I have finally got our treasurer/bookeeper to understand what the real situation is in Canada as well. According to Revenue Canada, there is no category called "housing allowance" that is set by the church. There is a tax break called "clergy residence deduction" which is entirely dependant on what sort of housing you live in and the limits of 1/3 of your income. So my church pays me a salary not a salary + housing allowance. From that salary I secure a place to live, in my case, owning my own home. I think the use of the term "housing allowance" is misleading for a congregation and still has people thinking that the church gives the pastor "free housing" alongside a full salary, which is never the case.
Our full time Youth Pastor also claims the clergy residence deduction but the congregation never used the term housing allowance for him. That just highlights the need to remove that term from our parlance. If you live in a parsonage, and you are not charged rent for it, your salary has been reduced by that factor, so in fact you do pay rent by having salary withheld. I believe it is healthier for a congregation with their pastor in a parsonage to pay a full salary and then have the pastor pay rent to them. That clarifies the status of that housing (and the responsibilities of both the landlord and tennant).
So what my pay stub has is a salary and then a designated portion that is "tax exempt" so that the bookeeper does not take off that tax and then I wait until tax return time to get it all back. Technically, to do this the employer has to ask Revenue Canada permission to do so, but given its longevitiy in our society, it is passively premitted so long as the amount is reasonable. Worse case scenario for the church is that they receive a penaltly from Revenue Canada for improper bookeeping practices or something like that (I discussed this with Revenue Canada and that is what they told me).
So I say, pay your pastor a full salary, and let them pay for their housing like every other employed homeowner in the congregation. If they choose to rent the parsonage, fine. What is claimed as clergy residence deduction is not relevant to the church, but to the clergy. It is based on the actual living situation, not on what the church says that situation is.
Realtors, property managers, rental ads should be used to find the market rental value of any home you own to determine what you can claim no matter what the church says about housing allowance. I would like our form letters of call also changed to correct for this misleading terminology.
Feel free to correct me here if I am out to lunch :)
Colin
Thanks to Terry and Shari for posting this. Everything Terry writes is accurate, but I believe it's important to make a few comments about details in filing for the clergy housing allowance in Canada.
I have been taking advantage of this "Constantinian" allowance since entering parish ministry in Canada in 1986. During our stays in our first two churches we lived in parsonages and thus were granted "free living." Since buying a house in St. Catharines where we have lived and worked for the last 8 1/2 years, filing for the allowance has become a bit different. My church treasurer every year indicates what the allowance should be, as determined by the finanance committee. This is not, in my case at least, even a third of my cash compensation. Rather, it is determined in conjunction with real estate values (for "fair rental market value") and rough estimates of utility costs (heating fuel, water & sewer, hydro [aka "electricity" in the US]).
When, however, I come to filing my taxes, I do my own using a computer tax program. (I probably shouldn't advertize, but it rhymes with "quick fax" or, more recently, "burpo slax.") I follow the detailed "step-by-step" option the program offers at start-up--though I can always go to the forms themselves. So far, though, this step-by-step option has proved relatively simple and accurate, since it asks questions that direct the user to opening and filling in the proper forms for his/her situation. Thus there is always a question: "Are you clergy?" to which I answer "yes." Then the program asks for costs for all of those exempt items: fair rental value (for which I ask a local realtor friend to give me a letter with an annual range estimate) and utility costs. I calculate all those and enter them on the indicated form, which then factors that into the rest of the tax return.
As I said above, so far this amount has not amounted to either 1/3 of my paid compensation or even the somewhat lower amount determined by our finance committee. (Ironically, after we put a new furnace, windows, doors, insulated and renovated the basement family room, our heating costs dropped by about 38%. So, we ended up spending money to save money! But the house is much more efficient and comfortable after those renovations.) One year I was asked by the tax department to prove the costs, which was simple to do, because I had kept all utility bills and then sent copies to the tax people.
My main point in this is to caution clergy merely not to estimate, but to report actual costs and to keep records accordingly. I always love April, b/c we get a good whopping bit of cash back from tax contributions through the year--even though the gov't used it for all that time. But it sure beats living in other places I've worked and lived!