Clergy Residence Information

The Canada Customs and Revenue Agency (CCRA) has recently issued a consolidation of their first bulletin IT-141R, dated May 4, 2000 and subsequent amendments regarding the Clergy Housing Allowance. Pastors and Church Treasurers are encouraged to consult the government web-site www.ccra.gc.ca to obtain a copy of this bulletin, IT-141R (consolidated), for their information.

The Clergy Residence Deduction form, T1223, which will be required to be filed with the pastor's tax return, is not yet available on the government web-site but should be available by the end of February.

A printable version of the T1223 form in Acrobat Reader format is available.

CCCC has prepared a “Guide for Completing Form T1223 E”. It is now on their website in PDF file format. Click http://www.cccc.org/release/document103.htm and this link will take you directly to the Guide.

Clergy Residence Deduction Changes
Alert from CCCC
as of June 14, 2001

Bill C-22 Receives Royal Assent

The legislation to implement the clergy residence deduction provisions announced last Winter were passed into law on June 14, 2001. Members of the clergy, regular ministers and members of religious orders, who also meet the function tests described in the Canada Customs and Revenue Agency Interpretation Bulletin IT-141R, may now claim a maximum deduction equal to the fair rental value of the home occupied PLUS the cost of utilities. Assuming a full year of employment the deduction is as follows:

1. For eligible individuals whose gross remuneration from the qualifying employer, including all taxable allowances, is $30,000 or less per annum, the claim is the lesser of (a) $10,000 and (b) the total of the fair rental value PLUS the cost of utilities.
2. For eligible individuals whose gross remuneration from the qualifying employer, including all taxable allowances, is greater than $30,000 per annum, the claim is the lesser of

(a) the fair rental value PLUS the cost of utilities, and
(b) one-third of gross remuneration.

The new law is effective from January 1, 2001. As announced earlier, a prescribed form is to be provided by the employer. CCCC will send information about the form as soon as it becomes available from CCRA. It is expected that it will be made available in late fall. It is not required until the tax filing for 2001 in the Spring of 2002.

On December 21, 2000, the Honourable Paul Martin released legislative proposals to amend the Income Tax Act. These amendments include the proposed changes to the treatment of the clergy residence deduction which we previously circulated. Following is a copy of information which has been circulated to all church treasurers with regard to these amendments.

As you may be aware, changes were proposed last year regarding the treatment of the clergy residence deduction or what we refer to as housing allowance. On December 21st, the Honourable Paul Martin released legislative proposals to amend the Income Tax Act. This proposed legislation is subject to further amendments but since, if it passes, it will be retroactive to January 1st, 2001 and since it could have serious implications for some of our pastors, I wanted to advise you now.

Church provides parsonage

Where the housing is provided by the employer to a qualified employee, all amounts that are included in the employee’s income in respect of the housing provided may be deducted by the qualified employee.

There are two significant changes in this case, from the current situation:

1. the pastor will need to obtain a certificate each year from the church in order to claim the deduction, and
2. the pastor will be able to claim the benefit of utilities and furnishings provided by the church to the extent that they are included in income.

Pastor provides own accommodation

Where housing is not provided, the qualified employee is entitled to claim the fair rental value of the principal residence or accommodation occupied, up to an amount not to exceed the employee’s remuneration for the year from qualifying sources. The claim is not to exceed the greater of $1,000 multiplied by the number of months (to a maximum of 10) in the year and one-third of the employee’s gross remuneration for the year from qualifying employment (i.e. employment earnings as reported in Box 14 of the T4).

There are two significant changes in this case, from the current situation:

1. the pastor will need to obtain a certificate each year from the church in order to claim the deduction, and
2.  the limitation of 1/3 of total remuneration could adversely affect some of our pastors. Your church may need to realign the breakdown between basic salary and housing allowance in order to accommodate this limitation. The limitation is also likely to have adverse affects on the pastor’s tax position as well as the church’s CPP contributions.

Employer certification

Effective for 2001 and subsequent years, the employer will be required to certify, on a prescribed form, that the employee meets the "status" and "function" tests in respect of the employed activities to claim the deduction.

Status refers to the requirement that the employee is a member of the clergy or a religious order or a regular minister of a religious denomination.

Function refers to the requirement that the employee is:

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

Forms are not available at this time but presumably will be available prior to February 2002 should the legislation pass.

You are strongly encouraged to meet with your pastor to discuss the ramifications of these changes. A letter of explanation will be sent to all pastors in the Convention mailing due out January 22nd. You may want to make the necessary adjustments now in anticipation of the legislation changes or you may want to delay making any adjustments until the legislation is passed. The decision is between you and your pastor.

Should you have specific questions, I encourage you to contact me but please not until after year end is over!! If you’d like to write or e-mail your questions, I’ll compile a list of frequently asked questions and provide answers (if possible) in early February.

There are a few questions that I have already asked to which there is not yet an answer:

Is the amount to be claimed as clergy residence deduction now pensionable for CPP purposes?

Can exemption from withholding income tax at source still be provided if a letter from the employee indicates the fair rental value that will be claimed?

Are utilities to be included in the fair rental value?

How will a chaplain who is on contract with a hospital, but is not considered an employee, obtain a certificate?

Examples of particular situations have been provided by the Canadian Council of Christian Charities (CCCC). As you review the information contained in this notice and find that your situation is somewhat unique, you are encouraged to forward the details of your situation to the Convention Treasurer (in writing) for follow-up with CCCC.

Situation 1:
There are two individuals in one household and both are certified by their respective employers to claim the deduction for the full year. May the deduction be claimed by both employees?

Yes, provided that the total deduction claimed does not exceed one-third of the gross income of both individuals, and further provided that the combined claim does not exceed the fair rental value. One of the individuals would first claim the deduction and, if any amount remained, the other individual could claim the rest.

Situation 2:
A youth pastor is hired by a church on March 1. The total remuneration paid to the youth pastor for the remainder of the year is $25,000 and the rent for the residence occupied is $1,100 per month. How much may the youth pastor deduct from income in respect of the clergy residence?

The youth pastor would be able to claim $10,000 because the period of employment in the year was ten months and the rent paid exceeded that amount.

Situation 3:
The church appoints a new pastor who takes office in October. The pastor left the previous church in April. The pastor’s gross income from the new employer is $4,000 per month, the same amount as in the former church. During the period between April and October, the pastor worked for three months for a Christian organization that is not (recognized as) a religious order (by CCRA) and earned $4,000 per month from that employment. The pastor owns the home occupied throughout the year. How much may the pastor claim as clergy residence deduction?

The total income of the pastor for the year is $40,000. However, the months of qualifying employment are from January through April and from October through December, a total of seven months. Therefore, the pastor will be able to claim $9,333.33, one third of the income earned from qualifying employment (the greater of one-third of qualifying income or $1,000 per month of qualified employment, i.e. $9,333.33 or $7,000).

Situation 4:
The youth pastor’s spouse earns self-employed business income and, as a result of using a portion of the home, claims all expenses in relation to 10% of home occupancy. The home is rented and the rental cost is $1,000 per month. The youth pastor is employed by the church throughout the year and earns $25,000 from qualifying employment. How much may the youth pastor deduct from income in respect of the clergy residence?

One-third of qualified income would be less than the minimum $10,000. However, since the youth pastor’s spouse claimed 10% of home expenses, the youth pastor may only claim the $10,000 or 90% of fair rental value, whichever is less.

Situation 5:
A member of a religious order or a pastor engaged in qualifying employment changes employment to other qualified employment during the year. Must the employee obtain a certificate from both employers to be able to claim the clergy residence deduction for the full year?

Yes. Each certificate is valid only in respect of the "status" and "function" test for one employer.

Situation 6:
A church in Toronto pays its youth pastor $30,000. The youth pastor pays rent of $1,200 per month. Because of the new limitation of the greater of $10,000 or one-third of gross income, the youth pastor is not able to claim the full $14,400 rent paid as a deduction. What can be done to make the full rental amount deductible?

If the church rents the home and provides it to the youth pastor, then the church would pay the youth pastor $15,600 in cash and add the housing benefit of $14,400 to the income reported in box 14 of the T4. In this situation, the youth pastor would be able to claim the full $14,400 as clergy residence deduction. The reason for this more beneficial treatment is because the church is providing the residence to the youth pastor.

For further information contact: Miranda Queh, Director of Administration and Treasurer

100 - 304 The East Mall
Etobicoke, ON M9B 6E2
Tel: (416) 620-2940, Fax: (416) 622-2308
E-mail: mqueh@baptist.ca