2021-0881541E5 Pension benefit from Chile

Principal Issues: Whether the withdrawal of funds from a mandatory pension scheme in Chile under an exceptional measure authorizing the withdrawal is subject to tax in Canada.

Position: No.

Reasons: Pursuant to Article 18(1) of the Canada-Chile Tax Treaty, pensions arising in Chile and paid to a taxpayer resident in Canada are only taxable in Chile.

Author: Graham, Kanwal
Section: 56(1)(a); 110(1)(f); 248(1) "superannuation or pension benefit"; Article 18(1) of Canada-Chile Treaty.

XXXXXXXXXX                                                               2021-088154
                                                                                       K. Graham

December 12, 2023

Dear XXXXXXXXXX:

Re: Withdrawal of funds from mandatory pension scheme in Chile

We are writing in reply to your request of February 18, 2021, in which you asked for our assistance with an enquiry from the Embassy of the Republic of Chile in Canada (“Embassy”) concerning the withdrawal of certain pension savings in Chile by individuals resident in Canada. Our understanding of the Embassy’s enquiry, as described in your request, is as follows:

* The Chilean government adopted an exceptional measure (“Measure”) in 2020, permitting the withdrawal of up to 10% of the pension savings in the individual pension accounts managed by the Pensions Funds Administrators (“AFP”) in Chile.

* The Measure was adopted to mitigate the economic effects of the pandemic in the population.

* Individuals may authorize the AFPs to transfer the withdrawn pension funds to a foreign bank account.

* Chilean citizens living in Canada are worried that if they choose to withdraw their pension savings through a direct transfer to their accounts at a Canadian bank, they will be taxed in Canada on those funds.

The Embassy has requested our views on the Canadian income tax treatment of funds withdrawn by Chilean citizens who are resident in Canada from the individual pension accounts managed by the AFPs.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (“Act”). This technical interpretation does not comment on the application of any provision of a foreign law. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations however, we offer the following general comments, which may be of assistance to you.

Please note that all legislative references in this letter refer to the Act, unless otherwise specified.

Under subparagraph 56(1)(a)(i) of the Act, any amount received by a taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of, a superannuation or pension benefit is included in income whether it is in the nature of a single payment or otherwise. The term “superannuation or pension benefit” is defined in subsection 248(1) and includes any amount received out of or under a superannuation or pension fund or plan. Generally, a plan will be considered a superannuation or pension fund or plan where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodic payments on or after the employee's retirement in consideration for his or her employment services. Subparagraph 56(1)(a)(i) of the Act applies equally to benefits from a foreign pension plan that are attributable to services rendered while the individual was not a resident of Canada. The determination of whether a specific payment from a particular individual pension account managed by the AFP in Chile would constitute a superannuation or pension benefit for purposes of the Act is a question of fact.

Any amount received by a person in a particular year as, on account or in lieu of payment of, or in satisfaction of, a superannuation and pension benefit, and included in that person’s income for the particular year, would be reported on line 11500 of a T1 income tax and benefit return (“tax return”).

However, relief from taxation may be available under the Convention Between Canada And The Republic Of Chile For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And On Capital (“Treaty”). In accordance with Article 18(1) of the Treaty, pensions arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in the Contracting State in which they arise. Therefore, where an amount received by a person resident in Canada out of or under the individual pension account resulting from the Measure is a superannuation or pension benefit under the Act and is included in the person’s income for the year, the person may claim a deduction for the amount under subparagraph 110(1)(f)(i) of the Act. This deduction is claimed on line 25600 of the tax return.

The reason that certain amounts are included in a taxpayer’s total income and then deducted in computing the taxpayer’s taxable income is to permit the calculation of certain benefits and entitlements that are based on a taxpayer’s income. This includes Old Age Security payments, which are clawed back from higher income taxpayers. The deduction of treaty-exempt income in computing a taxpayer’s taxable income gives effect to Canada’s obligations under the relevant tax treaty.

We trust our comments are of assistance.

Yours truly,

Angelina Argento
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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