2012 Ruling 2011-0428171R3 - 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: 1. Will a particular arrangement qualify as an "eligible funeral arrangement" as defined in subsection 148.1(1)? 2. Will an amount that has accrued, is credited or is added to the eligible funeral arrangement be included in the income of the funeral home or of the taxpayer pursuant to section 12.2? 3. Will an amount be considered to be distributed from the original eligible funeral arrangement and included in taxpayer's income under subsection 148.1(3)? 4. Will an amount be required to be withheld under section 153? 5. If enacted in its current form, would the proposed subsection 148.1(5) apply such that proposed subsection 148.1(4) would not apply?

Position: 1. Yes, 2. No, 3. No, 4. No., 5. Yes.

Reasons: 1. The proposed arrangement meets the definition of an "eligible funeral arrangement" in subsection 148.1(1), 2. Preamble of subsection 148.1(2) contains "notwithstanding any other provision of this Act", therefore section 12.2 would not override paragraph 148.1(2)(a), 3. Taxpayer never receives the funds, transfer is between two eligible funeral arrangements, 4. There is no withholding requirement in subsection 153(1), 5. All conditions in proposed subsection 148.1(5) are met.

XXXXXXXXXX
2011-042817

Attention: XXXXXXXXXX

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

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

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

(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or 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:

“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 14 to 16 below;

“Beneficiary” means the beneficiary named under the Policy;

“Funeral Home” means XXXXXXXXXX, a taxable Canadian corporation licensed 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 XXXXXXXXXX residents of Canada;

“New 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 9 to 13 below;

“Original Agreement” means an “eligible funeral arrangement”, as defined in subsection 148.1(1) of the Act and in existence before implementation of the New Agreement, between the Taxpayer and the Funeral Home for the provision of Funeral Services with respect to the Taxpayer upon his death;

“Policy” means an individual life insurance policy issued by the Insurer to the Taxpayer on the Taxpayer’s life, as described in paragraph 4;

“Taxpayer” means XXXXXXXXXX, an individual resident in Canada; and

“Trustee” 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.

2. The relevant tax centre for the Taxpayer is the XXXXXXXXXX Tax Centre.

3. The Taxpayer initially contributed an amount of $XXXXXXXXXX in respect of the Original Agreement which has been held “in trust” by the Trustee generating an annual rate of return of XXXXXXXXXX% and the current balance held by the Trustee, as of XXXXXXXXXX, is $XXXXXXXXXX.

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

a) the Taxpayer will pay an initial premium of $XXXXXXXXXX for the Policy;

b) the Policy will not be an “exempt policy” as defined in section 306 of the Income Tax Regulations;

c) the Policy will not permit any policy loan, or other indebtedness incurred on the security of the Policy that could, pursuant to the Policy, result in any deduction from the amount payable under the Policy;

d) the Policy will bear an accumulated face amount that will include the initial face amount of $XXXXXXXXXX plus $XXXXXXXXXX from Original Agreement plus any amounts added to that amount each year at the discretion of the Insurer;

e) the Insurer will pay an amount to the Beneficiary upon the death of the Taxpayer equal to the accumulated account value being equivalent to the initial account value plus credited interest plus any other discretionary credits to the account value made by the Insurer;

f) the owner of the Policy may elect to surrender the Policy for its cash value by filing a written notice at the administrative office of the Insurer;

g) the owner of the Policy has the right to change the name of the Beneficiary at any time during the Taxpayer’s lifetime; and

h) 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.

5. The Funeral Home is licensed under the laws 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.

6. The Funeral Home will be resident in Canada at the time the New Agreement is established.

7. The Funeral Home is a “qualifying person” as set out in subsection the definition in subsection 148.1(1) of the Act with respect to the New Agreement.

PROPOSED TRANSACTIONS

8. The Taxpayer will purchase the Policy and will pay an initial premium of $XXXXXXXXXX with the remaining amount of the premiums owed in respect of the Policy being $XXXXXXXXXX. 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.

9. The Taxpayer will then enter into the New 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.

10. The New 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 or second years of the Policy, the New Agreement will provide that the Taxpayer’s legal representative will be responsible for the shortfall in these circumstances.

11. The New 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.

12. The New Agreement will provide that it may be terminated at any time in writing by the Taxpayer prior to the Funeral Home providing Funeral Services or where the Funeral Home ceases to carry on business in the normal course. The New Agreement also provides that the Assignment does not restrict the Taxpayer’s right to purchase funeral merchandise or services on the open market at any time the Funeral Home provides Funeral Services. In the event the New Agreement is terminated, the New Agreement provides that the Funeral Home will agree to assign the rights and ownership of the Policy to an alternate funeral home or to any other person designated by the Taxpayer.

13. The Insurer will not be a party to the New Agreement.

14. The Taxpayer will make the Assignment and the Funeral Home will receive the Policy as a deposit and contribution solely for the purpose of funding the Funeral Services. The Funeral Home will be designated as the sole Beneficiary under the Policy entitling it to receive any death benefit payable by the Insurer under the Policy.

15. 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.

16. 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.

17. The Taxpayer will execute a document pursuant to which he will cancel the Original Agreement and instruct the Funeral Home and Trustee to transfer $XXXXXXXXXX, being the funds previously held in trust by the Trustee with respect to the Original Agreement, to the Funeral Home as the second contribution in respect of the New Agreement. Immediately thereafter the Original Agreement will be terminated.

18. The Funeral Home, together with the instructions provided by the Taxpayer in paragraph 17, will provide a written direction to the Trustee directing that the amount payable on the cancellation of the Original Agreement (which shall be $XXXXXXXXXX) be paid to the Insurer. Pursuant to this direction, the Trustee will pay the directed amount of $XXXXXXXXXX to the Insurer in satisfaction of the remaining Policy premiums.

19. The total contributions that will be made under the New Agreement will be $XXXXXXXXXX being comprised of the $XXXXXXXXXX amount as set out in paragraph 14 and $XXXXXXXXXX resulting from cancellation of the Original Agreement as set out in paragraph 18.

No contributions under the New Agreement will be made except as described in paragraphs 14 and 17 above. 20.

PURPOSE OF THE PROPOSED TRANSACTIONS

21. The purpose of the proposed transactions is to establish an eligible funeral arrangement with the Funeral Home to fund 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 New 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.

C. No amount will be included in Taxpayer’s income under subsection 148.1(3) of the Act solely as a result of the proposed transactions.

D. No amounts are required to be withheld under section 153 of the Act in respect of the payment described in paragraph 18.

Requested Opinion

Provided that proposed subsections 148.1(4) and 148.1(5) are added to the Act in the form proposed in the Income Tax Amendments Act – Part 1 – Technical Amendments dated July 16, 2010, it is our view that proposed subsection 148.1(5) would apply in respect of the transactions, such that subsection 148.1(4) would not apply.

Additional Comments

Nothing in this letter should be construed as implying that the Canada Revenue Agency (“CRA”) has reviewed, confirmed or otherwise considered:

a) whether Original Agreement is an eligible funeral arrangement, as defined in subsection 148.1(1) of the Act;
b) the extent to which provincial legislation permits the Assignment;
c) the fair market value of the Policy at any time;
d) the tax consequences in relation to the assignments of property as described in paragraphs 9 and 12; or
e) 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 New 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.

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 within XXXXXXXXXX months of the date of this letter.

Yours truly,

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