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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1) Will excess funds available under a prepaid funeral arrangement (which is an EFA) that are used by the funeral establishment, pursuant to written direction to do so, for the provision of additional or upgraded funeral services and supplies be included in the income of the deceased's estate?

2) What procedure must be followed in order to transfer contributions and accrued income thereon under a prepaid funeral arrangement that is an EFA to another funeral establishment on a tax free basis?

Position:

1) No, since the amount is not distributed to the estate and is included in the income of the funeral establishment that provides those services.

2) The transfer of the funds must be made directly between the funeral establishments.

Reasons:

1) This result is in accordance with policy intent and avoids double taxation since the amount would already included in the income of the funeral establishment.

2) In accordance with policy intent and the amount has not been distributed to the taxpayer for other purposes.

	                               962571
XXXXXXXXXX	                         		C.R. Bowen

Attention: XXXXXXXXXX

June 18, 1997

Dear Sirs:

Re: Prepaid funeral arrangements

We are writing further to your two letters of July 17, 1996, wherein you requested our comments on the amount to be included in the income of an estate where excess funds available under a prepaid funeral arrangement are used for the provision of additional or upgraded funeral services. In our telephone conversation (XXXXXXXXXX/Bowen) of March 14, 1997, you also requested that we provide our comments on transferring funds in a prepaid funeral arrangement to another funeral establishment. We apologize for the long delay in our response.

Background

In Ontario, a licensed funeral establishment may accept money (i.e., a contribution) from a person (i.e., a purchaser) as a prepayment for funeral services and supplies which will be performed and/or provided at the time of need (i.e., death) of an individual (referred to as a beneficiary). Although a purchaser and a beneficiary may not be the same person, we have assumed in this letter that they are and have referred to that person as a beneficiary. The contribution received by a funeral establishment from a beneficiary for a prepaid funeral arrangement must be invested and held in the name of the funeral establishment for the beneficiary. In some cases, the arrangement is only in respect of some of the items required at the time of need.

Excess Funds

After the death of the beneficiary, the cost of the funeral services and supplies that are included under a prepaid funeral arrangement is calculated by the funeral establishment in accordance with the price list in effect at that time. Where the contributions and accrued income exceed the cost of providing the services and supplies, there will be an excess available to be returned to the beneficiary's estate. In such a case, you indicated that the personal representative of the beneficiary may provide the funeral establishment with written authorization or direction to use all or part of that excess for the provision of additional funeral services and supplies not originally included in the arrangement or to upgrade those originally selected. These items will be of the type referred to in the definition of "funeral services" in subsection 148.1(1) of the Income Tax Act (the "Act") (i.e., property and services that relate directly to funeral arrangements in Canada for a deceased individual). The funeral establishment is required to report the amount charged for the services and supplies (including the additional or upgraded items) in computing its business income. The cheque issued to the beneficiary's estate will be for the amount remaining, if any, under the arrangement after deducting the cost of the additional or upgraded services and supplies from the excess originally determined.

As indicated above, the contributions and accrued income under an EFA paid to a funeral establishment for the provision of funeral services and supplies are included in computing its income. Consequently, the portion of accrued income under an EFA that is used for this purpose should not be included in the income of the beneficiary's estate (as supported by subparagraph 148.1(2)(b)(i) of the Act and News Release No. 94-096 issued by the Department of Finance). Therefore, where all or part of the excess funds available at the time of need under a prepaid funeral arrangement that qualifies as an EFA are used by a funeral establishment for the provision of additional or upgraded funeral services and supplies pursuant to the procedure described above, it is our opinion that for the purposes of the formula in subsection 148.1(3) of the Act, the amount that is distributed and the amount of "A" will equal the amount of the refund paid to the beneficiary's estate. In addition, the amount of "B" will equal the total of all payments made from the arrangement to the funeral establishment for the provision of funeral services and supplies, including the additional or upgraded items.

Example

Mr. A contributed $8,000 (this amount is a "relevant contribution" for the purposes of section 148.1 of the Act) to a prepaid funeral arrangement that qualifies as an EFA and under which he is the beneficiary. The balance under the arrangement immediately before Mr. A's death was $10,000. Since the cost of providing the funeral services and supplies under the arrangement at the time of need was only $9,000, Mr. A's personal representative provided written authorization to the funeral establishment to use part of the excess of $1,000 to: 1) place a newspaper notice at a cost of $100 (this item was not originally included in the arrangement) and 2) upgrade the casket at a cost of $600. The amount of the refund paid by the funeral establishment to Mr. A's estate was $300 (i.e., the amount distributed and (A)).

Pursuant to subsection 148.1(3) of the Act, the amount to be included in the income of Mr. A's estate is $300, which is the lessor of:

i) $300 (the amount that is distributed from the arrangement); and

ii) $2,000 ((A) $300 balance under the arrangement immediately before the refund plus (B) $9,700 payment made from the arrangement for the provision of funeral services and supplies minus (C) $8,000 relevant contribution).

Where Mr. A's estate is resident in Canada, the funeral establishment must issue a T5 slip to the estate in the amount of $300 for the year in which the payment was made.

Transferring Funds

A beneficiary of a prepaid funeral arrangement that qualifies as an EFA may cancel that contract and enter into another prepaid funeral arrangement that qualifies as an EFA with a second funeral establishment. In order for there to be a tax-free roll over of the accrued income under the first arrangement to the second arrangement, the contributions and accrued income must be transferred directly between funeral establishments (as per the policy intent expressed in News Release No. 94-096). In such a case, the first funeral establishment should not issue a T5 slip in respect of the accrued income to a beneficiary who is resident in Canada.

Where there is a direct transfer of funds between the funeral establishments, the amount of the relevant contributions to the second arrangement as a result of the transfer will equal the contributions made under the first arrangement. The second funeral establishment will need to ascertain this figure for the purpose of:

i) calculating the amount to include in the income of the beneficiary or the beneficiary's estate if there is ever a return of funds at a later date; and

ii) ensuring that the second arrangement continues to qualify as an EFA at any particular time. For example, such a determination would be necessary if the beneficiary makes additional contributions to the second arrangement, either at the time of the transfer or at a later date. That arrangement will remain an EFA only if the total of all relevant contributions in respect of the beneficiary does not exceed that beneficiary's contribution limit for funeral services.

Example

If the contributions made by a beneficiary to the first arrangement were $10,000 (i.e., the relevant contributions) and the accrued income at the time of the transfer was $900, the amount of the relevant contributions to the second arrangement as a result of the transfer will be $10,000 and not $10,900. If the beneficiary cancels the second arrangement at a later date after additional income of $50 has accrued, the second funeral establishment will be required to issue a cheque to the beneficiary for $10,850 ($10,950 less a $100 cancellation fee). In accordance with the formula indicated above for subsection 148.1(3) of the Act, the beneficiary must include $850 (i.e., the lessor of: i) $10,850 and ii) $850) in his or her income in the year of receipt. In addition, where the beneficiary is resident in Canada, the second funeral establishment will be required to issue a T5 slip to the beneficiary in the amount of $850 for the year in which the payment was made.

The above comments also apply to transfers or cancellations requested by a beneficiary's personal representative.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling, and accordingly, it is not binding on Revenue Canada.

Yours truly,

for Director
Resources, Partnerships
and Trusts Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch