Brazil Canada taxation

I will post an intersting exchange of messages I had with a reader of the blog. Names and details have been edited.






Hi There,

I have a question regarding Brazil-Canada tax policies and would appreciate your advice. 

I, a Canadian, live in Canada with my Brazilian common-law partner (she is a Canadian permanent resident).  She has been offered a contract to provide promotional services to a Canadian school in Brazil (student recruitment). 

We would move together to Brazil to undertake this work for at least one year. 

She would not be an employee of the institution but rather serve as a contractor. 

I am trying to figure out how this would work in terms of taxes i.e. what is practical and what is the most favourable option. 

1. She receive the funds via a company established in Canada and simply carries out the promotional activities in Brazil and reports income only to Canada. 

2.  She establishes a company in Brazil and pays taxes in Brazil only. 

I know we're covered by the double tax treaty but I don't know what is the most favourable option for avoiding tax losses. 

Any suggestions you have for the predicament would be very much appreciated!

Thanks,

John Snow

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Dear Mr. Snow, 

If you move to Brazil, you would be subject to Brazilian taxation over personal income, either personal income received from a source in Canada or from a source in Brazil.

In case the payment is made to a company based in Canada, you would only  pay taxes in Brazil in case you distributed dividends from Canada to yourselves, while living in Brazil.

If you do so, you might still have to pay taxes in Canada (I'm not sure if/how Canada would tax the dividends distribution).

If your wife provides services in Brazil, while living here as a representative of the Canadian company, and for a long time, there may be a tax issue regarding the Brazilian municipalities. They may understand that a service tax is due in Brazil. The service tax is usually 5%.

All the comments above are only valid if the payment source is located in Canada, as you mentioned. If the payments were originated in Brazil and directed to a Canadian company, the taxation would be very high (maybe 45%).

Also, in theory there must be a legal arrangement between the Brazilian school and the Canadian entity that is performing the payments to your wife. Otherwise, the whole transaction could be considered a tax evasion scheme.

If your wife were to incorporate a company in Brazil, the company would pay something around 16% of taxes, calculated over the gross revenue. There is also another possible scenario, in which the company would pay 34% of taxes over the dividends.

Finally, there is a third taxation optioin, called SIMPLES, that may allow for a lower tax rate, of about 10% over the gross income. But I would have to check if it is available for your specific case.

If your wife received payment through a Brazilian company, the dividends distributed by the Brazilian company to her would not be taxed in Brazil (this is the general Brazilian rule). But they might be taxed in Canada, in case she remains a tax resident there while providing services in Brazil.

As you can see, in your case there are not much instances of use of the Brazil Canada non-double taxation agreement.  The only case where it would be applicable is if the services were being provided by a Canadian company, invoicing directly to Brazil. In such situation, the treaty could be used either to avoid the payment of the whithholding income tax levied in Brazil (15%) or to obtain a tax debate, in Canada, for the same tax.  This 15% tax is included in the 45% estimate mentioned before.

Sorry for taking so long to answer.

Regards,

Adler