A Canadian Tax Lawyer’s Perspective on the Clergy Residence Deduction

Housing for the Clergy

Members of the clergy can leverage their housing to reduce their taxes by claiming the Clergy Residence Deduction pursuant to paragraph 8(1)(c) of the Income Tax Act. Housing allowances, rent-free or below-market rent housing received by virtue of a clergy member’s employment with a religious denomination are considered taxable benefits and increase the amount of tax owed by the taxpayer. The Clergy Residence Deduction offsets these taxable benefits, potentially completely annulling any addition to the clergy member’s taxation owing by virtue of receiving a housing benefit from his or her employer. Members of the clergy who do not receive housing benefits from their employer can still use the Clergy Residence Deduction to offset their income and reduce their taxes. However, not all members of the clergy can claim the Clergy Residence Deduction. The Clergy Residence Deduction is subject to limitations which will be discussed in greater detail below.

Amount of the Clergy Residence Deduction

The Clergy Residence Deduction cannot exceed the remuneration the clergy member receives. The amount of the deduction is dependent on the housing arrangement of the clergy member claiming the Clergy Residence Deduction and whether the taxpayer claims a taxable benefit with respect to the housing.

If the clergy member rents the housing, or the clergy member or his and her spouse/common-law partner owns the property, the Clergy Residence Deduction is calculated pursuant to a formula found in subparagraph 8(1)(c)(iv) of the Income Tax Act. The Clergy Residence Deduction will equal rent and utilities paid, or the fair rental value including utilities not exceeding the lesser of the following:

• The greater of $1,000 multiplied by the number of months (to a maximum of ten) in the year, during which the taxpayer is a person qualifying for the Clergy Residence Deduction and one-third of the taxpayer’s remuneration for the year from the office or employment
• The amount by which rent or fair rental value exceeds the total of all amounts deducted, in connection with the same accommodation or residence, in computing the clergy member’s income for the year from an office or employment or from a business (e.g. an office at home expense)

If the clergy member receives rent-free housing, rent-reduced housing or a housing allowance from his or her employer, the Clergy Residence Deduction is calculated under subparagraph 8(1)(c)(iii) of the Income Tax Act. The Clergy Residence Deduction will be equal to the taxable benefit under section 6 of the Income Tax Act. For clergy members who receive rent-free accommodations, for instance, this amount will be the fair rental value of the property plus utilities.

Status Test to claim the Clergy Residence Deduction

A taxpayer must be “a member of the clergy or of a religious order or a regular minister of a religious denomination” to claim the Clergy Residence Deduction. This is called the status test. The Canada Revenue Agency’s Interpretation Bulletin IT-141R, which has been archived, defines a member of the clergy as someone who is “set apart from the other members of the church or religious denomination as a spiritual leader. Priests, pastors, ministers, rabbis, imams, commended workers and other persons who have been commended, licensed, commissioned or otherwise formally or legitimately recognized for religious leadership within their religious organization may be members of the clergy.” The courts have developed tests for determining whether the taxpayer’s employer is a religious order, such as the six criteria in McGorman et al v The Queen 99 DTC 699 TCC. These criteria include the purpose of the organization, the commitment of the members and the standards for admission.

Function Test to claim the Clergy Residence Deduction

The Function Test requires the member of the clergy to be:

• in charge of a diocese, parish or congregation,
• ministering to a diocese, parish or congregation, or
• engaged exclusively in full-time administrative service by appointment of a religious order or religious denomination.

in order to claim the Clergy Residence Deduction. This test has been the subject of much interpretation by the courts. The courts have found, for instance, that students learning religious studies is not considered a congregation. Ministering, according to the court in Alemu et al v The Queen, 99 DTC 714, can encompass a wide variety of tasks, including “included daily devotionals, spiritual counselling and prayer, organizing and leading worship services at staff meetings and retreats. […] preaching, counselling and participating in Sunday worship services”. The Function Test must also account for the religious practices of the clergy member’s denomination. In Austin v. The Queen, 1999 CanLII 453, for instance, Justice Bowman found a minister of music for a Pentecostal church complied with the Function Test because music is a part of ministering in the Pentecostal faith.

Tax Tips: Know If You Qualify For The Clergy Residence Deduction Before You Claim It

The Status and Function Tests for claiming the Clergy Residence Deduction are not bright line tests. Whether a particular member of the clergy can claim the deduction will vary depending on his or her role, and the religious denomination to which he or she belongs. Nonetheless, the Clergy Residence Deduction is an important tool for qualifying taxpayers to reduce their taxes payable which they should take advantage of. A consultation with our experienced Canadian tax lawyers to determine whether you can claim the Clergy Residence Deduction can prevent a costly fight with Canada Revenue Agency over a denied deduction.