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The unexpected tax incentive Canadians don't necessarily want to think about

Funeral in church.
Funeral in church.

There’s a tax incentive that some Canadians are dying to get.

Income earned on contributions made to an “Eligible Funeral Arrangement” is allowed to grow tax-free under Canada’s Income Tax Act.

“I find that many people do not know of the financial advantages or prepaid funeral plans,” says funeral pre-planner and licensed funeral director Katherine Downey of Legacy Matters. “EFA funds earn two percent tax-exempt interest. This rate of return is better than the current rates on saving accounts and GICs. A woman I worked with had money in her savings account to pay for her eventual funeral arrangements earning 0.5 percent interest. When she learned that her money could be earning two percent in an EFA, she arranged to set up her prepaid funeral and use the money from her savings account to fund her EFA.”

Up to $15,000 can be put into an EFA for the sole purpose of prefunding a funeral only, according to according to Lycos Asset Management financial planner Steve Nyvik. That limit goes to $20,000 if the arrangement covers only cemetery services and $35,000 if the arrangement covers both funeral services and cemetery services for the individual.

Prepaid funeral funds in an EFA are insured to $100,000 in the purchaser’s name, Downey says.

People living in Ontario have other financial advantages to planning and paying for their funeral long before they kick the bucket. That province’s Funeral, Burial and Cremation Services Act mandates that funeral homes in Ontario must guarantee the future cost of a fully prepaid EFA.

“Specifically, once a funeral home has received payment in full for the qualifying person’s selected funeral services and merchandise, they are committed to providing those services and merchandise at the time of need in the amount on the current pricelist,” Downey says. “The funeral home cannot levy additional charges to account for inflation.

“The sooner an individual sets up an EFA, the sooner they lock in and guarantee the future cost of their funeral arrangements,” she adds. “Additionally, it is usually easier for people to fund their EFA with earned income rather than retirement income.

If the funds in the EFA exceed the actual funeral cost, the residual funds must be returned to the estate of the deceased. However, contribution limit must never be exceeded, or else the funds would no longer be a qualified EFA thus losing the tax exemption, Nyvik writes.

An EFA can be set up through a licensed funeral home via a licensed funeral director.

Eligible funeral expenses include:

- 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, such as transfer from outside the country to within Canada where the funeral ceremony is to be held

Eligible cemetery services include things like interment vaults, markers, flowers, liners, urns, shrubs, and wreaths.

“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,” Nyvik writes. “Your money grows faster when it grows tax deferred.  Not only can you get tax deferred growth--where you aren’t paying taxes on interest, dividends and realized gains while in the plan--but 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.”

Another advantage of planning and paying for a funeral in advance is that it’s easier for grieving loved ones to deal with once you’re gone.

Some caveats: be sure that the fund is being set up through a licensed funeral director and double-check that the funds are insured. Ask if you can transfer the prepaid arrangement anywhere in Canada if you end up moving.

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