2 September 1993 External T.I. 9319115 F - Prepaid Funeral Services Compensation Fund

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Prepaid Funeral Services Compensation Fund (the "Trust")

This is in reply to your letters of November 21, 1991 and April 20, 1993 addressed to the Communications Branch of Revenue Canada, Taxation which were forwarded to us for reply. We also acknowledge receipt of your transmittal sheet of June 22, 1993 with attached trust document. We regret the delay in replying to your correspondence.

You indicate that the Trust was established by the Ontario Ministry of Consumer & Commercial Relations and that XXXXXXXXXX is the Trustee of the Trust. You further indicate that the purpose of Trust fund is to compensate consumers who have prepaid funeral expenses, but who later discover that the payee has gone out of business.

It is your view that any income earned on the investment of the monies in the Trust fund would not be subject to tax pursuant to paragraph 149(1)(w) of the Income Tax Act (the "Act") and that it would not be necessary to file T3 Returns.

You ask that we review the Trust Agreement and confirm your opinion that the income earned by the Trust fund would be exempt from tax. Some relevant extracts from the Trust Agreement are as follows:

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Assurances as to how the Department will interpret specific provisions of existing Canadian income tax law in its application to a definite transaction or transactions which a taxpayer is contemplating are only given in the context of an advance income tax ruling. Information Circular 70-6R2 (a copy of which is included for you purposes) sets out the guidelines under which such rulings will be issued. The Rulings Directorate does provide written opinions on the interpretation of specific provisions of the law, however, as indicated, when a requested interpretation relates to a contemplated transaction, a taxpayer should request an advance ruling rather than an opinion. Notwithstanding the foregoing we do provide the following general comments.

Our Comments:

Paragraph 149(1)(w) of the Act provides that no tax is payable under Part I of the Act upon the income of a person for a period when that person was, "a trust established as required under a law of Canada or of a province in order to provide funds out of which to compensate persons for claims against an owner of a business identified in the relevant law where that owner is unwilling or unable to compensate his customer or client..."

On the assumption that a valid trust has been created, and this is a question of fact upon which we do not comment, it would appear that the Trust meets the above initial description. However, even though the statement is made in paragraph 2, set out above, that the Trustee shall make payment to claimants, it is not totally clear that the condition is met in paragraph 149(1)(w) of the Act that reads, "...if no part of the property of the trust, after payment of its proper trust expenses, is available to any person other than as a consequence of his being a customer or client of a business so identified." Similarly, even though the Compensation Fund was set up under Ontario Regulation 369/90, the Regulation requires the Compensation Fund to be held at all times in Ontario, and provision is made in paragraph 12 for the Trustee to turn all assets over to a successor trustee in the circumstances of that paragraph it is not totally clear to us that the property of the trust fund is not available to "any person" as required by paragraph 149(1)(w) of the Act upon winding-up or dissolution.

As indicated above, whether the Pre-Paid Funeral Services Trust meets the definition in paragraph 149(1)(w) is a question of fact to be determined based on a review of all the relevant circumstances of the particular situation. We are not in a position to make such a finding of fact. We suggest that the above clarifications be incorporated into the enabling documents to make it clear that the trust has been organized in conformity with the provisions of paragraph 149(1)(w) of the Act. However, if as a matter of fact, "no part of the property of the trust, after payment of its proper trust expenses, is available to any person other than as a consequence of his being a customer or client of a business so identified", the Trust would appear to qualify for exemption under paragraph 149(1)(w) of the Act.

As stated previously, the foregoing comments are an expression of our opinion and as such are not an advance income tax ruling and are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.      Theresa Murphy, Trusts Section