Applying the 2008 GST/HST Rate Reduction to Prepaid Funeral and Cemetery Arrangements

GST/HST Info Sheet GI-040
November 2007

Effective January 1, 2008, the rates of the goods and services tax/harmonized sales tax (GST/HST) will be reduced. The rate of the GST will be reduced from 6% to 5%. The rate of the HST will be reduced from 14% to 13%. The Minister of Finance is introducing legislative amendments to implement these changes (see Bill C-28, Budget and Economic Statement Implementation Act, 2007).

This info sheet explains how to determine the rate of the GST/HST that applies to products or services sold under prepaid funeral and cemetery arrangements and to taxable interment rights.

In this info sheet, "arrangement" means a prepaid funeral or cemetery arrangement. "Operator" means the operator of a funeral home and/or cemetery.

The HST applies only to supplies made in or imported into a participating province (i.e., Nova Scotia, New Brunswick, and Newfoundland and Labrador). The GST applies to supplies made in or imported into the rest of Canada. If you are uncertain as to whether a supply is made in a participating province, refer to Technical Information Bulletin B-078, Place of Supply Rules Under the HST.

The GST/HST becomes due when amounts are withdrawn from trust ("new rules")

Amounts in trust

Operators do not account for the GST/HST when contributions under an arrangement are placed in trust. Operators account for the GST/HST on all amounts withdrawn from trust when these amounts are distributed to the operator. The contributions made under an arrangement are based on an estimate of the amount that will be payable for the products or services and the GST/HST that will eventually apply.

Where these rules apply to an arrangement entered into between October 31, 2007, and December 31, 2007, operators may use the rate of 5% or 13% to estimate the GST/HST that will eventually apply. For arrangements entered into on or after January 1, 2008, operators should use the rate of 5% GST or 13% HST to estimate the tax that will eventually apply.

Where all of the contributions under an arrangement are payable and paid before January 1, 2008, operators need not adjust the estimate of the GST/HST that will eventually apply, even if the purchaser asks for a refund.

However, where some of the contributions under the arrangement are payable on or after January 1, 2008, operators should adjust the rates used to estimate the GST/HST included in those contributions payable and paid on or after January 1, 2008, to 5% or 13%.

If an operator does not adjust the estimate of the GST/HST included in contributions payable and paid before January 1, 2008, the purchaser cannot recover the amount from the CRA because the amount paid to the operator is not tax, but rather an estimate of the GST/HST that will eventually apply.

Similarly, where an operator does adjust the estimate of the GST/HST included in contributions payable and paid before January 1, 2008, and refunds that part of the contributions to the purchaser, the operator cannot recover the amount refunded from the CRA since the amount refunded was not tax, but rather an estimate of the GST/HST that will eventually apply.

Amounts not in trust

Any contributions paid or payable under an arrangement in 2007, and not placed in trust (e.g., administrative fees) are subject to the GST/HST at the rate of 6% or 14%. Similarly, any amounts that are withdrawn from trust in 2007 are subject to GST/HST at the rate of 6% or 14%.

Conversely, any contributions payable under an arrangement on or after January 1, 2008, which were not paid in 2007, and which were not placed in trust are subject to the GST/HST at the rate of 5% or 13%. Similarly, any amounts withdrawn from trust on or after January 1, 2008, are subject to the GST/HST at the rate of 5% or 13%.

GST/HST charged and accounted for when the arrangement was entered into ("old rules")

Some operators charged an amount as GST/HST when the contributions were paid or payable under the arrangement, even where the contributions were placed in trust. These operators accounted for the amount charged as GST/HST in their net tax calculation for the period in which the contributions were paid or payable, whichever was earlier.

Where this was the case, operators cannot adjust the amounts charged as GST/HST for the contributions under the arrangement that were payable and/or paid before January 1, 2008. Operators cannot adjust these amounts even if the products or services are provided on or after January 1, 2008.

Where any of the contributions under the arrangement are payable on or after January 1, 2008, and not paid before that date, the operator charges an amount as GST/HST at the rate of 5% or 13%.

