File: 11745-3
XXXXX ss. 344(2)
Dear XXXXX
This in response to your letter dated June 18, 1996 and your two letters dated August 16, 1996 wherein you request an interpretation concerning the Goods and Services Tax ("GST") treatment of the above.
You stated that often, for various reasons, purchasers of prepaid funeral arrangements wish to move their arrangements from one funeral home to another, either belonging to the same licensed operator or to completely unrelated parties.
In your letter you indicated that in XXXXX a licensed operator may own and operate more than one funeral home establishment. However, each establishment licensed under The Funeral Directors and Establishments Act must meet all the requirements of that Act independently. Therefore, if a prepaid funeral is transferred from one establishment to another that is owned by the same licensed operator, it is considered to be an arm's length transaction, the same as if the transfer took place between unrelated parties.
Question One (from your letter dated June 18, 1996)
You have requested an interpretation where individuals who have entered into their agreement prior to September 1, 1990, wish to move their arrangements from one funeral home to another, or to transfer services, under the following conditions:
• the funeral service and supplies purchased at the second funeral home (B) are in nature the same as those purchased at the original home (A);
• the trust is directly forwarded to the second funeral home (B); and
• the trust funds are not available to the purchaser or the purchaser's representative and are placed in trust by the new funeral home (B) to provide for the funeral services and/or supplies.
Response
The Department has addressed the issue of the substitution of a supplier under a written prepaid funeral arrangement in policy paper P-071, Prepaid Arrangements for Funeral Services. The following comments are all pursuant to this policy paper.
The central issue to be dealt with in this question is whether the change in suppliers has fundamentally changed the prearranged funeral plan. In other words, as a result of the change in suppliers from (A) to (B), does the original prearranged funeral plan still exist, or has a new funeral plan been prearranged? In our view, in this particular situation (the example given above), the change is such that the prearranged funeral plan has been fundamentally altered. The prearranged funeral plan between the individual and (A) ceases to exist, and a new prearranged funeral plan between the individual and (B) has been created. Unless there is a specific provision in the original agreement that allows the purchaser of the funeral services to substitute the supplier of the services, a change in suppliers will be considered to be a fundamental change in the funeral arrangement. (None of the sample contracts provided to us had such a provision.)
As a result of the substitution of suppliers in the prearranged funeral plan, the original agreement in writing has been cancelled and a new agreement in writing now exists between the purchaser and B. Where the change in suppliers has occurred subsequent to August, 1990, the prearranged funeral plan is no longer grandfathered. Where funeral services are to be supplied after 1990, GST will apply. Given that B has accepted the trusteeship of the trust funds from A and, notwithstanding that there are no changes to the plan, B, the new supplier, is required to charge GST on the value of the consideration for the supply of the funeral service as provided for in the prearranged funeral plan.
In this situation, where the prepayment made to the funeral home is held in an account in trust due to provincial legislation, GST will apply at the time that such prepayments are made or become due, whichever is earlier. This is the case even though the prepaid funeral is transferred from one establishment to another that is owned by the same licensed operator, unless the prepaid funeral arrangement specifically states that the supplier of the funeral services can be substituted.
However, in the case where a funeral home undergoes an organizational change, resulting in a change of ownership, it would be unreasonable for the Department to expect the purchaser of a prepaid funeral arrangement to anticipate this type of change after entering into the arrangement. Therefore, as long as the new supplier honours the prepaid arrangement as provided pursuant to the original contract, the grandfather status of a written prepaid funeral arrangement is not affected by a change of supplier under the circumstances of a reorganization.
Question Two (from your first letter dated August 16, 1996)
Background
Under the Funeral Directors and Establishments Act, a funeral home licensed in XXXXX may accept monies as prepayment for funeral services and supplies which will be performed and/or provided at the time of the beneficiary's death. The Act also requires that at the time the services and supplies are rendered the funeral home maintain a record of all money disbursed under the contract. The funeral home is expected to maintain an itemized list of the services and supplies according to the price list in effect at the time of death, the amount that was withdrawn from the trust account, and a contract for the items, if any, selected by the beneficiary's personal representative in addition to those that were prepaid. For the sake of reducing paperwork, many funeral homes execute a funeral service contract on which they place all of the information they are required to maintain. In essence the contract is a reconciliation of the prepaid account and an authorization for the additional items purchased all in one document.
Question 2a
Does the new contract supersede the original prepaid contract or is the contract considered an addendum to the original contract? What are the tax implications in each circumstance?
Response
The new contract, in itself, does not supersede the prepaid contract nor is it considered to be merely an addendum. They are considered to be two separate, legally binding contracts unless otherwise indicated on the contract itself. It is our understanding that, in XXXXX a person can only be the beneficiary of one prepaid funeral contract [arrangement], however there are no restrictions on additional contracts concluded by the representative of the beneficiary at the time of need (i.e., at/after the death of the beneficiary). A prepaid funeral service contract remains in effect until the services are performed unless the contract is specifically cancelled.
Section 344 of the Excise Tax A[c]t (the "Act") does not grandfather funeral service contracts entered into before September, 1990; it grandfathers funeral arrangements entered into in writing before September, 1990. That is to say, if the funeral service at the time of need has been fundamentally changed (i.e., significantly altered) from the funeral arrangement entered into in writing prior to September, 1990, the funeral service is no longer grandfathered. GST would then be payable on the consideration for the supply on the "new" contract.
Question 2b
If the document is considered a new contract replacing the original contract, does this imply that the items that may have been GST exempt (prepaid before Sept. 1, 1990) are now taxable or can they maintain their GST exempt status? (The funeral home understands that any additional items purchased at the time of need are always taxable.) i.e., The beneficiary of a pre-paid contract that was executed in 1985 dies in 1996. A funeral service is completed at the time of death. There are no deviations from the original prepaid contract. The services are provided and a funeral service contract is executed to show the prices in effect at the time of death and to acquire authorization to embalm the deceased. Does the execution of the new contract imply that the GST is now applicable or can the arrangement maintain its GST exempt status?
As long as the funeral arrangement has not been fundamentally or significantly altered, the items prepaid prior to September, 1990, remain free of GST. If the funeral arrangement is fundamentally or significantly altered, the entire funeral arrangement is subject to GST.
If there are several minor additions or changes requested by the purchaser or the representative of the beneficiary at the time of need, the additional items and/or changes to the original funeral arrangement would be subject to GST. According to the sample contract submitted, substitutions initiated by the funeral home in accordance with note 8, "Substitution" [i]i1, would not alter the funeral arrangement, and therefore, would have no GST consequences. Consider the following examples:
• If the only deviation between the original contract and the new contract is the authorization for embalming, and the funeral service proceeds as in the original funeral arrangement, only the cost of the embalming would be subject to GST. (subsequent addition to the funeral arrangement)
• If the prepaid funeral arrangement did not include a newspaper announcement, and a subsequent contract signed by the representative of the beneficiary included such an announcement, the cost of the announcement would be subject to GST while the remaining items would remain grandfathered. (subsequent addition to the funeral arrangement)
• If the original prepaid funeral arrangement referred to a "traditional headstone" without specifying a particular type, and the equivalent headstone at the time of need was determined to be a $300 headstone, and where the substitution, at the request of the representative of the beneficiary, of a $500 headstone instead of the $300 headstone, GST would be payable on the full $500. The Department would consider that part of the original contract that referred to the headstone cancelled, and a new item added at the time of need. (substitution of items at the request of the representative)
• If the original prepaid funeral arrangement referred to a "traditional headstone" without specifying a particular type, and the equivalent headstone at the time of need was determined to be a $300 headstone, but the headstone was not available and the funeral home substituted a $500 headstone for no additional charge, the substitution would not trigger GST as no additional consideration was paid. (substitution of items by the funeral home)
• If the original prepaid funeral arrangement covered the cost of two vehicles, and the representative signed a subsequent contract for an additional vehicle ( i.e., three vehicles), the cost of the third vehicle would be subject to GST. (subsequent addition to the funeral arrangement)
• If the changes and additions to the funeral arrangement were significant - e.g., the funeral arrangement was changed to include all of the following: embalment and burial instead of cremation, changing the casket from a very simple type to a very luxurious type, changing the time of viewing the deceased from one day to three, relocation of the services from the funeral home to a church, three vehicles instead of one, addition of a newspaper announcement, additional flowers, and the memorial service changed from a simple prayer service to one including a soloist and organist, etc. - the entire funeral arrangement would be subject to GST. (significant change in the funeral arrangement)
Question 2c
For the purposes of maintaining the GST exempt status on those items that were prepaid prior to the implementation of the tax should/could a statement, such as those in the following examples, be added to the funeral contract. Examples: "This is an addendum to prepaid contract #XXXXX and authorization for additional services purchased by the estate." or "This is a reconciliation of prepaid contract #XXXXX and agreement for additional items purchased."
Response
As stated previously, it is not the contract that is grandfathered under section 344 of the Act, but the funeral arrangement itself. In our conversations, you indicated that a number of the prearranged funeral contacts entered into before September, 1990, contain only general terms such as "traditional memorial service" or "traditional funeral service", which, while commonly understood, do not specify the items or services included in the funeral arrangement (or the costs, or range of costs, of these items).
Statements such as "This is a reconciliation of prepaid contract #XXXXX and agreement for additional items purchased" and an indication of what items are included under the prepaid contract and what items are new items, additional, or substituted, would be very beneficial in clarifying the tax status of the items in the actual funeral arrangement. Again, whether or not a funeral arrangement retains its grandfathered status after the addition and/or substitution of items is a matter of fact. If the funeral arrangement is fundamentally or significantly altered, the entire funeral arrangement is subject to GST. A reconciliation of the arrangement would aid in this determination.
Question Three (from your second letter dated August 16, 1996)
Background
For various reasons it is becoming increasingly more common that purchasers of prepaid funeral services are wishing to move their prepaid arrangements from one funeral home to another. As a result of this there are many questions about the logistics of moving monies and tax implications of doing so. Due to the logistic nightmare of moving the monies prior to death it has been suggested that it is easier to do so after the death. Under sub-clause 22(1)(a) 2 funeral home (B) would provide the services and supplies and send a proof of the beneficiary's death and a copy of the funeral service contract to funeral home (A) where the services and supplies were originally prepaid and would be entitled to payment for the said account.
Question 3(a)
Is the new agreement considered a new contract replacing the original contract and does this imply that the items that may have been GST exempt (prepaid before September 1, 1990) are now taxable? Or, can they maintain their GST exempt status? (The funeral homes understand that any additional items purchased at the time of need are always taxable.)
Consider the following example:
The beneficiary of a prepaid contract that was executed at funeral home (A) in 1985 dies in 1996. A funeral service contract is completed between the estate representative and funeral home (B) at the time of death. There are no deviations between the new and the old contract. The services are provided and a copy of the agreement and a proof of death are forwarded to funeral home (A).
Does the execution of the new contract imply that the GST is now applicable or can the arrangement maintain its GST exempt status?
Response
As we understand your question, the beneficiary's representative would sign a funeral contract with funeral home (B) for the funeral services to be provided. In the view of the Department, the change of vendors, evidenced by the new funeral contract, will be considered to be a fundamental change in the funeral arrangement.The funeral arrangement would no longer be grandfathered unless where the prepaid funeral arrangement specifically allows a substitution of the supplier of the services.
One exception would be if the funeral home had undergone an organizational change. As stated in our response to question one, as long as the new supplier in the organizational change honours the prepaid arrangement as provided pursuant to the original contract, the grandfathering provisions would remain in place.
In your given example, we would not consider the funeral arrangement to be grandfathered, and GST would be due on the entire funeral arrangement. If the facts in your example included a statement to the effect that the original prepaid funeral arrangement included a specific provision that allows the purchaser of the funeral services to substitute the supplier of the services, and that the substitution of funeral homes was made pursuant to that provision, it is possible that the funeral arrangement would have remained grandfathered.
Question 3(b)
Is there anything that can be done to maintain the GST exempt status? Could something be added to the funeral service contract (funeral home (B) in the example above) which would enable the contract to maintain the GST exempt status? Would it help to add a statement similar to the following example: "This is an authorization to fulfill the terms of funeral home (A) prepaid contract #XXXXX and for additional services purchased by the estate."?
Response
If a statement such as "This is an authorization to fulfill the terms of funeral home (A) prepaid contract #XXXXX and for additional services purchased by the estate." were added to the funeral contract between the beneficiary's representative and funeral home (B), it would not alter the fact that the services provided by (B) would be subject to GST. A clear indication on the contract between funeral home (B) and the purchaser at the time of need, indicating that the services are provided pursuant to the prepaid funeral arrangement entered into between the purchaser of the prepaid funeral arrangement and funeral home (A), as well as a copy of the original agreement which specifically allows the substitution of the supplier, would be necessary in order for the funeral services provided by funeral home (B) to be treated as grandfathered under section 344 of the Act.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in GST Memoranda Series (1.4), do not bind the Department with respect to a particular situation. If provided with details of a specific fact situation according to the guidelines issued in GST Memorandum Series 1.4, we would be able to issue to you an application ruling. We have included a copy of GST Memorandum 1.4 with our letter.
If you have any questions, please feel free to contact me at (613) 954-4393.
Karl P. Marten
Rulings Officer
Financial Institutions & Real Property Division
GST Rulings and Interpretations Directorate
Policy and Legislation Branch
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