Eligible Funeral Arrangements (EFA)

Steve Nyvik, Senior Portfolio Manager at Lycos Asset Management

Eligible Funeral Arrangements (EFA): If you’ve paid off your mortgage, have made your maximum contributions to RRSPs, TFSAs, RESPs, and RDSPs, and you still have personally held monies to invest, you might consider contributing to an Eligible Funeral Arrangement (EFA).

“Why is that?” you might ask. The answer is simple. Your money grows faster when it grows tax deferred. You can get tax deferred growth. That means not paying taxes on interest, dividends and realized gains while in the plan.  Moreover, if the growth is used for eligible funeral and cemetery expenses, then the growth is tax-exempt. Next to a Tax Free Savings Account (where you can spend your money on anything), this is then one of the best ways to invest.

What is an Eligible Funeral Arrangement (EFA)?

In 1995 the Federal Government amended the Income Tax Act to implement measures relating to pre-paid funeral arrangements. It set out rules allowing for tax-free build-up of income earned on contributions made under an EFA.

An Eligible Funeral Arrangement (EFA) is established for the sole purpose of funding funeral or cemetery services in Canada for the benefit of one or more individuals. It is structured as an irrevocable Trust.

The parties to the EFA include:

  • a Funeral Director (who is referred to as the qualifying person) who commits to providing funeral or cemetery services;
  • the beneficiary of the EFA – this being the person who has funeral and cemetery services provided for on their behalf;
  • a Trustee (who is referred to as a custodian), who is a Canadian resident when the EFA is established. The Funeral Director may act as the Trustee.

How does an Eligible Funeral Arrangement work?

Any person can make contributions to an EFA. There are limits on how much a contributor can contribute to an EFA for the benefit of an individual.

One cannot deduct contributions under an EFA in computing the contributor’s income.

Income that accumulates in an EFA is not included in the income of the contributor. Neither is the EFA subject to Part I Income Tax on such accumulated income.

Where funds from the EFA are used to pay the Funeral Director for the provision of funeral or cemetery services on behalf of the named individual (the beneficiary of the EFA), no amount is included in the income of:

  • the contributor to the EFA;
  • the named beneficiaries of the EFA for whom the services are performed, or
  • the estate of such named individuals of the EFA.

If funds are distributed from the plan other than as payment to the Funeral Director for the provision of funeral or cemetery services for the individual – for example, because the arrangement is cancelled or because not all the funds held under the arrangement are needed to pay for the funeral or cemetery services, an amount is usually required to be included in the income of the recipient, essentially equal to the lesser of the amount received and the income that has accumulated in the EFA. Such income is treated as property income (i.e. interest income).

What are Eligible Funeral or Cemetery Expenses?

Subsection 148.1(1) defines eligible “Funeral services” as being services directly related to funeral arrangements in Canada in consequence of the individual’s death. The following are examples of funeral services:

  • services or supplies provided by a funeral director for the care and embalming of the deceased;
  • a casket for the deceased;
  • services or supplies provided by a funeral director in connection with the funeral rite for the deceased; and
  • the transportation of the deceased. This would include, for example, transportation of the deceased from a place outside Canada to a place in Canada where the funeral ceremony is to be held, assuming that such transportation is provided under an arrangement made in Canada by the Funeral Director.

Subsection 148.1(1) defines eligible “Cemetery services” as being:

  • property (including interment vaults, markers, flowers, liners, urns, shrubs and wreaths); and
  • services directly related to cemetery arrangements in Canada including property and services to be funded out of a cemetery care trust. So, property or services provided by a cemetery operator would generally fall within the definition of “cemetery services”.

Cemetery services specifically excludes: for the immediate acquisition of a right to burial in or on property that is set apart or used as a place for the burial of human remains or of any interest in a building or structure for the permanent placement of human remains.

Eligible Funeral Arrangement (EFA) Contribution limit

For purposes of determining whether an arrangement qualifies as an EFA, there is a lifetime limit on the amount of contributions (including contributions to a Cemetery Care Trust) that can be made on behalf of an individual for whom services are to be provided under the arrangement. This limit is:

  • $15,000, if the arrangement covers only funeral services for the individual;
  • $20,000, if the arrangement covers only cemetery services for the individual; or
  • $35,000, if the arrangement covers both funeral services and cemetery services for the individual.

It is critical that the above limit is never exceeded as the EFA would no longer be a qualified EFA thus losing the tax exemption. Given how the limit is determined, it is advisable that an EFA be used only for the benefit of one individual (see the example below) in the event that an excess contribution does not inadvertently put the EFA offside for all members of the entire EFA.

Eligible Funeral Arrangement (EFA) Taxation

Where an individual makes a contribution to an EFA, the contributor cannot deduct it against the contributor’s income.

Where a contribution is made by a corporation on behalf of an employee, the employer’s contributions are an employee benefit which is deductible by the employer and included in the income of the employee. And where a corporation makes contributions on behalf of a shareholder, the amount of the contribution is included in the shareholder’s income as a shareholder benefit; However, such contribution is not deductible by the corporation.

Income generated from investing the contributions within a EFA is not included in the income of the contributor while it accumulates. And the EFA itself is not subject to income tax on such income.

Payments out of the EFA to the Funeral Director for funeral or cemetery services for the named individual do not result in any amount being included in the income of:

  • The contributor to the EFA;
  • The named beneficiaries of the EFA for whom the services are performed; or
  • The estate of such individuals of the EFA.

If funds are distributed from the plan other than as payment to the Funeral Director for the provision of funeral or cemetery services for the individual – for example, because the arrangement is canceled or because not all the funds held under the arrangement are needed to pay for the funeral or cemetery services, an amount is usually required to be included in the income of the recipient, equal to the lesser of two amounts:

  • the amount actually received, and
  • an amount (calculated by a formula) which essentially represents the income that has accumulated in the EFA.

If the amount actually received is greater than the amount included in the recipient’s income, the excess represents a non-taxable refund of contributions.

Eligible Funeral Arrangement (EFA) Possible Tax Problems

Due to the Income Attribution rules of the Income Tax Act, if there is a distribution other than as payment to the Funeral Director for the provision of funeral or cemetery services, the amount of income paid to the recipient will be taxed in the hands of the contributor if the contributor is alive; otherwise, it is taxed in the hands of the recipient.

The funds held in an EFA for an individual can generally be transferred to another arrangement. That arrangement can be for the same individual without incurring any adverse income tax consequences. However, the transfer will have to be made directly from the first arrangement to the second arrangement. Adverse tax consequences can occur if there is no direct custodian-to-custodian transfer.

The Next Step

This article provided a summary of the features and benefits of an Eligible Funeral Arrangement. One must exercise care as not all EFAs are set up for the benefit of the customer. For instance, some plans provide that the Funeral Provider gets to keep the money in the EFA. Instead, they could return it to the family. Alternatively, they could contribute it to the spouse’s or other descendants of the deceased to fund their EFAs.

Steve Nyvik

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