9 June 2003 GST/HST Interpretation 40566 - Proper Processing of GST on Prepaid Funeral Services

Dear XXXXX:

Thank you for your letter XXXXX, with attachments, sent on behalf of your client XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to prepaid funeral services. Your request has been transferred from the XXXXX GST/HST Rulings Centre for a response.

The following information was provided in your letter, which included a completed copy of a XXXXX (agreement). Additional information was provided by your client.

1. XXXXX (the Company), is registered for the GST/HST XXXXX.

2. The Company owns and operates XXXXX.

3. The Company, XXXXX, enters into agreements to provide prearranged funeral services to its clients. Where a client utilizes the service within XXXXX years of signing the agreement, the client pays the prearranged agreement prices.

4. The agreement may provide for additional amounts identified as XXXXX or XXXXX (collectively to be referred to as disbursements) for items such as church fee, grave opening, newspaper notices and registration fee.

Interpretation Requested

You wish to know if your client is applying GST properly with respect to the prepaid funeral services the Company provides to its clients.

Interpretation Given

We note that you did not provide a complete agreement, including all relevant terms and conditions, with respect to the prearranged funeral services. However, based on the information provided, we offer the following interpretation of the relevant provisions of the Excise Tax Act (ETA). For your convenience, Technical Information Bulletin (TIB) B-091, Timing of the Application of the GST/HST to Prepaid Funeral Arrangements, has been provided. In particular, pages 8-10 should be of assistance to your client. The TIB outlines the current CCRA position with respect to prepaid funeral arrangements.

Prepaid Funeral Arrangements

In general, the CCRA's position is that for prepaid funeral arrangements where the contributions are held in trust pursuant to provincial legislation and/or the terms of the arrangement, the contributions are not considered to be prepayments. The funeral home will not be required to account for the GST/HST on the contributions made under the prepaid funeral arrangement and any interest that accumulates in the trust until the amounts are no longer required to be held in trust and are distributed to the funeral home. The contributions may be based on an estimate of the consideration that will be payable for the funeral services and the eventual GST/HST that will apply.

GST/HST will apply on the value of the consideration to be paid to the funeral home under the prepaid funeral arrangement at the time it is paid or becomes due to the funeral home whichever is earlier. The value of the consideration and tax payable to the funeral home under the agreement generally approximates the amount of the contributions and any interest that has accumulated in the trust. Any additional amounts payable by the purchaser or the individual's estate at the time the funeral services are provided will also be subject to the GST/HST at that time.

Any amount not held in trust, whether it is pursuant to the applicable provincial legislation or the terms of the contract itself, is part of the consideration payable for the services provided by the funeral home. As such, the funeral home 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.

Additionally, where the income generated by the funds held in trust is payable directly to the funeral home, pursuant to provincial legislation and/or the terms of the arrangement, that income is considered to be part of the consideration for the services to be provided by the funeral home and is subject to the GST/HST at the time that it is paid to the funeral home. Of course, if the price charged to the client is tax-included, that portion of the amount that represents GST/HST must also be accounted for according to the usual rules.

GST/HST will also apply in the above manner where the contribution is made by the purchaser to an insurer in respect of an insurance contract whereby the insurance proceeds are payable to the funeral home as the beneficiary.

Subject to the transitional rules in sections 344 and 360 of the ETA, the rules outlined in the TIB are effective with the implementation of the GST on January 1, 1991 and the HST on April 1, 1997. However, the CCRA recognizes that some funeral homes have not been accounting for the GST/HST in accordance with these rules. As a result, no additional GST/HST will be payable with respect to the consideration for funeral services specified in the original contract for those prepaid funeral arrangements that were entered into before April 1, 2003, provided that:

-    the contributions were placed in a trust fund pursuant to provincial legislation or the terms of the contract itself;

-    the funeral home that was the original party to the agreement, has, since its registration for the GST/HST, accounted for the GST/HST in respect of the contributions at the time the arrangements were entered into;

-    the GST/HST has not been refunded, credited, or rebated to the purchaser; and

-    the funeral home has not subsequently claimed an input tax credit or an adjustment for that GST/HST in its net tax.

Where the funeral home has complied with the above requirements and an arrangement of the type described above is amended, the following rules apply:

-    GST/HST will be payable on the value of the consideration of any property or service that is added to the prepaid arrangement;

-    where the arrangement is amended to increase the value of a particular property or service, GST/HST is payable on the additional value of the consideration for the property or service;

-    where a supply of property or service that was to have been made under the arrangement is cancelled, the funeral home may refund or credit the contributor for the tax calculated and collected with respect to the consideration for the original property or service and may deduct a corresponding amount in determining its net tax, provided that the requirements of section 232 of the ETA are met (e.g., a credit or debit note is issued and the refund or credit is provided in or within four years after the end of the reporting period in which the consideration was reduced); and

-    where the value of the consideration for a particular property or service that is part of the arrangement is reduced, the funeral home may refund or credit the contributor for the tax calculated and collected with respect to the amount by which the consideration for the original property or service is reduced and may deduct a corresponding amount in determining its net tax, provided that the requirements of section 232 are met.

