5-911167
Dear Madam:
This is in reply to your letter of April 25, 1991 concerning trusts established under the Ontario Cemeteries Act.
You mention that under the Ontario Cemeteries Act, cemetery owners are required to deposit certain amounts into two trust funds; i.e., a pre-need assurance fund and a perpetual care fund. You ask us to confirm that the income and capital gains realized on these trust funds are exempt from tax by virtue of paragraph 149(1)(1) of the Income Tax Act, on the basis that income earned on the funds is payable to the cemetery owners for their benefit and can only be used for prescribed purposes.
Our Comments
We note that you included with your letter a copy of only the Ontario Cemeteries Act (1980). Such Act was revised in 1989 and the revised Act was assented to on October 16, 1989. In our following comments, this revised Act is referred to as the Ontario Cemeteries Act (1989).
We do not agree that the income (including taxable capital gains) realized on the subject trust funds would be exempt from tax. As discussed below, the income earned on the funds would be included in the income of either the cemetery owner or the purchaser and would be exempt from tax only if that person were exempt from tax under a particular provision of the Income Tax Act. For example, where the income is that of the cemetery owner, an exemption under paragraph 149(1)(1) of the Income Tax Act would be available only if the cemetery owner were a club, society or association described in that paragraph.
Pre-Need Assurance Fund
1. Ontario cemeteries Act (1980)
Subsection 27(2) of this Act, which applies to pre-need funds by virtue of subsection 38(3) thereof, requires the trustee to pay to the cemetery owner the income from the investment of those funds.
Consequently, income earned on the pre-need funds prior to 1989 (including any taxable capital gains if payable to the cemetery owner within the meaning of subsection 104(24) of the Income Tax Act) would be included in the income of the cemetery owner pursuant to subsection 104(13) of the Income Tax Act.
2. Ontario Cemeteries Act (1989)
Section 24 of this Act permits the purchaser to cancel the contract at any time before delivery of pre-need supplies or services. If the purchaser does cancel the contract, the trustee is required under subsection 36(7) of this Act to pay the original payment, plus income earned thereon, to the owner. The owner in turn is required to pay that amount (less any service fee) to the purchaser.
Consequently, any income (or taxable capital gain or loss) earned on the pre-need funds in 1989 and subsequent taxation years of the trust is to be included in the income of the purchaser by virtue of subparagraph 75(2)(a)(i) of the Income Tax Act.
Perpetual Care Funds
3. Ontario Cemeteries Act (1980) and (1989)
Subsection 27(2) of the Ontario Cemeteries Act (1980) requires the trustee to pay to the cemetery owner the income earned on the perpetual care funds. Under the Ontario Cemeteries Act (1989), the perpetual care fund would be included in the Care and Maintenance Fund referred to in subsection 35(1) of that Act. By virtue of subsection 35(3) thereof, the income earned on this fund is treated the same as the income on the perpetual care fund under the former Act. Consequently, income earned on the perpetual care fund and the care and maintenance fund (including any taxable capital gains if payable to the cemetery owner within the meaning of subsection 104(24) of the Income Tax Act) would be included in the income of the cemetery owner pursuant to subsection 104(13) of the Income Tax Act.
Our comments are an expression of opinion only and are not binding on the Department, as explained in paragraph 21 of Information Circular 70-6R2. We trust, however, that they are of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch