29 July 1998 GST/HST Interpretation HQR0000665 - Prepaid Funeral Arrangements

                                                                        GST/HST Rulings and Interpretations
  Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your letter of April 25, 1997 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to prepaid funeral arrangements. In particular, you were responding to our letter of November 7, 1996 to XXXXX had inquired about the tax consequences of moving or altering funeral arrangements which were entered into prior to September 1, 1990.

Interpretation Requested

In your letter, you have raised in substance four arguments concerning our response to XXXXX[.] These are:

1. A policy statement is not law.

2. The concept of fundamental change does not appear in section 344 of the Excise Tax Act (the Act) nor in Policy Statement P-071.

3. So long as the original contract has not been terminated, it continues to exist and any services provided at the time of need, including additional or substituted services and whether there has been a change in suppliers, are not subject to tax.

4. The incidental supply rule in section 138 of the Act would deem any additional or substituted services to be part of the original arrangement, such that they would not be subject to tax.

Interpretation Given

Based on the information provided in your letter and in XXXXX letter, our response is as follows.

Issue No. 1 - Purpose of Policy Statements

Policy statements are not quoted or referred to because they are law, but rather as an expression of the Department's interpretation of the law, and which policies Departmental officials are generally obligated to follow.

Issue Nos. 2 and 3 - Fundamental Change

These two issues can be addressed by asking, what is meant by the phrase "under the arrangement" in subsections 344(2) and (3) of the Act?

Section 344 of the Act sets out a number of criteria in order for prepaid funeral services to be free from tax. The criterion relevant here is that where an arrangement has been entered into, no tax is payable in respect of the funeral services provided "under the arrangement". Can it be said that where a new supplier is involved, or additional or substituted services are provided, the services are provided under the arrangement originally entered into?

With respect to the substitution of the supplier, revised Policy Statement P-071 (a copy of which was sent to you previously) addresses this issue specifically. It states that:

"... where a new supplier is substituted for the original supplier of the funeral services, and the substitution is made under the arrangement for the services, the tax relief provided under subsections 344(2) and (3), or subsections 360(2) or (3) [for HST purposes], of the Act will continue to apply."

The policy statement does not explain what is meant by a substitution "made under the arrangement". If the contract expressly provided for such substitution, then such a case would be within the policy. If the contract provided that such a substitution resulted in the termination of the contract, then that would result in a new arrangement and be outside the policy. If the contract was silent on the issue, then a substitution of the supplier by way of assignment would not terminate the contract and the existing arrangement would continue and be within the policy.

The policy statement also states that:

"... where the substitution of one supplier for another is made for reasons beyond the control of the individual who is the object of the arrangement for funeral services, provided the new supplier honours the original arrangement, it is the Department's position that the tax relief provided under subsections 344(2) or (3), or subsections 360(2) or (3), of the Act will continue to apply, even if the substitution is not made under the arrangement."

Finally, P-071 provides that a substitution of the original purchaser by a new individual "will effect a new arrangement" and render the funeral services subject to tax.

P-071 does not address the addition or substitution of various services. However, our letter to XXXXX stated that substantial changes would result in either a new arrangement or an additional arrangement. We stated that section 344 of the Act does not refer to "contracts", but rather to "arrangements". Additional services not provided for in the original arrangement, and contracted for subsequently, cannot be said to be part of the original arrangement, even if they do not constitute a new contract. The reference in section 344 of the Act is to "arrangements" and not "contracts".

Upon further consideration, our position on the issue is as follows. The application of section 344 of the Act is based on the idea that an arrangement is those services which are agreed upon at the time the arrangement is made. While some older contracts may use general terms to describe the services (e.g., "deluxe service") and other contracts itemize all of the services to be provided, nevertheless the arrangement constitutes what is described at the time. Only those services which are described or contained in the original arrangement are provided "under the arrangement". Services contracted for subsequently cannot be provided under the arrangement because they were not part of the arrangement. They may be provided in connection with, or further to, the original arrangement but not under the original arrangement. "Under the arrangement" must be read as meaning "as provided for in the arrangement at the time the arrangement was entered into". This is implicit in the phrase "under the arrangement".

The intent of the transitional rules which grandfather certain supplies free of tax, such as prepaid funeral arrangements, is that at the time these contracts were entered into, it was not reasonable to expect the parties to have contemplated the GST. It removes from the GST net those supplies provided under contracts which were entered into prior to GST but which supplies are actually provided after the GST came into force. Where changes are made to an existing funeral arrangement after August 1990, it is not within the intent of the transitional provisions that they be tax-free, except to the extent outlined in this letter.

The following is the tax treatment that will result in various circumstances. Items that are substituted at no extra cost (e.g., one type of headstone for another) are not subject to tax. If the substituted item requires additional payment (e.g., a more expensive headstone), then the additional payment is subject to tax (but not the portion previously paid for that item). If additional items are purchased (e.g., three vehicles instead of two) the additional item (but not the original items) are subject to tax.

Issue No. 4 - Incidental Supply

Section 138 of the Act deems a supply to be part of another supply when they are supplied together, the one supply is incidental to the other supply and there is a single consideration for the supplies.

Policy Statement P-159 discusses the meaning of the phrase "reasonably regarded as incidental" and P-160 the meaning of the phrase "where a particular property or service is supplied together with any other property or service".

Although the funeral arrangement drawn between the supplier and the contract purchaser refers to a total amount as the consideration, this in fact is simply a tally of the costs of the individual elements (casket, headstone, organist, etc.) included in the funeral service and not a single consideration. The sample contracts provided by XXXXX indicated that a funeral service is essentially designed from a "menu" of available services and supplies. The contract purchaser selects the individual elements desired and arrangement for funeral services is drawn for the sum of those items. The single consideration test is not met.

The supplies must be made together. Pursuant to paragraph 133(a), a supply is made at the time the agreement for the making of the supply is entered into. Where an item is added or substituted, the agreement for the supply of that item is not entered into at the same time as the agreement for the original arrangement. The added or substituted item is not supplied together with the other items.

In order that a particular supply be incidental, it must be of a minor, subordinate or non-essential nature to the overall supply. Whether or not any particular item was of such a nature would have to be determined on an item-by-item basis.

Finally, as P-159 indicates, the incidental supply rule will not be applied where there are significant tax revenue implications.

The various criteria of section 138 of the Act have not been met and it would not apply to funeral arrangements, prepaid or otherwise.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. Section 360 of the Act provides transitional rules for prepaid funeral arrangements in the participating provinces, which mirror the rules in section 344 of the Act. Our comments above would apply to section 360 of the Act as well.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-7909.

Yours truly,

Gunar Ozols
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate