2007 Ruling 2007-0228701R3 - life insurance and eligible funeral arrangements

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.

Principal Issues: Will the assignment of death benefit payable under a life insurance policy to a funeral home be sufficient for the policy, which will still be owned by the taxpayer, to qualify as a eligible funeral arrangement?

Position: No.

Reasons: Since an eligible funeral arrangement must be established and maintained by a qualifying person (generally restricted to the administrators of funeral homes and cemeteries) and the contribution must be held by either the trustee of a trust governing the plan or the qualifying person who will be providing the services, this plan will not qualify as an EFA.

While the death benefit payable under a life insurance is not taxable, and certain life insurance policies will generally not give rise to tax in the hands of the policy holder, at least one insurer is marketing life insurance policies would otherwise be subject to the accrual rules for the taxation of the accumulated investment in the policy to be exempt from tax on the assumption that the assignment of the death benefit to a funeral home would be sufficient to allow the policy to qualify as an EFA. In the case under consideration in this ruling, no arrangement for funeral services was to be made at the time of the purchase of the policy, the policy was not established and maintained by a qualifying person, nor was the policy acquired with the contribution to be held in trust or by a qualifying person as required by subsection 148.1(1).

XXXXXXXXXX 								2007-022870

Attention: XXXXXXXXXX

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: XXXXXXXXXX Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling in respect of the above-noted taxpayer. We also acknowledge your correspondence of XXXXXXXXXX.

To the best of your knowledge and that of your client, none of the issues involved in the ruling request is:

• in an earlier return of your client or a related person,
• being considered by a tax services office or taxation center in connection with a previously filed tax return of your client or a related person,
• under objection by your client or a related person,
• before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or
• the subject of a ruling previously considered by the Directorate in respect of your client or a related person.

You provided us with a copy of a blank master policy issued by the Insurer in respect of policies similar to the Policy as well as a copy of the assignment of benefits form used by the Insurer to transfer benefits payable under a policy to a funeral home.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader. XXXXXXXXXX

Except as otherwise noted, all statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. The following terms have the meanings specified:

"Beneficiary" means the beneficiary named under Policy and is subject to change at the direction of Taxpayer;

"Funeral Home" means the XXXXXXXXXX, a taxable Canadian corporation licensed in the province of XXXXXXXXXX to provide complete funeral, memorial and prearrangement services in XXXXXXXXXX and is located in XXXXXXXXXX;

"Insurer" means XXXXXXXXXX, a taxable Canadian corporation authorized to underwrite insurance policies issued to residents of Canada;

"Policy" means a single premium policy issued by the Insurer as described in paragraph 2 that is not an "exempt policy" as defined in subsection 12.2(11) and section 306 of the Income Tax Regulations to the Act; and

"Taxpayer" means XXXXXXXXXX .

The relevant Tax Services Office for the Taxpayer is the XXXXXXXXXX Tax Services Office and the relevant Tax Centre is the XXXXXXXXXX Tax Centre.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. Taxpayer is currently XXXXXXXXXX years old and for the purpose of the Policy, his attained age at this time is XXXXXXXXXX.

2. Insurer has offered the Policy to the Taxpayer with following terms:

• the Taxpayer will pay a single premium of $XXXXXXXXXX for the Policy;
• the Insurer will pay a $XXXXXXXXXX death benefit to the Beneficiary upon the death of the Taxpayer less any amount of indebtedness owing under the Policy and subject to any assignment of that benefit made by the Taxpayer and subject to the other terms set out in the Policy;
• the Policy will bear an accumulated face amount that will include the amount paid for the Policy and the amounts added to that amount each year at the discretion of the Insurer;
• the accumulated face amount of the Policy can be converted to an annuity by the Taxpayer at any time under the terms and conditions set out in the Policy;
• as the certificate owner named under the Policy, the Taxpayer is entitled to obtain a loan from the Insurer at a rate of XXXXXXXXXX % under the conditions specified in the Policy and using the Policy as security for the loan;
• the Policy is revocable;
• Taxpayer has the right to change the name of the Beneficiary at any time; and
• other terms and conditions specified in the Policy that are not relevant to this ruling.

3. The estimated cost of a funeral provided by Funeral Home at this time is $XXXXXXXXXX to $XXXXXXXXXX . Taxpayer has not made any arrangements with Funeral Home to obtain funeral services at this time.

Proposed Transactions

4. Taxpayer intends to purchase Policy for a single premium of $XXXXXXXXXX. Policy will provide a benefit on the death of Taxpayer of $XXXXXXXXXX. The initial beneficiary named in Policy will be Funeral Home. There will be no contingent beneficiaries named under the terms of Policy.

5. Notwithstanding that Funeral Home is named as the Beneficiary at the time the Policy is issued, Taxpayer will assign the death benefit payable under the Policy to Funeral Home, using the assignment form provided by the Insurer. The primary purpose of the assignment is to act as a method of notifying Funeral Home that it has been named as the beneficiary under the Policy as described in paragraphs 2 and 4. The legal effect of the assignment of the Policy is not binding on Taxpayer and can be revoked at any time. In particular, the assignment of benefits will be revoked if Taxpayer decides to surrender the Policy for cash, converts the Policy to an annuity or obtains a loan from the Insurer in his capacity as the certificate owner of the Policy.

6. Taxpayer will advise Funeral Home that the assignment has been made but will not enter into any contract with Funeral Home to provide funeral services. Since arrangements for the funeral services to be provided on Taxpayer's death do not need the Taxpayer's consent, it is intended that such arrangements will be made at a later date.

7. No trust will be established to hold the Policy. Funeral Home will not be custodian of the Policy. The Taxpayer will continue to be the certificate owner named on the Policy. There is no assurance that the benefits provided under the Policy will be available to pay for the funeral of Taxpayer as the Taxpayer at any time can change the name of the beneficiary of the Policy and revoke the assignment to Funeral Home. In the event of the death of Taxpayer and assuming that there has been no change in the name of the beneficiary of the Policy or the assignment to Funeral Home, Funeral Home will use the death benefit received under the Policy to pay for any funeral services provided in respect of the Taxpayer. If the amount received is in excess of the fees charged by Funeral Home for such services or if the services of Funeral Home are not used to provide a funeral for Taxpayer, Funeral Home will voluntarily transfer the amount received under the Policy in excess of their fees to the executor of the estate of Taxpayer. If the fees charged by Funeral Home for the funeral of Taxpayer are in excess of the amount received from the Insurer under the Policy, the person who makes the arrangements for the funeral will be required to pay any such additional amount that is required.

Purpose of the Proposed Transactions

8. The purpose of the transaction is to establish an insurance policy with an annual growth component that will build over time in order to generate sufficient funds to cover or exceed the cost of funeral goods and services at the time of Taxpayer's death.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, the proposed transactions are completed in the manner described above and there are no other transactions that may be relevant to the rulings given, our ruling is as follows:

A. The purchase of the Policy and the subsequent assignment of the Policy to Funeral Home will not qualify as an eligible funeral arrangement as defined in subsection 148.1(1) of the Act.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed within six months of the date of this letter. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

XXXXXXXXXX
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch