CRA letter on clergy residence deduction and Canadian charities
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This CRA letter discusses the clergy residence deduction and “Is an Executive Director of a charitable organization eligible for a clergy residence deduction pursuant to paragraph 8(1)(c) of the Act.”
AUTHOR Srikanth, Vyjayanthi
SUBJECT Clergy Residence Deduction
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu’exact au moment émis, peut ne pas représenter la position actuelle de l’ARC.
PRINCIPAL ISSUES: Is an Executive Director of a charitable organization eligible for a clergy residence deduction pursuant to paragraph 8(1)(c) of the Act.
REASONS: Does not meet the conditions for ‘status’ test and we did not consider the ‘function’ test.
May 5, 2010
Dear XXXXXXXXXX :
Re: Clergy Residence Deduction
This is in response to your letter dated April 15, 2010, wherein you requested our comments on the clergy residence deduction provided for in paragraph 8(1)(c) of the Income Tax Act (the “Act”). Specifically, you would like our opinion on whether, as an Executive Director of XXXXXXXXXX (the “Mission”), you are eligible to claim a clergy residence deduction pursuant to paragraph 8(1)(c) of the Act.
Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled Advance Income Tax Rulings. This Information Circular and other Canada Revenue Agency (“CRA”) publications can be accessed on our website at http://www.cra-arc.gc.ca. If, however, the particular transactions are completed or partially completed, the enquiry should be addressed to the relevant Tax Services Office. Your request was not submitted as an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries which are not advance income tax rulings and we are prepared to provide you with the following comments.
Generally, to be eligible for the clergy residence deduction, an individual must be a member of the clergy, a member of a religious order, or a regular minister of a religious denomination (the status test). When one of these conditions is met, the individual must be in charge of, or ministering to, a diocese, parish or congregation, or engaged exclusively in full-time administrative service by appointment of a religious order or religious denomination (the function test).
Further, in order to qualify for the clergy residence deduction, pursuant to paragraph 8(1)(c) of the Act, the person must satisfy both the status and the function tests discussed below.
In order to qualify for the clergy residence deduction under paragraph 8(1)(c), the person must be one of the following:
* a member of the clergy;
* a member of a religious order; or
* a regular minister of a religious denomination.
Paragraph 4 of Interpretation Bulletin IT-141R, entitled Clergy Residence Deduction (Consolidated), states a “member of the clergy” is a person 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.
You have indicated in your letter that you are not currently affiliated with any specific denomination as an ordained minister. We have no further information which indicates that you are a member of the clergy. Hence, in our view, you are not considered to be a member of the clergy for the purpose of the status test.
In order to satisfy the ‘status’ test, we will now have to determine if you are a member of a religious order or a regular minister of a religious denomination, i.e., if the Mission is a religious order or a religious denomination
Judge Bowman has established in McGorman et al v The Queen (99 DTC 699 TCC), with respect to the meaning of a “religious order”, six criteria to serve as guidelines in determining whether an organization (or a collectivity of persons therein) is a religious order, and the Canada Revenue Agency (the “CRA”) has accepted these guidelines as indicated in paragraph 9 of IT-141R. These guidelines can be used to review the information provided to determine whether or not the Mission is a religious order. The six criteria are:
1. The purpose of the organization should be primarily religious.
2. The members must agree to adhere to and in fact adhere to a strict moral and spiritual regime of self-sacrifice and dedication to the goals of the organization to the detriment of their own material well being.
3. The commitment of the members should be full-time and of a long-term nature. In some cases it may be for life, but this is not essential. It is important that it not be short term, temporary or part-time.
4. The spiritual and moral discipline and regime under which the members live must be markedly stricter than that to which the lay church members are expected to adhere.
