In this letter, CRA discusses whether a religious organization qualified as a religious organization for the purpose of paragraph 8(1)(c) deduction under the Income Tax Act (Canada).  In this case the organization “failed to satisfy all six conditions set out by Judge Bowman in McGorman et al v The Queen, 99 DTC 699, in determining if an organization is a “religious order”.”

LANGIND E
DOCNUM 2009-0339731I7
AUTHOR Srikanth, Vyjayanthi
DESCKEY 26
RATEKEY 2
REFDATE 100226
SUBJECT Clergy residence deduction
SECTION 8(1)(c)
SECTION
SECTION
SECTION
$$$$
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 XXXXXXXXXX a religious organization for the purpose of paragraph 8(1)(c) deduction
POSITION: No.
REASONS: It does not meet all the six conditions in determining whether an organization is a religious order
February 26, 2010
Office Audit Section V. Srikanth
St. John’s Tax Centre Income Tax Rulings Directorate
St. John’s NL A1B 3Z1
2009-033973
Attention:  Debbie Thorne

Clergy Residence Deduction
We are writing in response to your letter dated September 2, 2009, wherein you requested that we reconsider our views expressed in our document 2009-030576, in response to the additional information provided by the taxpayer (the “Taxpayer”) via his letter dated August 13, 2009 (the “Letter”).
In document 2009-030576, dated March 19, 2009, we had indicated that it was our view that the XXXXXXXXXX is not a “religious order” for purposes of the deduction provided in paragraph 8(1)(c) of the Income Tax Act (the “Act”), as it failed to satisfy all six conditions set out by Judge Bowman in McGorman et al v The Queen, 99 DTC 699, in determining if an organization is a “religious order”. Specifically, in our view, XXXXXXXXXX did not satisfy the following four of the six criteria:
* 2nd Criterion – Strict Moral and Spiritual Regime,
* 3rd Criterion – Full-time and Long-term Service,
* 4th Criterion – Spiritual and Moral Discipline, and
* 5th Criterion – Strict Standards of Spiritual and Personal Suitability.
The following are our comments with respect to the additional information provided by the Taxpayer in support of XXXXXXXXXX satisfying the remaining four criteria.
Criterion # 2: Strict Moral and Spiritual Regime:
The members must agree 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.
Our comments in 2009-030576:
“…We are, however, not given any evidence indicating that the personnel earn less than others who perform similar work in an organization of similar size in the public or private sector.  Furthermore, we do not know if XXXXXXXXXX places any limitations on the earning of outside income.”
In response, the Taxpayer has provided us with a comparative statement of the salary range of the employees working in XXXXXXXXXX and those of members of the XXXXXXXXXX . According to the Taxpayer, the salary level of the officers in XXXXXXXXXX is “well below salary levels for similar positions of peer organizations”.
As an example, the Letter states that for the years XXXXXXXXXX , the Executive Director of XXXXXXXXXX is in the salary range of $XXXXXXXXXX . In comparison, the salaries of officers in other similar organization, averages between $XXXXXXXXXX . Further, the Letter states that their situation is comparable to the one discussed in Alemu et al v The Queen (“Alemu”), 99 DTC 714.
It may be noted that in Alemu, Judge Bowman, when analyzing the salary paid to the employees of the Christian Horizons made the following remarks:
“…One difference is the structured pay scale for the employees of Christian Horizons. Their remuneration, particularly in the case of the senior administrators, is appreciably less than that paid to senior employees of non-religious institutions taking care of mentally handicapped persons. In the case of religious orders such as CBOMB and SIM no such differentiation in salary levels exists. The employees are, regardless of qualification, responsibility or seniority, paid only enough to satisfy their basic needs.”
Further, in Koop et al v The Queen, 99 DTC 707, Bowman J. made the following comments when comparing the Navigators with other organizations like Youth For Christ, Christian Horizons, etc and reasons for dismissing Navigators as not being a religious order:
“Their devotion, their acceptance of straitened material circumstances as a way of life, their humility, and their selfless dedication to the social and spiritual goals of their order exemplify the highest standards of a Christian religious order. The difficulty with The Navigators is to determine whether the members of that organization exemplify the same qualities.
…The Navigators have no restriction on what outside activities they can engage in, or what other sources of income besides fundraising for themselves may be developed by them… Although they meet some of the criteria set out above in which I endeavored to enumerate the qualities that were characteristic of a religious order, it cannot be said that they meet them all. Unlike the members of the other organizations, the members of The Navigators earn comfortable incomes, can set their own level of targeted income, devote a significant part of their time to raising funds for their own support, and are free to earn income from other sources. This is a significant distinction. It is not merely a difference in degree. It is a fundamental and qualitative difference.”
As can be seen, the salary range of the officers in XXXXXXXXXX may be relatively less than some of the officers holding similar positions in a peer organization, however, it does not necessarily mean that the members of XXXXXXXXXX are not earning comfortable incomes, i.e., the amount cannot be considered to be “only enough to satisfy their basic needs”, nor are there any limitations on the earning of outside income.
Accordingly, in our view, the additional information does not provide any evidence that the second condition has been fulfilled.
Criterion # 3 – Full time and Long-term Service
The commitment of the members should be full-time and of a long-term nature. It is not essential that the commitment be for life but it is important that it not be short-term, temporary or part-time.
Our comments in 2009-030576:
“While the submission gives details of the specific duties and responsibilities of the members of various committees, we were not given any evidence indicating that the personnel in the organization dedicate their working time exclusively, and on a long-term basis, to the pursuit of the objectives of the organization.
Hence we are unable to comment if this criteria has been met by XXXXXXXXXX .”
In his Letter, the Taxpayer explained that one of the employees (the “Employee”) of XXXXXXXXXX who wishes to claim the clergy residence deduction, has a XXXXXXXXXX -year employment history working for XXXXXXXXXX on a full-time basis, of which XXXXXXXXXX years has been in an administrative capacity and in pursuit of the objectives of XXXXXXXXXX . The Officer was initially the Administrator and later became the Executive Director of the XXXXXXXXXX .
While it is reasonable to conclude that the Employee’s contribution is on a long-term basis, the Letter does not provide any information indicating that all the members of the organization are expected to commit to a long-term relationship with the organization.
Hence, based on the additional information, we cannot determine if this criterion has been satisfied.
The 4th Criterion – Spiritual and Moral Discipline
The spiritual and moral discipline and regime, under which the members live, must be markedly stricter than that to which the lay members of the church are expected to adhere.
Our comments in 2009-030576:
“In our view, subscribing to a statement of faith is not, in and of itself, indicative of living under a markedly stricter spiritual and moral discipline, than that which the lay members of the organization are expected to adhere.
… Furthermore, there is no indication that XXXXXXXXXX members are required to commit to any vows of chastity, to abandon a secular lifestyle or otherwise commit to life as members of a religious order. The XXXXXXXXXX does not indicate if the members of the organization are required to live a markedly stricter life than that to which the lay members of the church are expected to adhere. We are, therefore, of the view that this criterion is not met.”
In response, the Taxpayer states in his Letter that membership into XXXXXXXXXX requires one to be baptized by immersion upon confession of faith. Prior to baptism, a baptismal candidate must attend baptism classes, conducted by the pastor of the church. At the time of baptism, candidates must present publically to other members their personal testimony of conversion and take a vow and enter into “XXXXXXXXXX “. Furthermore, confession and baptism into the XXXXXXXXXX church signifies that the individual commits themselves to following Christ in obedience as a member of a local church.
It is our understanding that several other religious organizations require that the lay members of their organization follow the procedures of baptism and confession of faith, i.e., the above-noted procedures are not specific to only members of XXXXXXXXXX . Further, we do not have enough information to determine how the above procedure is different from what the lay members of XXXXXXXXXX are required to follow. In our view, these procedures are not sufficient for XXXXXXXXXX to fulfill the requirements to be a religious order.
In Oligny v The Queen 96 DTC 1744, Dussault J. made the following comments when determining whether Christian Service Brigade of Canada (“CSB”) was a religious order:
“…in order to form a religious order, persons must submit to particular rules uniting them, rules that are normally more compelling, usually vows, than those generally uniting the adherents to a religion or particular denomination.”
Dussault J. further stated that:
“From the definitions of the common dictionaries and the decisions cited above, the conditions that appear essential for an organization to be considered as a religious order are, in my view, first that the members adhere to the particular rules uniting them in a formal way and that those particular rules governing them be more compelling than those that consist simply in ratifying the beliefs established by the religion or the denomination to which they already belong.  A simple inter-denominational organization such as CSB offering a statement of faith to which the members of a number of religious denominations adhere and rules of conduct stated in very general terms does not meet this condition.”
Accordingly, in our view, the explanation provided in the Letter, does not, in anyway, indicate that XXXXXXXXXX has any specific rules or norms that unite all its members. The process of baptizing is more a ratification of the Christian faith. Such a requirement does not set the members apart from the broader community as a unique group.
Hence based on the above discussion, it is concluded that the 4th criterion has not been fulfilled.
The 5th Criterion – Strict Standards of Spiritual and Personal Suitability
The admission of members must be in accordance with strict standards of spiritual and personal suitability.
Our comments in 2009-030576:
“The admission of members must be in accordance with strict standards of spiritual and personal suitability. There also appears to be certain standard procedure for XXXXXXXXXX , as laid out in the XXXXXXXXXX . However, it is not clear if the same procedure is followed for general membership admission as well. This criterion appears to be met in the case of appointing pastors and ministers. However, it is not clear if a similar procedure is followed in case of other salaried employees in the organization.
Furthermore, we did not notice anything that would confirm that the personnel could be recognized from the broader community as members of a religious order either by their conduct, dress or public statements. We were not given any evidence indicating that there is a probationary period, a documented assessment methodology or training required to be a member of this organization.”
XXXXXXXXXX This, the Taxpayer points out, is an indication that the members of XXXXXXXXXX are being recognized as distinct from the broader community, for the purpose of determining XXXXXXXXXX as a religious order.
However, in our view, the above-mentioned special concession does not set apart the members of XXXXXXXXXX from the rest of the community.  Based on this additional information, we are unable to conclude that the personnel belonging to XXXXXXXXXX could be recognized from the broader community as a unique group.
Hence, the 5th criterion is not considered to be satisfied.
Based on the review of the additional information provided, we are unable to conclude that XXXXXXXXXX satisfies all six criteria to be considered a religious order. Hence, in our view, XXXXXXXXXX is not a religious order for the purposes of claiming a clergy residence deduction provided for in paragraph 8(1)(c) of the Act.
If the Employee was a regular minister and if it was determined that XXXXXXXXXX is a religious denomination, he may be eligible to claim a clergy residence deduction by virtue of being a regular minister of a religious denomination, and provided he is engaged exclusively in full-time administrative service by appointment of a religious denomination. However, in your situation, the Employee is not a regular minister. Hence, no further determination is being made whether XXXXXXXXXX is a religious denomination.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library.  A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases.  The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer.  Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity.  You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898.  A copy will be sent to you for delivery to the client.
Roberta Albert
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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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.

Note

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: 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: 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: www.cra.gc.ca/E/pub/tg/t4001/t4001-03-e.html#P400_34608 “