of property and services that are either made or deemed to be made in Canada. The limited categories of supplies on which GST/HST is not levied are either referred to as "exempt" or "zero-rated". The principal distinction 19#20CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW between zero-rated supplies and exempt supplies relates to the availability of input tax credits. Persons supplying zero-rated supplies (supplies that are taxable at a rate of 0%) are generally entitled to recover GST/HST incurred to make those supplies through a claim for input tax credits. The zero-rating mechanism ensures that no GST/HST is collected from the final purchaser of the property or services and that no GST/HST is embedded in the cost of the property or service. Some of the more common examples of zero- rated supplies include certain medical and health related property, basic groceries and goods exported from Canada for supply, use or consumption outside of Canada. Persons making only exempt supplies (supplies that are not subject to GST/HST) are generally not entitled to recover the GST/HST incurred to make those supplies (though, in certain limited circumstances, a partial rebate of GST/HST may be available). Accordingly, some GST/ HST expense will ultimately be embedded in the cost of any exempt property or service. The most common example of such a supply is that of financial services (which includes insurance). The GST/HST is automatically levied on tangible property that is imported into Canada. This tax is generally paid by the importer of record at the time of importation. The GST/HST is also levied on intangible property or services that are considered to be supplied outside of Canada and then used in Canada. Where such a property or service is used in Canada, the business importing such property or service is generally required to self-assess the GST/HST, although broad exemptions from this self- assessment also exist. (1) Provincial Sales Tax All Canadian provinces, with the exception of Alberta, levy a provincial sales tax, either independently or in conjunction with the federal GST. The rates of provincial sales tax range from 5% to 10%. Like Alberta, none of the three Canadian territories Yukon, Northwest Territories and Nunavut levy any sales tax other than the federal GST (at a rate of 5%). As outlined above, the provinces of New Brunswick, Nova Scotia, Newfoundland, Ontario and Prince-Edward Island do not directly levy a provincial sales tax. Instead each of these provinces have entered into an agreement with the Federal Government that results in the Canada Revenue Agency collecting provincial tax as a component of the HST. Ontario While the HST is generally subject to the same rules as the GST, there are some province-specific rules. In Ontario there are point-of-sale rebates for a limited range of consumer products and special rules restricting input tax credits for the provincial component on certain expenses incurred 20#21CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW by large businesses. Large business (annual taxable sales in excess of $10 million) and financial institutions are prohibited from claiming input tax credits in respect of the provincial component of the HST on certain business inputs, such as: Energy, except where purchased by farms or used to produce goods for sale; Telecommunication services other than internet access or toll-free numbers; Road vehicles weighing less than 3,000 kilograms (and parts and certain services) and fuel to power those vehicles; and Food, beverages and entertainment. The restrictions on recovering the provincial portion of the HST are in place for a limited period and will be phased out over the next several years. These restrictions are similar to those that apply to large businesses under the Québec sales tax. In addition, note that Ontario maintains a separate retail sales tax (levied at a rate of 8%) that remains applicable to insurance products and benefit plans and a separate taxation system that is relevant to fuel, tobacco and a limited set of other products. Where a business supplies or is deemed to supply such taxable products it will be required to register under a provincial tax regime that is separate from its GST/HST registration. Québec The Québec sales tax (OST) is based upon the federal GST and it is very similar to the GST in terms of structure and applicability. The QST applies to most property and services that are considered to be supplied in Québec. Similarly, the QST applies to certain importations into Québec. To the extent that a QST registered business incurs QST expenses to make a subsequent taxable supply of property or services, the business is entitled to claim an input tax refund (which is analogous to the GST input tax credit). The QST is levied at the rate of 9.975%. British Columbia, Saskatchewan and Manitoba British Columbia, Saskatchewan and Manitoba levy their own retail sales tax. These taxes are separate from the GST/HST. However, each of these taxes is levied in a similar manner and only at one stage in the production/ distribution chain (generally at the retail level). Such retail sales taxes apply to most transfers of tangible personal property and software, but are only applicable to certain specifically 21#22CORPORATE LAW BY ALAIN RANGER BRAZIL - CANADA COMPARATIVE LAW enumerated services. The most commonly taxed services are telecommunications services, services relating to the repair or installation of tangible personal property and accommodation (hotel) services. Retail sales tax is not applicable to the transfer of real property or related fixtures as the transfer of such property is generally taxed through separate provincial tax legislation. Businesses that provide either taxable goods or services in the course of a business carried on in any of British Columbia, Saskatchewan or Manitoba, or businesses that are resident in Canada and sell property into British Columbia or Manitoba, are generally required to register for retail sales tax purposes and charge, collect and remit retail sales tax on any taxable sale. Unlike the GST/HST and the QST, retail sales tax legislation does not permit the claiming of input tax credits or allow for a similar tax refund mechanism. To avoid the cascading of retail sales tax, taxable property intended for re-sale (e.g. raw materials or inventory) is generally exempt from retail sales tax. In addition, exemptions are generally provided for production machinery or equipment purchased by a manufacturer. As a matter of public policy, certain items of tangible personal property are also exempt from retail sales tax even when provided to an end user. The most common examples are grocery items, children's clothing and certain educational materials. The general rates of retail sales tax are 7% in British Columbia, 5% in Saskatchewan and 8% in Manitoba. ■ 22#23B Perrotti e Barrueco Advogados Associados Perrotti e Barrueco Av. Cidade Jardim, 377, 9° floor 01453-000 São Paulo, SP, Brazil Phone: 55 11 3168-1111 [email protected] Website: www.perrottiebarrueco.com.br FASKEN MARTINEAU Fasken Martineau 800 Rue du Square-Victoria Montréal, QC H4Z 1A1, Canada Phone: +1 514 397 7555 Fax: +1 514 397 7600 Website: www.fasken.com ල CHAMBER OF COMMERCE BRAZIL-CANADA Chamber of Commerce Brazil-Canada Rua do Rocio, 220 cj 121, 12° floor 04552-000 São Paulo, SP, Brazil Phone: 55 11 4058 0400 Website: www.ccbc.org.br Editor: Estela Cangerana Art Director: Graziela Raucci Art Assistant: Lucas Leal