5. Admission to the order must be in accordance with strict standards of spiritual and personal suitability.
6. There should generally be a sense of communality.
The 1st Criterion - Purpose
The purpose of the organization should be primarily religious. It may have other objects within the overall context of that religious purpose such as education, the relief of poverty, or the alleviation of social ills and suffering. A religious order may have objects that go beyond preaching the gospel and prayer and meditation, and extend to works beneficial to humanity such as running hospitals or helping the poor and homeless.
Your submission describes the Mission as a non-denominational organization focussed mainly on spiritual development of youth, evangelism and short term missions. The ‘Constitution’ of the Mission states the following:
In Oligny v The Queen 96 DTC 1744, Dussault. J made the following remarks when determining whether Christian Service Brigade of Canada (“CSB”) was a religious order:
“It also appears that the purposes and principal activities of a religious order must be exclusively, or at the very least mostly, religious. When the principal purpose of an organization is education, assistance to needy persons or personal development through the conduct of sports, recreational or outdoor activities, as in the instant case, it cannot be characterized as a religious order, even if the religious or spiritual aspect of the activities is present and may be of fairly great importance.”
In Small et al v MNR 89 DTC 663 (“Small”), Goetz. J made the following comments when concluding why the Ontario Bible College and Ontario Theological Seminary (the “College”) was not considered to be a religious denomination nor a religious order for the purpose of paragraph 8(1)(c) deduction:
“...[I]n order to have a denomination you must also have some coherent ideology which binds the members of the denomination and distinguishes them from other members of the society. The appellants argue that this is found in the College’s doctrinal statement. But, even ignoring the fact that this does not seem to have been strictly enforced, the elements found in the statement are not sufficient to constitute a religious ideology. To begin with, the principles, found within the Statement are nothing more than a broad affirmation of basic Judea-Christian beliefs that are shared by most members of society (in one form or another). More importantly, while the aims of the College may be to further these principles in one manner or another, there is no element of worship to the College’s activities and they cannot be said to be united by a common faith, that is, the doctrinal statement represents only a small part of the religious beliefs of the signatories thereto.”
In our view, it appears as though the above comments made by Goetz. J in Small apply in your situation as well, and while the aim of the Mission may be to further the principles set out in the doctrinal statements in one way or the other, there is no element of worship involved. In our view, the Mission’s ‘Constitution’ and the ‘Statement of Faith’ are “not sufficient to constitute a religious ideology”. Based on your submission, the Mission’s primary purpose appears to be the uplifting of youth through their spiritual development. Hence, in our view, religion is not the primary purpose of the Mission. Accordingly, the Mission has not met the first of the six criteria set by the court.
It is CRA’s view that, to be a religious order for the purpose of paragraph 8(1)(c) of the Act, not most, but all the relevant criteria set out by the court should be met. Since the Mission has not met at least one condition, in our view, it is not considered a religious order for the purpose of paragraph 8(1)(c) of the Act. Further analysis of whether the Mission satisfies the remaining 5 criteria is, therefore, not necessary.
Finally, you have indicated in your submission that the mission is a non-denominational organization. Hence, in our view, you cannot be considered to be a regular minister of a religious denomination.
Since you have not satisfied at least one of the conditions of status test, in our view, you do not satisfy the status test.
As indicated earlier, in order to claim a clergy residence deduction pursuant to paragraph 8(1)(c) of the Act, it is necessary for an individual to satisfy both the status and function tests. As noted above, in our view, you do not satisfy the status test; therefore, you are not eligible to claim the clergy residence deduction provided for in paragraph 8(1)(c). No further analysis has been done to determine if you satisfy the function test.
We trust our comments will be of assistance to you.
R.A. Albert, CA
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
For more information on the Clergy Residence Deduction see Registered Charities Newsletter No. 23 - June 2005 which is located at http://www.cra-arc.gc.ca/E/pub/tg/charitiesnews-23/charitiesnews-23-e.html and which states as follows:
“Clergy residence deduction
Although the clergy residence deduction does not fall under the jurisdiction of the Charities Directorate, we recognize that it is of interest to many charities, and are pleased to be able to include information on the deduction. You can get more information in Interpretation Bulletin IT-141R (Consolidated), Clergy Residence Deduction.
If you have questions on the clergy residence deduction, please contact the Individual income tax enquiries area of the CRA at:
1-800-959-8281 (for service in English)
1-800-959-7383 (for service in French)
Q. 8. What is the clergy residence deduction?
A. 8. Under the provisions of paragraph 8(1)(c) of the Income Tax Act, a person who is employed, or has an office, as a member of the clergy or a religious order or as a regular minister of a religious denomination may be entitled to claim a clergy residence deduction for his or her residence, when calculating the income from that employment or office. To qualify for the deduction, the person must satisfy both a status test and a function test.
Q. 9. What is the status test for the clergy residence deduction?
A. 9. To qualify for the clergy residence deduction, the person must be one of the following:
•a member of the clergy;
•a member of a religious order; or
•a regular minister of a religious denomination.
Whether or not a person is a “member of the clergy” or a “regular minister” depends on the structure and practices of the particular church or religious denomination. A member of the clergy is a person set apart from the other members of the church or religious denomination as a spiritual leader. It is not necessary that the process of appointment be referred to as ordination or that the appointment be by someone higher up in the ecclesiastical hierarchy; it may be done by the congregation itself. Priests, pastors, ministers, rabbis, imams, or other persons who have been commended, licensed, commissioned, or otherwise formally or legitimately recognized for religious leadership within their religious organizations can be members of the clergy.
Q. 10. What is the function test for the clergy residence deduction?
A. 10. To qualify for the deduction, a person who has the required status must also be employed in a qualifying function. The person’s function must be that he or she is:
•in charge of, or ministering to, a diocese, parish, or congregation; or
•engaged exclusively in full-time administrative service by appointment of a religious order or religious denomination.
Q. 11. Can the word “appointment” in the function test be interpreted to allow a recommendation or commendation of an individual to another organization?
A. 11. No. A recommendation or commendation of a person for administrative responsibilities with another organization does not constitute appointment by the order or denomination that makes the recommendation or commendation. Furthermore, for an appointment, it should either be to a position within the same entity or with an entity that is controlled by and that is an integral part of the religious order or denomination. See paragraph 20 of Interpretation Bulletin IT-141R (Consolidated), Clergy Residence Deduction.
Q. 12. Does an employee who is appointed by a religious order or a religious denomination to work as a full-time administrator in a bible college qualify for the clergy residence deduction if he or she has additional teaching duties?
A. 12. Yes. This can be considered full-time administrative service under the function test. Therefore, if the employee meets the status test and his or her full-time qualifying function requires at least 35 hours, the employee would qualify for the clergy residence deduction, even if he or she had additional responsibilities for teaching. A part-time administrator in an otherwise similar position does not qualify. A full-time professor or teacher would likewise not qualify.
Q. 13. Is a person who is not a member of the clergy but works with the youth of our congregation eligible for the deduction?
A. 13. No, if such a person is also not a regular minister
of a religious denomination, he or she is not eligible
(see paragraph 5 of IT-141R (Consolidated)).
Q. 14. Is a minister who is no longer required to be in full active service entitled to the clergy residence deduction?
A. 14. Yes. Part-time employment qualifies for the clergy residence deduction in this case. The minister would be entitled to the deduction on the employment income that meets the function test. This is in contrast to administrative functions, which must be full-time to qualify.
Q. 15. Can a clergyperson of a foreign church that has no status in Canada within its religious denomination claim the clergy housing deduction?
A. 15. No. To claim the deduction, the clergyperson must have authority and be recognized as a minister under his or her own denomination.
Q. 16. What is Form T1223?
A. 16. Form T1223, Clergy Residence Deduction, is the form required to claim the clergy residence deduction. Form T1223 has to be completed by both the individual claiming the deduction and the employer representative to certify that the status and function tests are met for a particular year.