Adding products or services

When an arrangement is amended to add products or services, the rate to be charged as GST/HST depends on the date when the consideration charged for the products or services is paid or becomes due. Where the contributions for the products or services are paid in 2007, the operator charges an amount as GST/HST at the rate of 6% or 14%. Where the contributions for the products or services become due on or after January 1, 2008, the operator charges an amount as GST/HST at the rate of 5% or 13%, provided the amount was not paid in 2007.

Cancelling products or services

Sometimes arrangements are amended to cancel products or services that were to have been provided. Where an amount was charged and accounted for as GST/HST at the rate of 6% or 14% by the operator, the amount can be refunded to the customer and a deduction taken from the operator's net tax calculation, provided the usual requirements are met (i.e., that an acceptable credit/debit note is issued within the applicable time limits).

Further information is available in GST/HST Info Sheet GI-042, Applying the 2008 GST/HST Rate Reduction to Price Adjustments, Adjustments for GST/HST Overcharged and Returned Goods.

Cancelling arrangements

Sometimes an arrangement is cancelled before the products or services are provided. Normally, the operator charges a cancellation fee that is withdrawn from trust.

In these situations, the operator must account for the GST/HST on a tax-included basis with respect to the amount charged as a cancellation fee. Any cancellation fees withdrawn from trust before in 2007 are GST/HST included at 6/106 or 14/114.

Conversely, any cancellation fees withdrawn from trust on or after January 1, 2008, are GST/HST included at 5/105 or 13/113.

Transitional measures

Some operators were unable to comply with the "new rules" by the dates established by the CRA. In these cases the operators were able to use transitional rules.

Under the transitional rules, the operators must:

• charge an amount as GST/HST when the contributions are paid or payable under the arrangement, whichever is earlier, and must account for these amounts in their net tax calculations;
• charge and account for the GST/HST on the amount equal to any interest that accumulates in the trust when the amount is withdrawn from trust and disbursed to the operator; and
• account for the GST/HST on any increase in the amount payable to the operator for the products or services supplied, if applicable.

Where these rules apply, operators must charge an amount as GST/HST at the rate of 6% or 14% on any contributions paid or payable in 2007. Where the contributions are payable on or after January 1, 2008, the operator must charge an amount as GST/HST at the rate of 5% or 13%, provided that the amount was not paid in 2007.

Operators will charge and account for the GST/HST on the amount equal to any interest that accumulates in the trust and that is withdrawn from trust on or after January 1, 2008, at the rate of 5% or 13%.

Finally, where products or services are provided on or after January 1, 2008, the operator multiplies the new amount payable by the rate of 5% or 13% and subtracts the original amount charged as GST/HST for the products or services and accounts for the difference.

Grandfathered arrangements

Written arrangements entered into before September 1990 are not subject to the GST/HST. Similarly, arrangements entered into before April 1, 1997, in a participating province are not subject to the provincial component of the HST, but are subject to the GST if entered into after August 1990. The CRA refers to these arrangements as grandfathered arrangements.

Arrangements that were grandfathered during the period when the rates of the GST/HST were 7%/6% and 15%/14% will continue to be grandfathered under the new 2008 reduced rates, provided the conditions for grandfathering the arrangement are still valid.

Taxable interment rights

The GST/HST becomes payable on a taxable supply of interment rights on the earlier of the day the payment is made and the day the payment becomes due. Where a supply of interment rights is made under a written agreement that provides for a series of payments, a payment is considered to become due on the day it is required to be paid under the agreement. The GST/HST is payable on the value.

Any payment for a taxable supply of interment rights that becomes due after June 30, 2006 and before January 1, 2008, is subject to the GST/HST at the rate of 6% or 14%, unless the payment was made before July 1, 2006, without having become due. In addition, any payment for a taxable supply of interment rights that is made after June 30, 2006 and before January 1, 2008, without having become due before July 1, 2006, is also subject to the GST/HST at the rate of 6% or l4%.

Where a payment becomes due on or after January 1, 2008, and has not been paid before that date, the rate of the GST/HST to be charged is 5% or 13%.

If you did not have to charge tax when you provided interment rights before the announcement about the rate reduction, you still do not have to charge tax when you provide these rights.