Pre-Paid Funeral Arrangements

More Canadians are incorporating pre-paid funeral arrangements into their estate plan. Also known as an Eligible Funeral Arrangements (EFA).

Where Can I Buy a Pre-paid Funeral Contract?

A pre-paid funeral contract may be purchased from any person licensed to provide funeral or cemetery services, including a funeral director or owner or operator of a licensed cemetery, mausoleum, crematorium or columbarium.

How are Funeral Services and Cemetery Services Distinguished for the Plan?

“Funeral services” mean property and services other than cemetery services such as, services or supplies provided by a funeral director for the care and embalming of the deceased, a casket, funeral rite services or supplies, and transportation of the deceased.

“Cemetery services” mean such things as internment vaults, markets, flowers, liners, urns, shrubs, and wreaths and services directly related to the cemetery arrangements. 

Who May Contribute to an EFA?

Anyone at least age 18, or his or her employer (as an employee benefit), attorney for property, guardian. Individual plans are commonly set up by individuals at the onset of their retirement but can be set up at any time.

What are the Contribution Limits?

The contribution limits in order to earn interest tax exempt:

  • $15,000, if for funeral services only;
  • $20,000 if for cemetery services only
  • $35,000 if for funeral services and cemetery services.

If the contribution limit is exceeded, the entire arrangement ceases to qualify as an EFA from the point of an overcontribution

What is the Tax Treatment of Contributions?

While contributions under an EFA are generally not deductible in computing income, income (e.g., interest on contributions) that accumulates in an EFA is tax-exempt until paid. If the income accumulates in a trust governed by the EFA or in a cemetery care trust, the trust’s taxable income is exempt from Part I income tax.

An income inclusion occurs when the funds are distributed from an EFA. The amount to be included in the recipient’s income is the lesser of:

  • The amount actually distributed to the recipient out of the balance held for the individual under the arrangement; and
  • The amount determined by the formula: A+B-C.

A is the balance held for the individual under the arrangement (not counting the value of property held in a cemetery care trust).

B is the total of all amounts paid out of the arrangement (before the distribution to the recipient) for the provision of funeral or cemetery services for the individual (not counting cemetery services funded by property held in a cemetery care trust).

C is the total of the relevant contributions (except contributions to a cemetery care trust) for the individual under the arrangement immediately before the distribution to the recipient.

If any amount in excess of income (determined in B) is distributed, it represents a non-taxable refund of relevant contributions.

If an arrangement for the provision of funeral or cemetery services does not qualify as an EFA in accordance with the requirements (contained in subsection 148.1 of the ITA) either because it never qualified or because it ceased to qualify as such, then the plan is taxable as a regular non-registered investment account from the time the plan ceased to qualify.  An amount paid to a non-resident is subject to withholding tax at the treaty rate.

Other Advantages to EFAs

Prepaid funeral contracts must be guaranteed by funeral homes (since July 1, 2012), which means that prices are locked-in from the date of the contract from a price list at the time the items are chosen, including applicable taxes, until the funeral is required.

Individuals of prepaid funeral contracts can minimize their funeral and cemetery expenses and eliminate the risk of “emotionally over-spending” estate assets at the time of death.  They can purchase a plan according to their own preferences, culture, beliefs and budget while also not burdening their loved ones with these choices. Payment is made directly from the guaranteed certificate and any additional funds remaining in the account are returned to the estate.

Funds can be transferred from one custodian to another without giving rise to an income inclusion under s.148.1(3) of the Income Tax Act. However, the contract made with the funeral home or cemetery does not follow the funds transferred and prices will likely differ when a new contract is established with the new custodian.

Where the plan holder is an Ontario Disability Savings Plan (ODSP) recipient, the assets in an EFA are excluded from the total assets assessed in determining Ontario Disability Savings Plan (ODSP) payment claw backs.

When Should I Set Up an EFA?

Setting up an EFA as early as possible locks in the price and provides tax-exempt growth for the duration of your lifetime. Once set up, you will want to inform family members of the arrangement and incorporate the EFA into your Will.  The emotional and financial benefits of EFAs are invaluable, and they provide families with a sense of accomplishment and peace of mind.

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