Where additional amounts of GST/HST are payable by the contributor, the funeral home is required to include the GST/HST in respect of the additional amount in determining its net tax for the reporting period in which the amount is paid or becomes due, whichever is earlier.

Note that the above rules only apply when the existing arrangement is amended. If a new arrangement were created instead, the GST/HST would apply to that new arrangement in accordance with the applicable rules.

Disbursements

With respect to disbursements, there are two possible situations; first, where a funeral home acquires property and services of another in the course of supplying a funeral service to its client, and second, where a funeral home, as agent of a client, acquires property and services on behalf of the client.

Where a funeral home's disbursement is for an expense incurred in the course of supplying a funeral service to its client, this cost is an input of the funeral home in providing the funeral service. In this case, GST/HST is charged to the client by the funeral home on the reimbursement of the expense to the extent that GST/HST is payable for the funeral service provided by the funeral home. Generally, the funeral home will be required to collect the GST/HST when the invoice in respect of the expense is issued. The funeral home must account for this tax in its net tax for the reporting period during which the tax is payable by the client and remit any net tax owing for the period. In addition, the funeral home may claim an input tax credit (ITC) for any GST/HST paid or payable in respect of the expense provided that the conditions for claiming an ITC are met.

For example, if a funeral home acquires the service of an organist or soloist who is registered for GST/HST purposes and the fee is $100 plus $7 GST, the funeral home, if eligible, will claim an ITC of $7 and then charge the client $100 plus $7 GST if the funeral service provided by the funeral home is subject to GST at 7%. If the organist or soloist is not required to charge GST/HST e.g., the organist/soloist is a small supplier who is not registered for GST/HST purposes, the funeral home will not claim an ITC, as GST/HST is not payable to the organist or soloist. However, the funeral home will charge the client $100 plus $7 GST if the funeral service provided by the funeral home is subject to GST at 7%.

Similarly, where a funeral home pays an amount, e.g., $200, to the clergy for its service of performing a funeral rite and that service is exempt of GST/HST, the funeral home will not claim an ITC. An ITC would be available to the funeral home if the clergy provides a taxable supply and $214 (i.e., $14 GST) is payable to the clergy. In addition, the funeral home will charge the client $200 plus $14 GST if the funeral service provided by the funeral home is subject to GST at 7% whether the supply by the clergy is exempt or taxable. Where the amount given to the clergy by the funeral home is a donation, made otherwise than as agent of the client, no GST/HST will be payable to the clergy, however, GST/HST will apply in the same manner described above when the funeral home seeks reimbursement from the client.

For your information, GST/HST does not apply to a donation where the donation is not consideration for a supply. If a donor receives something of value, the amount of the donation could be considered consideration for a supply. A gift at common law is considered a voluntary transfer of property without consideration. No right, privilege or material advantage may be conferred on the donor as a consequence of the gift. Accordingly an amount of money given to the clergy on a voluntary basis and for which the donor does not receive any advantage or material benefit will be considered a donation. Consequently, if the funeral home or client, as the case may be, has the choice of whether or not to make a contribution to the clergy, any amount contributed will not be considered to be consideration for a supply even if the funeral home or client is encouraged by the clergy to make a donation. Moreover, an amount given to the clergy for which an official donation receipt may be issued under the Income Tax Act is not regarded as consideration for a supply.

Where a funeral home incurs an expense as agent of a client, no GST/HST is charged by the funeral home on the subsequent reimbursement of the expense. In addition, the funeral home is not entitled to claim an ITC in respect of this disbursement.

Using the examples above, if a funeral home acquires the service of an organist or soloist as agent of the client and the fee is $100 plus $7 GST, the funeral home will not claim an ITC and will not charge or account for GST/HST in its net tax when it seeks a reimbursement of the $107 from its client. In this case, the $7 GST is payable by the client and is paid by the funeral home on the client's behalf. The subsequent timing of the reimbursement by the client to the funeral home of the $7 GST paid on its behalf is a matter to be addressed by the parties. Likewise, if the organist or soloist is not required to charge GST/HST, the funeral home will not claim an ITC and will not charge the client GST/HST when it seeks a reimbursement of the $100.

Similarly, where a funeral home pays an amount, e.g., $200, as agent of a client to the clergy for its service of performing a funeral rite and that service is exempt of GST/HST, the funeral home will not claim an ITC and will not charge the client GST/HST when it seeks a reimbursement of the $200 from the client. Where the amount given to the clergy by the funeral home is a donation made on behalf of the client as its agent, no GST/HST will be payable to the clergy and GST/HST will not apply when the funeral home seeks reimbursement from the client.

The enclosed draft policy statement P-182, Determining The Meaning of "Agent" and "Agency" addresses the issue of agency. For GST/HST purposes, a person is an agent acting on behalf of another person if the person is an agent at law. It is a question of fact whether an agency relationship exists. Where an agency relationship exists, there should be some evidence of the existence of the relationship. For example, the contract between the funeral home and the client could specify that the funeral home will act as agent of the client for specific acquisitions of property and services on the client's behalf. In that case, the expenses invoiced to the client and paid by the funeral home as agent will be treated as having been incurred by the client.

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 Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-8814.

Yours truly,

Robert Douthwright, CGA
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate