1 June 1990 Income Tax Severed Letter ACC972 - Cemetery Companies: Capital Gains Versus Income on Trust Fund Investments

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.

Appeals Branch                                Financial  Industries
Appeals and Referrals Division                  Division
                                              D. Duff
                                              (613) 957-3498
Attention:   Josephine Yu

                                              FILE  901325

                                              EACC 9727

Subject:  Cemetery Companies: capital gains versus
          in came on trust fund investments 

This is in reply to your memorandum of June 12, 1990 requesting our comments on the above noted issue.

Facts
                       24(1)
Ontario Cemeteries Act 1980):

Subsection 38(1) requires a cemetery owner selling pre-need supplies or services to set up a pre-need assurance fund. Subsection 27(2), which applies to pre-need assurance funds by virtue of subsection 38(3), requires the trustee to pay the income from the fund to the cemetery owner.

Regulation 91 contains the rules for maintaining the pre-need assurance fund. Subsection 4(2) states that 65, of a pre-need supply and service sale is to be transferred to the fund. Section 7 requires a minimum deposit in the fund of 50, and 65 respectively of pre and post January 1, 1966 contracts for supplies and services that have not yet been fulfilled, and sections 5 and 6 permits the trustee to pay these amounts to the owner upon fulfilling the contract.

Therefore the objective of the 1980 Cemeteries Act, regarding the pre-need assurance fund, appears to have been only to maintain the original percentage of the contract price until it is fulfilled. There was no requirement to leave the funds grow in the trust to off-set anticipated higher costs in the future to provide these supplies or services.

Ontario Cemeteries Act (1989):

The revisions to the Act resulted in considerable changes to procedures for maintaining the pre-need assurance fund. Subsection 36(3) requires all amounts received for pre-need supplies or services to be transferred to the fund.

Income earned in the fund must be retained and paid out as explained below. When a portion of the contract for supplies or services is completed, the trustee can Day to the cemetery owner the lesser of the current market price and the customer payment plus income. If the payment plus income exceeds the current market price at that time, the trustee will pay the excess to the owner (per 36(6)) who in turn pays it to the purchaser or his estate (per 36(9)). Section 24 and subsections 36(7) and 36(8) permit the purchaser to cancel his contract any time before delivery of pre- need supplies or services. Upon cancellation the trustee pays the original payment plus income to the owner who in turn pays it to the customer, after retaining a service fee. 75(2) of the Income Tax Act:

Subsection 75(2) of the Income Tax Act deems income and gains
earned on property transferred to a trust to be that of the
transferor where the property may revert to the transferor.  The
1900 version of the Cemeteries Act contains no provision for return
in a funds to the customer upon cancellation of a prepaid
arrangement.
                         24(1)
With the 1989 revisions to the cemeteries Act. a customer has the
right to cancel a contract for pre-need supplies and services and
get a refund of his money plus income.  Because of this
cancellation right subsection 75(2) is applicable to the
arrangement. Even if a contract did not provide for a refund upon
cancellation, presumably, the Cemeteries Act would override it with
the result that subsection 75(2) of the Income Tax Act would apply.

The above comments are restricted to the province of Ontario. To determine if subsection 75(2) applies to other provinces it would be necessary to review the respective provincial acts and contracts of the local cemetery companies.

These comments are consistent with our position on prepaid funeral arrangements and we are currently advising funeral directors of this.

Gains versus Income

1.       Neither the fact that         24(1)        can direct the 
         trust, nor the fact the trust is required to be created by 
         provincial legislation is very relevant to the income    
         versus gains determination.  A trust is a separate entity 
         for tax-purposes and the income versus gains question    
         should be determined by analyzing the course of conduct of 
         the trust.  Paragraphs 10 to 13 of 
IT-479R
 list various  
         factors to consider in ascertaining whether the course of 
         conduct indicates the carrying on of a business.  Also as 
         indicated in paragraph 9 of 
IT-479R
, some transactions may 
         be on account of income while others are on account of   
         capital.

         If, after examining the activities of the trust, it is   
         concluded that the trust is carrying on a business in    
         securities trading and all transactions are on account of 
         income there will be no gains to allocate to the         
         beneficiaries.  Under the 1980 cemeteries Act the        
         beneficiaries would be the cemetery owners while it would 
         be the customers under the 1909 Act.

2.
                           24(1)

                                       24(1)
                                      The 1989 Act requires 100% of 
the amounts received for supplies and services to be transferred to
the pre-need assurance fund and any income must be held in the
fund.  While the 1980 version only required 65% of the amount
received to be transferred and no income withheld.

However, as previously indicated, the main determinant of the income versus gains questions would be the trust activity and not the legal requirements regulating the trust. Also, for insurance companies, this determination would be based on activity and not on legislation. For more information on the Department's position regarding insurance companies we suggest you contact Mary Loveday of the Specialized Industries Section, Special Audits Division.

3. Subsection 104(21) of the Income Tax Act permits a Canadian resident trust to flow capital gains through to its beneficiaries including corporate beneficiaries.

Chief Deferred Income Plans & Trust Section Financial Industries Division