30 March 2006 GST/HST Ruling 62164 - Application of GST to Complimentaries

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letters XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of interment rights and supplies of cemetery products and/or services (hereafter collectively referred to as "cemetery property and services") under a pre-need arrangement. XXXXX.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

You have asked five questions that involve a cemetery operator's supply of cemetery products and services under a pre-need arrangement that is either paid for in full at the time the arrangement is entered into or through instalment payments.

Question #1:

With respect to a XXXXX Agreement, relating to a supply of cemetery products and services under a pre-need arrangement, is it sufficient to have a single box at the bottom of the document to account for the total amount of GST/HST pertaining to the supplies purchased under the arrangement?

Answer #1:

Yes, it is sufficient to have a single box at the bottom of a document presented to a cemetery operator's customer to account for the total amount of GST/HST pertaining to all of the supplies acquired under the pre-need arrangement. However, you are required to maintain proper documentation to demonstrate that the GST/HST has been properly accounted for. This information need not be contained in one document, portions can be contained in several documents.

Question #2:

XXXXX.

XXXXX.

Answer #2:

Generally, where an arrangement has been entered into to provide goods and/or services, the ETA deems the entering into of the arrangement to be a supply of the goods and/or services made at the time the arrangement is entered into. As a consequence, GST/HST applies to any prepayment or part payment of the consideration for a supply even if the goods and/or services are not supplied at the time the payment is made.

However, when dealing with a pre-need arrangement, the accounting for GST/HST may differ from the general method of accounting for the tax. Specifically, if a cemetery operator places some or all of the contributions made under a pre-need arrangement for the supply of cemetery products and services in trust in accordance with either provincial law or the terms of the arrangement itself, or as a result of the cemetery operator's normal business practices, those contributions or parts thereof are not considered to be prepayments, and the cemetery operator does not account for the GST/HST on them until such time as the contributions have been withdrawn from trust by the cemetery operator, even if they are held for a short period of time before being segregated in trust.

When an amount is withdrawn from trust by the cemetery operator for the supply of cemetery products and services under the pre-need arrangement, the amount is regarded as consideration for the supplies and the GST/HST will apply on the value of that consideration at the time it becomes due unless the amount paid or due to the cemetery operator represents the total of the consideration and tax (i.e., the amount is considered to include tax). The GST/HST (i.e. the GST/HST calculated on a tax-extra or tax-included basis as applicable) must be included by the cemetery operator when determining its net tax for the reporting period in which the amount is paid or becomes due, whichever is earlier.

There are times when a cemetery operator receives contributions under a pre-need arrangement that are not held in trust (e.g., for an administration service). When this occurs, the contributions are part of the consideration payable for the cemetery products and services and the cemetery operator is required to include GST/HST in respect of the amount in determining its net tax for the reporting period in which the amount is paid or becomes due, whichever is earlier.

Therefore, where a cemetery operator places contributions in trust that include an amount that is an estimate of the GST/HST on the pre-need arrangement, the cemetery operator may record the amounts paid into the trust in any manner that is acceptable under general accounting principles. When the amount is removed from trust, the cemetery operator will account for the tax on its supplies of cemetery products and services. Where a cemetery operator charges consideration for a supply of a good or service and does not place the amount in trust, or withdraws an amount from trust to pay for a good or service supplied by the cemetery operator, the cemetery operator must account for the applicable amount of GST/HST on this amount. XXXXX.

Question #3:

This question concerns the implications to the pre-need arrangement if a customer chooses to add or remove some or all of the products and services to be provided under the arrangement.

XXXXX.

XXXXX.

XXXXX.

Answer #3:

Subject to the terms of the agreement between the cemetery operator and the client, when a client requests an amendment to a pre-need arrangement, it is up to the cemetery operator to decide whether to enter into a new pre-need arrangement with the client, to cancel one arrangement and enter into a new one, or to amend an existing arrangement.

Amending an arrangement could, in fact, result in a new arrangement. We have released a draft policy statement, entitled Agreements and Novation [copy enclosed], on how to determine if an agreement has been modified, varied or otherwise materially altered to the extent that the existing agreement is terminated and a new agreement is entered into. It is a question of fact whether a pre-need arrangement is cancelled or altered to the extent that a new arrangement is entered into and, as a result, whether novation has occurred.

Where novation has occurred and the existing pre-need arrangement is terminated, the cemetery operator is required to account for the GST/HST on a tax-inclusive basis with respect to any amount that is not refunded to the customer or transferred in trust to another arrangement. The cemetery operator must account for GST/HST in its net tax for the reporting period in which the amount is paid or forfeited by the customer.

When an existing pre-need arrangement is cancelled, the cemetery operator is also required to account for the GST/HST on a tax-inclusive basis with respect to any amount that is not refunded to the customer or transferred in trust to another arrangement. The cemetery operator must account for GST/HST in its net tax for the reporting period in which the amount is paid or forfeited by the customer. For example, if the GST/HST-registered cemetery operator charges a cancellation fee, the cancellation fee would be subject to the GST/HST on a tax-included basis and the cemetery operator accounts for this tax on its GST/HST Return for the period. Any remaining amount transferred in trust to a new pre-need arrangement is not subject to the tax until such time as it is removed from trust and used to pay for the products and/or services on a tax-included basis under the pre-need arrangement. Any funds that are returned to the customer in this scenario are not subject to the GST/HST.

If an existing pre-need arrangement that is cancelled was entered into in writing prior to the implementation of the GST and the tax on the amount to be retained was not contemplated in the arrangement, the amount retained by the cemetery operator is not subject to tax. If the existing pre-need arrangement was entered into after the GST came into force but prior to the implementation of the HST, if the cemetery operator's supplies under the pre-need arrangement are deemed to be made in a province participating in the HST, the amount retained by the cemetery operator as payment for its supplies (e.g., an administration service) is subject to the GST on a tax-inclusive basis.

Question #4:

Provided amendments to a pre-need arrangement meet specific requirements, amendments to arrangements may not trigger a change in the timing of the application of the GST/HST. XXXXX.

For partially paid arrangements, when there are amendments to the arrangements, would it be possible to recover the GST/HST remitted (under the old way) and trust the same under the new rules?

Answer #4:

As discussed in the previous answer, the GST/HST implications for amendments to arrangements is dependent upon the terms of the agreement between the parties involved (i.e., the cemetery operator and the customer). The tax implications of a particular change to a pre-existing arrangement will also depend on whether novation has occurred.

Where novation has not occurred, and an arrangement for which GST/HST was charged at the time of entering into the arrangement is amended, GST/HST is payable on the value of consideration of the products and services added to the pre-need arrangement if the value of the arrangement is increased by the amendment. Where additional amounts of tax are payable, the cemetery operator is required to include the GST/HST in respect of the additional amounts in determining its net tax for the reporting period in which the amount is paid or becomes due, whichever is earlier.

If the value of such an arrangement is reduced or products and/or services are cancelled by an amendment, and novation has not occurred, the cemetery operator may refund or credit the contributor for the tax calculated and collected with respect to the amount by which the consideration for the original product or service is reduced and may deduct the corresponding amount in determining its net tax, provided the requirements under the ETA are met.

Where the cemetery operator creates a new arrangement to add additional products and/or services, GST/HST would apply in accordance with the applicable rules at the time the new pre-need arrangement was entered into.

Further information on this process is discussed on pages 10 and 11 of TIB B-093.

Question #5:

If there is a change in the tax rate for the GST/HST between the time the estimated tax is trusted and the subsequent withdrawal from trust, what tax rate would be used?

Answer #5:

If there is a change in the tax rate, the rate of tax to charge on the consideration for cemetery property provided, or for services rendered, under a pre-need arrangement is the rate of tax required to be charged for that particular pre-need arrangement in accordance with Part IX of the ETA.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in the aforementioned GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-2488.

Yours truly,

Marjorie Stevens
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/03/31 — RITS 63336 — Supplies of Tickets to an Event