31 May 1996 External T.I. 9532895 - PREARRANGED FUNERAL PLANS

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:

Whether T5 slips are required to be issued to purchasers of prearranged funeral plans where the funeral home is entitled to receive the interest income that accrues on the money held on deposit.

Position:

T5 slips should not be issued to the purchasers of such plans, but should be issued to the funeral home.

Reasons:

The purchaser has no legal right to receive the interest income. The income that accrues each year is paid to the funeral home and a T5 slip must be issued by the trust company to the funeral home pursuant to paragraph 201(1)(b) of the Income Tax Regulations.

		953289
XXXXXXXXXX	C.R. Bowen

Attention: XXXXXXXXXX

May 31, 1996

Dear Sirs\Mesdames:

We are writing in reply to your letters dated December 8 and 29, 1995, wherein you requested our comments on whether it is necessary for a trust company to issue a T5 slip to the purchaser of a prearranged funeral plan costing over $15,000 where the interest income is paid to the funeral home.

The Prearranged Funeral Services Act (Alberta) RSA 1980 indicates that money held in trust by a funeral home under a prearranged funeral plan is to be deposited in a special fund with a trust corporation. The money paid under such a plan may be withdrawn by the purchaser of the plan without payment of a penalty or other charges. The purchaser is entitled to such interest on the money paid under the plan as may be agreed upon by the purchaser and the funeral home.

You indicated that it is your understanding that in Alberta all agreements for the provision of prearranged funeral services include a clause to the effect that the purchaser agrees that all interest income earned on the money paid under the prearranged funeral plan will be the property of the funeral home. Hence, the interest income earned each year is paid to the funeral home and reported in its business income.

While we are unable to provide specific comments on the wording of a particular prearranged funeral service agreement which establishes the funeral home's entitlement to the interest income earned on money paid under the plan, we can provide the following general comments which may be of assistance to you.

Our Comments

Section 148.1 and paragraph 149(1)(s.1) of the Income Tax Act (the "Act") were introduced to allow for the tax-free build-up of income earned on contributions made to an eligible funeral arrangement where that income is credited, accrued or added to the arrangement. However, certain contracts for prearranged funeral plans provide that the funeral home is legally entitled to receive the interest income earned on the contribution as it accrues and consequently, that income is not credited or accrued to the plan. This type of plan is described in paragraph 5 of Interpretation Bulletin IT-246 where it states, in part,:

If the provincial statute only requires the monies received under the agreement to be deposited in trust and does not refer to the disposition of interest earned thereon, the contracting parties are left to deal with the interest as they see fit.... (I)f ... the interest is paid or credited to the funeral director as it accrues... the interest is considered received or receivable, as the case may be, under paragraph 12(1)(c) for the purposes of computing the funeral director's income for the taxation year in which the interest accrues.

Where this type of prearranged funeral plan exists, it is our opinion that a T5 slip for the interest income earned each year on the contribution to the plan should not be issued to the purchaser since it is the funeral home (and not the purchaser) that has a) the legal entitlement to receive the interest income and b) is the recipient of that amount. This opinion applies even where the contributions made in respect of an individual for the provision of funeral services exceed the $15,000 contribution limit contained in the definition of eligible funeral arrangement (in subsection 148.1(1) of the Act). However, a trust company which has contributions from this type of plan on deposit for a funeral home is required (pursuant to paragraph 201(1)(b) of the Income Tax Regulations) to issue a T5 slip to that home for payments of interest income made in the year regardless of the amount contributed to the plan. As indicated above, the amount of interest income indicated on the T5 slip is required to be included in the funeral home's income.

These comments are provided in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.

Yours truly,

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

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