Q. 17. What is Form T1213?
A. 17. Form T1213, Request to reduce tax deductions at source, is the form an individual can use to request that an employer deduct less tax at source.
Q. 18. Are members of the clergy who qualify for the clergy residence deduction and who request a reduction of the income tax deducted at source, required to file a T1213 with the CRA or can this amount simply be reduced by the treasurer?
A. 18. There has been some confusion concerning the filing of a T1213 so we will answer this based on two distinct scenarios. In both scenarios, the employee must inform the employer, in writing, of the employee’s intent to claim the clergy residence deduction (this could include Form T1223).
Scenario 1) When the clergy member lives in their own house or rents a property and claims a clergy residence deduction based on the fair market value of the house or the rent paid, respectively, they will need to file a T1213 with the local tax service office. When the T1213 is approved, the employer will reduce the employee’s taxable income by the amount of the clergy residence deduction and withhold income tax at source on the difference. See A.19 scenario 1 for CPP information.
Scenario 2) When the clergy member lives in employer provided accommodations and claims the clergy residence deduction, the deduction will generally be offset by the income inclusion relating to the taxable benefit of employer provided accommodations. In this scenario, there is no change in income for withholding tax purposes, and a T1213 is not required to be filed. When determining the amount of income subject to withholding tax, the employer should include the taxable benefit relating to employer provided accommodations in the employee’s income. The employee’s taxable income should then be reduced by the clergy residence deduction which the employee will be claiming. See A. 19 scenario 2 for CPP information.
Q. 19. How does this affect Canada Pension Plan (CPP) amounts?
A. 19. Scenarios 1) and 2) from A.18 will be discussed separately.
Scenario 1) When calculating pensionable earnings and the amount of CPP to withhold, the employer should reduce the employee’s earnings by the amount of the clergy residence deduction and withhold CPP contributions on the net amount. In this situation, the amount of pensionable earnings to be reported in box 26 (pensionable earnings) of the employee’s T4 slip is the result when the earnings in Box 14 are reduced by the clergy residence deduction. Such employees must inform their employer, in writing, of their intent to claim the clergy residence deduction (this could include Form T1223). If the employee also wants a reduction of income tax at source, as noted above, they must request a waiver by completing and filing Form T1213 with the local tax service office.
Scenario 2) When calculating pensionable earnings, the clergy residence deduction will generally be offset by the income inclusion relating to the taxable benefit of employer provided accommodations. As the deduction and income inclusion generally net out, there are no changes required to the clergy member’s income for the purpose of withholding CPP at source. In this situation, although box 14 (employment income) of the employee’s T4 slip will include the amount of the housing benefit, due to the offset noted above, the amount of the benefit will not be included in box 26 (pensionable earnings) of the T4 slip. Such employees must inform their employer, in writing, of their intent to claim the clergy residence deduction (this could include Form T1223). However, as noted above, they need not file a T1213.
For more information about eligibility for the clergy residence deduction, please see Interpretation Bulletin IT-141R (Consolidated), Clergy Residence Deduction, available at: http://www.cra.gc.ca/E/pub/tp/it141r-consolid/it141r-consolid-e.html
To get more information on the Canada Pension Plan, call your nearest tax services office. The telephone numbers and addresses are listed in the government section of your phone book and on the CRA Web site at: http://www.cra.gc.ca/tso
Q. 20. What is the role of employers in ensuring that the amount deducted for CPP is correct?
A. 20. Employers that are charities have the same responsibility as all employers for ensuring that CPP is correctly deducted. If an employee is seeking a reduction in CPP through Form T1223, the employer is responsible for completing Part B of the form and signing it to make sure the employee has met the required conditions.
For more information about employers’ obligations for withholding CPP, please see Chapter 2 of guide T4001, Employers’ Guide Payroll Deductions – Basic Information, available at: http://www.cra.gc.ca/E/pub/tg/t4001/t4001-03-e.html#P400_34608 “