Pastors, Church Admin & Finance
Clergy Housing, Tax Free - Canada
December 6, 2011
Updated March 14, 2017
9 comments 3335 views
Much has been written about the clergy residence deduction (CRD) which is available to clergy and other eligible individuals in Canada. To be eligible, an individual must meet both a status test and a function test. The status test in the Christian Reformed Church (CRC) context is normally met where an individual is ordained for service. The function test requires the individual to be in charge of or ministering to a congregation (loosely defined) or to be engaged exclusively in full-time administrative service.
In cases where the employer provides the housing, i.e. parsonage, the amount of the CRD is generally considered to be the annual rental value of housing supplied and utilities paid. This amount is also considered to be a taxable benefit and added to income, so they effectively offset each other. If housing is not supplied, the CRD amount is simply the rental value plus utility costs of the clergy’s owned/rented house.
The CRD is generally limited to one third of the income from qualifying employment. The form T1223E is required to be filed annually in order to claim the CRD.
The Canada Revenue Agency (CRA) interpretation bulletin IT-141R provides all of the details on the CRD. In addition, CRA also issues technical interpretations on occasion which provide further clarity and guidance for employers and taxpayers.
Another valuable source for information on clergy employment and church administration is the Charities Handbook, available through the Canadian Council of Christian Charities (www.cccc.org). I highly recommend it.
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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!
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 :)
The "Letter of Call" refers to "the use of the parsonage (or a housing allowance of $_____ annually)." Some churches pay a cash salary and cash compensation for housing. My understanding is that this statement on the Letter of Call refers only to these instances. It is not intended to be used for entering housing allowance or the clergy residence deduction for tax purposes.
Thanks Pastor Jim and Pastor Colin for sharing your experience!
Colin, you are correct that "housing allowance" is not really relevant in Canada in terms of employment, tax, and the Clergy Residence Deduction. However, the concept lives on and it is still very much a part of the CRC vernacular. The formal Letter of Call used by the CRC throughout North America references "housing allowance" to the extent that it is relevant in the USA and may be considered by Canadian churches in how the total compensation (salary) is determined. Similarly, the term and concept is also found in the annual Ministers' Compensation Survey. Doing so provides some bases for comparison between classes and regions and even between churches within a Classis.
It is clear though that "housing allowance" and the Clergy Residence Deduction are not one and the same and are not simply interchangeable.
Regarding the reduction of income tax in consideration of the Clergy Residence Deduction, the onus is rightly on the employee, as the taxpayer. CRA requires the submission of a Request to Reduce Tax Deductions At Source (see link below), by which an eligible person would request recognition of the CRD and possibly, other recurring and substantiated deductions ie charitable donations. If successful, CRA will issue an approval to be provided to the employer which permits the employer to effectively reduce the amount of tax deducted at source. This avoids the "worst case scenario" of penalties, etc as mentioned by Colin.
Colin, I don't think this means that you're out to lunch, although if you're ever in Ontario or would consider a call to the East, lunch is on me.
Geepers, Terry, you've never invited ME for lunch and I live real close, slightly east of you.
1) We have received information from CRA that the value of the housing allowance is also to be included in calculating EI premiums. This is especially so for Youth pastors who may be part time and get a partial housing allowance and their salary alone is below the EI cut off.
2) We use a payroll service and have asked them to include all allowances ((study, car, hospitality etc.) as tax free. We leave it up to the Pastors to keep receipts for those expenses related to these items to at least the amount they receive. If they have more receipts they can claim the excess only. We have been challanged on this procedure by the payroll service. They also said these amounts must be included in the EI premium calculation
3) One commenter noted we should simply pay a Pastor a total wage and let him/her be responsible for filing the taxes. I like this approach but living in the greater Vancouver area I suspect we would have trouble determinening what this wage should be if no house is being provided. Maybe we should add that as a seperate discussion.
3) When I read all the comments it appears churches may want to have some consistent advice and what we should do in regard to the allowance situation for Pastors.
Found this thread while searching for this info.
The status test in the Christian Reformed Church (CRC) context is normally met where an individual is ordained for service. The function test requires the individual to be in charge of or ministering to a congregation (loosely defined) or to be engaged exclusively in full-time administrative service.
I serve in a non-ordained leadership role in a CRC. The function of the role is quite similar (in some cases identical) to what an 'executive pastor' might do. (staff supervision, oversight of ministry goals, etc.).
Does this mean I could qualify for a housing exemption?
If the answer is yes, then (to push things a bit), can our 'administrative assistant' also apply?
To be eligible for the CRD, an individual must meet BOTH the status and function test.
In the context of the CRC, status is generally met if the individual is ordained; minister, elder, deacon.
The function test is fairly clear in the context of serving as a pastor or ministry leader who is ordained or commissioned for service. Engaged exclusively in full-time administrative service may be a bit more ambiguous in the context of a local congregation but the example you give of an Executive Pastor could apply, assuming it is an exclusive, full-time position.
Administrative assistants would normally not be eligible under the terms of both the status and function test.
I wonder if we can move this discussion to the impact of how the CRC Pension Fund deals with the issue of salary.
Colin in fact raises the question by having "only" a salary. I understand the pension arrangement for CRC pastors are based on average salaries. I wonder how these are reported. In the case of Colin his salary would include the housing allowance, whereas if they used our Pastor's salary the housing allowance would not be included.
On balance I have for a long time advocated for an "only" salary position and letting the Pastor do his or her own taxes. I was even in favor of the church paying for professional advice.
Of course the impact of this on the Pension Fund is not insignificant. Average salaries would rise if all Pastors in the plan went on a salary "only" basis.
This could also have an impact on those Pastors who have a full time job at the CRCNA HO in Burlington (in Canada's case). The salaries on that position are on a fixed grid which is generally significantly higher than that of a Pastor at a local congregation.
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