1 November 1993 External T.I. 9330995 F - Care and Maintenance Fund and Pre-need Assurance Trust

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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Cemetery Trusts

We are writing further to our telephone conversation (XXXXXXXXXX/Bowen) of October 27, 1993 and your father's letter of June 15, wherein our comments on certain issues related to Care and Maintenance Funds and Pre-Need Assurance Funds were requested. These issues include the application of the "21 year deemed realization rule" to these trusts and the taxation of capital gains realized by Care and Maintenance Funds which are not registered charities as defined in the Income Tax Act (the "Act").

BACKGROUND

Care and Maintenance Funds

The majority of cemetery owners are exempt from income tax since they are either registered charities or non-profit organizations as defined in subsection 248(1) and paragraph 149(1)(1) of the Act, respectively. Section 35 of the Cemeteries Act (Revised) (Ontario) R.S.O. 1990, C.-4 (the "Cemeteries Act"), which came into force on April 1, 1992, requires cemetery owners who sell interment rights to establish trust funds with a trust company which will act as trustee and invest and manage the funds the cemetery owners receive for the care and maintenance of their cemeteries. Such trusts are referred to as Care and Maintenance Funds (formerly Perpetual Care Funds). Some of these trusts may be eligible, but have not applied for, registered charity status under the Act. A purchaser of interment rights does not have the right to cancel the contract.

Section 35 of the Cemeteries Act requires that:

1)     A trustee of a fund shall pay the income from the fund to the owner of the cemetery involved.

2)     No trustee of a fund shall pay out any of the capital portion of the fund.

Income is defined in the Cemeteries Act to mean "the interest or money earned, including compounding thereof, by the investment of funds." There is no definition of capital. Section 6 of the Regulations to the Cemeteries Act indicates the permitted uses to which the income from a fund may be used by the owner of the cemetery. These uses include maintaining, securing and preserving the cemetery, its grounds and buildings and the equipment used for the purposes of maintenance, security and preservation. Should a cemetery cease operations, the capital of the trust fund would normally be used to provide income to the new cemetery where the human remains were transferred.

Pre-Need Assurance Funds

A) Post-April 1, 1992

Section 36 of the Cemeteries Act requires cemetery owners who sell pre-need cemetery supplies or services (e.g. vaults, markers, urns, artificial wreaths, etc.) to pay the money received into a trust fund established with a trust company as trustee. These funds are referred to as Pre-Need Assurance Funds. Subsection 36(4) of the Cemeteries Act provides that a trustee of a fund is to hold all money received for the benefit of the purchaser of such services, either until the pre-need assurance contract is cancelled or completed. A pre-need assurance contract can be cancelled at any time by the purchaser before the services or supplies are provided; in which case, the initial contribution and accrued income is returned to the cemetery owner who must return it to the purchaser. If the contract is completed, the trustee must pay to the cemetery owner the lesser of a) the current market price for the supplies or services or b) an amount equal to the payments made for the supplies or services together with income accrued on those payments. Any excess of b) over a) is paid to the cemetery owner which must return that amount to the purchaser or to the estate of the interred person.

B) Pre-April 1, 1992

Pre-Need Assurance Funds established under the predecessor to the Cemeteries Acts were treated differently from Pre-Need Assurance Funds under the current Cemeteries Act. The cemetery owner was required to transfer a percentage (usually 65 percent) of the purchase price for pre-need assurance supplies or services to a Pre-Need Assurance Fund. All trust income was paid to the cemetery owner. The registrar under the current Cemeteries Act has consented to having cemetery owners continue to receive income from Pre-Need Assurance Funds established before April 1, 1992.

When a pre-April 1, 1992 contract for pre-need supplies or services is completed, the trustee pays to the cemetery owner the lesser of the market price for the supplies or services and the amount in the trust paid by the purchaser. If this latter amount exceeds the former, the excess is retained by the cemetery owner. It is not returned to the purchaser or to his or her estate. However, if the purchaser cancels the pre-need assurance contract, which can be done at any time, the amount of the purchase price in the Pre-Need Assurance Fund is returned to the purchaser.

OUR COMMENTS

21 Year Deemed Realization Rule

Subparagraph 108(1)(j)(i.1) of the Act provides, in part, that a trust in which all interests have vested indefeasibly and no interest in which may become effective in the future will not be subject to the 21 year deemed realization rule in subsection 104(4) of the Act. It is our understanding that although it was not the intent of subsection 104(4) of the Act to apply to Pre-Need Assurance Funds and Care and Maintenance Funds, the current wording of subparagraph 108(1)(j)(i.1) of the Act was not drafted with those trusts in mind.

It is our opinion that while Care and Maintenance Funds meet the wording of subparagraph 108(1)(j)(i.1) of the Act, Pre-Need Assurance Funds established before or after April 1, 1992 do not. In the latter case, the monies in the trust may revert to either the purchaser or the cemetery owner and in our opinion, the rights of those parties cannot be combined in order to make the determination that all rights have vested indefeasibly. As exempting Pre-Need Assurance Funds from the application of subsection 104(4) of the Act would require an amendment to the existing legislation, we have brought this matter to the attention of the Department of Finance for their consideration.

Capital Gains

If the terms of a trust indenture or a statutory act governing the trust do not provide that capital gains are to be considered income for the purposes of the trust, then capital gains arising in the trust are considered to be capital of the trust under trust law. Since the Cemeteries Act is silent on the treatment of capital gains, it is our opinion that any capital gains arising on the disposition of the trust's property will be treated as part of the capital of the trust for trust purposes. As subsection 35(5) of the Cemeteries Act prevents the payment of any capital portion of a Care and Maintenance Fund to the cemetery owner, no part of any capital gains earned by such a trust in a year would be considered "paid or payable" to cemetery owner for the purposes of paragraph 104(6)(b) and subsection 104(24) of the Act. Consequently, all capital gains arising in a Care and Maintenance Fund established in accordance with section 35 of the Cemeteries Act will be included in the income of that trust for income tax purposes.

As an exemption from income tax for Care and Maintenance Funds that are not registered charities would require an amendment to the existing income tax legislation, we have brought this matter to the attention of the Department of Finance for their consideration.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Customs, Excise and Taxation.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch