2009 Ruling 2008-0293451R3 - Eligible Funeral Arrangement - Insurance Policy

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 particular arrangement qualify as an 'eligible funeral arrangement' for purposes of the Act such that subsection 148.1(2) will apply?

Position: yes, in the circumstances

Reasons: Wording of the Act

XXXXXXXXXX 2008-029345

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX ) and your subsequent submissions of XXXXXXXXXX .

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

(i) in an earlier tax return of the taxpayer or a related person;

(ii) being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts or,

(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

You provided us with a copy of a proposed funeral services agreement in respect of XXXXXXXXXX . In addition, you have provided us with a copy of the insurance policy that is proposed to be issued as well as a copy of the assignment of benefits form to be used to transfer benefits payable under a policy to a funeral home.

However, 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.

Unless otherwise stated, all references to a statute are to 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 definitions unless otherwise indicated.

The following terms have the meanings specified:

"Agreement" means the arrangement between the Taxpayer and the Funeral Home, the specific terms of which are not subject to change, for the provision of Funeral Services with respect to the Taxpayer upon his death as described in paragraphs 6 to 10 below;

"Alternate Funeral Establishment" means a person, other than the Funeral Home, licensed or otherwise authorized under the laws of a province to provide funeral or cemetery services with respect to the Taxpayer;

"Assignment" means the absolute and irrevocable assignment of all of the Taxpayer's rights, title and interest as owner of the Policy to the Funeral Home as a contribution solely for the purpose of funding Funeral Services to be provided by the Funeral Home as described in paragraphs 11 to 13 below;

"Beneficiary" means the beneficiary named under the Policy;

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

"Funeral Services" has the meaning as set out in subsection 148.1(1) of the Act;

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

"Policy" means the policy issued by the Insurer to the Taxpayer, as described in paragraph 3; and

"Taxpayer" means XXXXXXXXXX .

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

FACTS

1. The Taxpayer currently resides in XXXXXXXXXX and is XXXXXXXXXX years old. For purpose of the Policy, the Taxpayer's attained age at this time is XXXXXXXXXX .

2. The relevant tax services office and tax centre for the Taxpayer are the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre, respectively.

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

• the Taxpayer will pay an initial premium of $XXXXXXXXXX plus additional monthly premiums of $XXXXXXXXXX for XXXXXXXXXX months, for the Policy. No other subsequent payments will be made by the Taxpayer;
• the Policy will bear an accumulated face amount that will include the initial face amount of $XXXXXXXXXX plus any amounts added to that amount each year at the discretion of the Insurer;
• the Insurer will pay an amount to the Beneficiary upon the death of the Taxpayer equal to the accumulated face amount, 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. If death occurs during the first policy year, the amount payable is limited to the return of premiums paid plus interest at XXXXXXXXXX % per year to the date of death;
• the Policy may be surrendered at any time for its cash value, as calculated pursuant to the terms of the Policy;
• the cash value can be converted to an annuity by the owner of the Policy at any time under the terms and conditions set out in the Policy;
• the owner of the Policy is entitled to use the Policy as sole security for a policy loan, subject to the terms of the Insurer;
• the owner of the Policy has the right to change the name of the Beneficiary at any time during the Taxpayer's lifetime; and
• the owner of the Policy may assign the Policy. The Insurer agrees to comply with the terms of the assignment if it is in writing and on file at the administrative office of the Insurer.

4. The Funeral Home is licensed under the laws of the province of XXXXXXXXXX to provide funeral or cemetery services with respect to individuals. The estimated cost of a funeral provided by the Funeral Home for the benefit of the Taxpayer, at this time is $XXXXXXXXXX .

PROPOSED TRANSACTIONS

5. The Taxpayer will purchase the Policy and will agree to make all premium payments under the Policy. Initially, the Beneficiary named in the Policy will be the Taxpayer's spouse and there will be no contingent Beneficiaries named under the terms of the Policy.

6. The Taxpayer will then enter into the Agreement where the Funeral Home will agree to provide Funeral Services with respect to the Taxpayer upon his death and the Taxpayer will agree to make the Assignment. The Taxpayer also agrees to make all premium payments that are required under the Policy.

7. The Agreement guarantees that the price for Funeral Services in respect of the Taxpayer will not exceed the full death benefit payable by the Insurer under the Policy as a consequence of the Taxpayer's death. As such, the Funeral Home will be agreeing to accept the death benefit paid under the Policy in full satisfaction of the price of the Funeral Services, notwithstanding that the death benefit paid under the Policy may be more than or less than the cost of comparable funeral services it offers at that time. For greater certainty, if at the time of the Taxpayer's death the retail price of the Funeral Services is less than the death benefit provided under the Policy, the excess funds will be retained by the Funeral Home and will not be refunded to the Taxpayer's estate. However, where the death benefit under the Policy is reduced by either the non-payment of premiums by the Taxpayer, or where the Taxpayer dies in the first year of the Policy term, the Agreement will provide that the Taxpayer's estate will be responsible for the shortfall in these circumstances.

8. The Agreement will provide that the Funeral Home is not entitled to request a loan against the Policy, or to otherwise reduce the death benefit under the Policy whether by conversion to an annuity, partial or full surrender or by cancellation.

9. The Agreement will provide that it may only be terminated by the Funeral Home should the Taxpayer default on its premiums or where the Funeral Home ceases to carry on business. The Agreement also provides that the Assignment does not restrict the Taxpayer's right to purchase funeral merchandise or services on the open market. In the event the Agreement is so terminated by either the Funeral Home or the Taxpayer, the Agreement provides that the Funeral Home will agree to assign the rights and ownership of the Policy to an Alternate Funeral Establishment or to any other person designated by the Taxpayer.

10. The Insurer is not a party to the Agreement.

11. The Taxpayer will make the Assignment and the Funeral Home will receive the Policy as a deposit for the provision of the Funeral Services. The Funeral Home will designate itself as the sole Beneficiary under the Policy entitling it to receive, as custodian of the arrangement, any amounts payable by the Insurer under the Policy and in particular, the amount payable upon the death of the Taxpayer.

12. The Assignment will be permitted by the XXXXXXXXXX . As a result of this Assignment, the Funeral Home will become the sole legal and beneficial owner of the Policy and neither the Taxpayer nor the Taxpayer's estate will have any rights or any entitlements to benefits under the Policy. However, the Assignment will specifically preclude the Funeral Home from requesting any policy loans, and will specifically acknowledge that the Insurer will not issue any policy loans to the Funeral Home.

13. As provided under the terms of the Policy, the Insurer will recognize the Assignment such that the Insurer will otherwise accord to the Funeral Home all rights as sole owner of the Policy and as the only Beneficiary entitled to receive benefits from it under the Policy.

PURPOSE OF THE PROPOSED TRANSACTIONS

14. The purpose of the transaction is to establish an eligible funeral arrangement to cover the anticipated cost of Funeral Services with respect to the Taxpayer.

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 rulings are as follows:

A. The Agreement will qualify as an eligible funeral arrangement as defined in subsection 148.1(1) of the Act.

B. Pursuant to paragraph 148.1(2)(a), no amount that has accrued, is credited or is added to the eligible funeral arrangement in respect of the Policy will be included in the income of the Funeral Home or the Taxpayer pursuant to section 12.2 of the Act, solely because of such accrual, crediting or adding.

Additional Comments

Nothing in this letter should be construed as implying that the CRA has reviewed, confirmed or otherwise considered:

(a) the extent to which provincial legislation permits the Assignment;

(b) the fair market value of the Policy at any time;

(c) the tax consequences in relation to the assignments of property as described in paragraphs 6 and 9; or

(d) any other tax consequences relating to the facts and the proposed transactions described herein other than those specifically described in the Rulings given above.

For greater certainty, this ruling will be binding on the CRA only if:

i. no contributions under the arrangement are made in respect of the Taxpayer other than those specifically contemplated under the Agreement;

ii. there is at no time any policy loan, or other indebtedness incurred on the security of the Policy that could, pursuant to the Policy, result in any deduction from any amount payable under the Policy; and

iii. after the completion of the proposed transactions, the property that is the Policy, or any amount paid or payable pursuant to the Policy, including any amount payable as a consequence of the death of the Taxpayer, is at all times held or received only by the Funeral Home or an Alternate Funeral Establishment.

The above advance income tax rulings, which are based on the Act and Income Tax Regulations to the Act in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX .

Yours truly,

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