17 November 1989 Income Tax Severed Letter 0-0241 - [Funeral Directors - Prepaid Funeral Costs]

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

November 17, 1989 Financial Industries Division M. Shea-DesRosiers 957-8953

FILE DOSSIER 0-0241

SUBJECT: OBJET: Funeral Directors - Prepaid Funeral Costs

Background

1. With the exception of the province of Newfoundland, which is presently drafting legislation on prepaid funeral arrangements, all the provinces have in place legislation requiring the funeral directors to place all or nearly all of any amounts received in respect of prepaid arrangements in trusts. Although section 19 of the Quebec's statute provides that the amounts must be deposited in trust and the funds that are held in trust are deemed to be held in trust for the buyers by the seller, such disposition does not create a trust within the meaning of Part I of the Income Tax Act, but creates, between the seller and the buyer, a relationship of the mandate type. This is due to the fact that Quebec law does not have an institution that corresponds to the common law concept of "trust". However, since the treatment afforded to trusts in other provinces should be equally applicable to Quebec, we will consider that, for the purposes of the Income Tax Act, the funds are held in "trust" in the province of Quebec.

2. Our present administrative practice is to permit the reporting by the buyer of the services of all interest accumulated on the trust funds either at the time of withdrawal upon cancellation of the contract or at the time the monies are applied against the cost of the services provided by the funeral home.

3. Similarly, as provided for in IT-246 , the funeral director is required to include in his income the total amount retained by him either at the time the contract is cancelled or at the time the services are performed. This does not, in any way, reduce the amount of interest income required to be reported by the client.

Problem

4. Although our present administrative practice is to permit the reporting of the interest by the client at the time the services are rendered, it has come to our attention that, in most cases, such interest has not been reported. Furthermore, we have been informed verbally by one major trust company that neither they nor, to the best of their knowledge, any other trust company handling such deposits ever inform executors of estates that such interest should be included in the deceased taxpayer's last return. It was their view that such interest is never taxed in the hands of the purchaser unless the purchaser cancelled the contract and withdrew the funds. The trust company also noted that there are some $450,000,000 in deposits in prepaid funeral arrangements which would indicate that there may be in excess of $20,000,000 annually in interest income upon which taxes are not only deferred but in fact never paid.

Comments

5. With one exception, (Saskatchewan's statute is silent on the withdrawal privileges), the prepaid funeral statutes of the provinces allow the buyer of the services to cancel the contract at any time and to receive a refund of any deposits made less, in some cases, a penalty of up to 12% if the cancellation is made within 3 years of entering into the contract. In addition, with the exception of Nova Scotia which provides that interest on the funds belongs to the vendor should the contract be cancelled by the purchaser, the legislation of the provinces provide that interest earned on the trust funds is property of the purchaser and is therefore paid to him/her on cancellation.

6. In a letter dated January 11, 1985, Mr. R.A. Short, General Director, Tax Policy and Legislation Branch, Department of Finance, stated that "Subsection 75(2) clearly applies to a funeral trust arrangement and, whether or not it was enacted specifically for this purpose, the taxation of the beneficiary on income earned through the trust is consistent with the taxation of income earned from investments in general. Further, investment in a funeral trust represents a discretionary personal expenditure and, in the absence of a specific exempting measure, income earned therefrom should be taxable."

7. The Policy Committee had agreed on February 21, 1985 to require annual reporting with the policy to be reflected in a Special Release to IT-246 . At a later meeting of the Policy Committee on May 24, 1985, implementation of the above decision was deferred at the request of Mr. Anglin who was to speak to Mr. Rogers on this matter. No further action was taken after said date.

Recommendation

It is our view that subsection 75(2) of the Income Tax Act clearly applies to include interest on the funds credited in a year in the income of the purchaser for the year because property is held by a trust on condition that it may revert to the purchaser from whom it was received.

We recommend that the interest in question be reported by the purchaser on an annual basis. This would require the annual reporting of interest credited to the prepayments by the trustee of the funds. These reporting requirements should be implemented starting with 1990.

Interpretation Bulletin IT-246 does not deal with the purchaser of prepaid funeral arrangements but only with the funeral directors. We also recommended that the Interpretation Bulletin be expanded to discuss the tax implications to the purchasers of prepaid funeral arrangements.

Given the past history of this subject, our recommendations should be forwarded to the Policy Committee.

Wayne Douglas

Chief Deferred Income Plans & Trusts Section Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch