16 July 2009 External T.I. 2009-0315181E5 - 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: Clarification of the extent to which members of the clergy may claim the residence deduction under paragraph 8(1)(c) of the Act when the two members of clergy are spouses and occupy the same residence.

Position: Each can claim the maximum amount calculated in accordance with the provisions of the Act

Reasons: Operation of the Act

XXXXXXXXXX 								2009-031518
V. Srikanth
July 16, 2009

Dear XXXXXXXXXX :

Re: Clergy Residence Deduction

This is in response to your e-mail dated March 25, 2009, 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 wanted to know the amount that can be claimed by the individual spouses where both the spouses are eligible for a deduction under paragraph 8(1)(c) and they reside in the same house.

Our Comments

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.

In your submission, you have described a scenario where a husband and wife are both members of the clergy and both of them satisfy the status test and function test. Further, they reside in the same home which they own. For the purpose of claiming clergy residence deduction pursuant to paragraph 8(1)(c) of the Act, you would like to know the maximum amount each of them could claim on Lines 6 and 7 of Form T1223- Clergy Residence Deduction.

Since 2001, where a taxpayer qualifies for a clergy residence deduction pursuant to paragraph 8(1)(c) of the Act, the amount that a taxpayer can claim is stated to be:

"...the amount, not exceeding the taxpayer's remuneration for the year from the office or employment, equal to...

(iii) the total of all amounts including amounts in respect of utilities, included in computing the taxpayer's income for the year under section 6 in respect of the residence or other living accommodation occupied by the taxpayer in the course of, or because of, the taxpayer's office or employment as such a member or minister so in charge of or ministering to a diocese, parish or congregation, or so engaged in such administrative service, or

(iv) rent and utilities paid by the taxpayer for the taxpayer's principal place of residence (or other principal living accommodation), ordinarily occupied during the year by the taxpayer, or the fair rental value of such a residence (or other living accommodation), including utilities, owned by the taxpayer or the taxpayer's spouse or common-law partner, not exceeding the lesser of

(A) the greater of

(I) $1,000 multiplied by the number of months (to a maximum of ten) in the year, during which the taxpayer is a person described in subparagraphs (i) and (ii), and

(II) one-third of the taxpayer's remuneration for the year from the office or employment, and

(B) the amount, if any, by which

(I) the rent paid or the fair rental value of the residence or living accommodation, including utilities

exceeds

(II) the total of all amounts each of which is an amount deducted, in connection with the same accommodation or residence, in computing an individual's income for the year from an office or employment or from a business (other than an amount deducted under this paragraph by the taxpayer), to the extent that the amount can reasonably be considered to relate to the period, or a portion of the period, in respect of which an amount is claimed by the taxpayer under this paragraph."

Basically, in a situation where spouses who are clergy members, rent or own their home, the provision limits the amount of deduction, for each particular spouse, to the least of the following three amounts:

1. the particular spouse's remuneration for the year from the office or employment [paragraph 8(1)(c) mid-amble],

2. the greater of

• $1,000 per month (to a maximum of ten months) in the year during which the particular spouse meets the conditions set out in subparagraphs 8(1)(c)(i) and (ii), [subclause 8(1)(c)(iv)(A)(I))], and

• 1/3 of the particular spouse's total remuneration from the employment for the year [subclause 8(1)(c)(iv)(A)(II)], and

3. the rent paid or the fair rental value of the residence including utilities (this amount must be reduced by the total of all other amounts deducted in computing either spouse's income from a business or from an office or employment in connection with the residence other than the particular spouse's clergy residence deduction). [subclauses 8(1)(c)(iv)(B)(I) & (II)].

As indicated in paragraph 23 of Interpretation Bulletin IT 141R- Clergy Residence Deduction, "the maximum amount of clergy residence deduction that any particular spouse could claim would be subject to the entire calculation in subparagraph 8(1)(c)(iv), which can be determined using the prescribed form mentioned in paragraph 24."

In our view, for the purpose of subclause 8(1)(c)(iv)(B)(I), i.e., Line 6 on T1223, each spouse will report the total amount of rent paid or the rental fmv, as the case may be. Further, in our view, to avoid a circular calculation regarding paragraph 8(1)(c) deductions, for the purpose of subclause 8(1)(c)(iv)(B)(II), i.e., Line 7 on T1223, the first spouse should calculate the amount as if no amount has been deducted by the other spouse under this provision; while the second spouse will take into account the amount claimed by the first spouse under paragraph 8(1)(c) and calculate his or her deduction accordingly.

Consider the following three examples concerning spouses which have been completed on this basis:

A cleric's deduction under subparagraph 8(1)(c)(iv) is generally the lesser of (A) and (B) where:

(A) is the greater of (A)(I) and (A)(II) where (A)(I) = ($1,000) x (number of months in eligible employment), to a maximum of $10,000 and (A)(II) = 1/3 of eligible salary.

(B) is (B)(I) - (B)(II) where (B)(I) = actual rent paid or rental fair market value ("fmv") and (B)(II) = deductions on the same residence taken by another employee or self-employed individual (under this or another provision of the Act) or deductions taken by the cleric (under another provision).

Example 1:

Spouse 1 earns $36,000, Spouse 2 earns $7,000 and fmv = $25,000, # of months = 12

Spouse 1: (A) = greater of (A)(I) or $10,000 and (A)(II) or 1/3 of $36,000; then (A) = $12,000

Spouse 2: (A) = greater of (A)(I) or $10,000 and (A)(II) or 1/3 of $7000; then (A) = $10,000

Therefore:

Spouse 1: (A) = $12,000 and (B) = $25,000 such that Spouse 1 deducts $12,000

and

Spouse 2: (A) = $10,000 and (B) = $25,000 - $12,000 (deducted by Spouse 1) or $13,000 such that Spouse 2 would deduct $10,000 but for the prohibition that the deduction cannot exceed eligible employment income, so Spouse 2 deducts $7,000.

Combined deductions = $19,000 (which is not greater than the fmv)

Example 2:

Each spouse earns $15,000, fmv = $20,000, # of months = 12

Spouse 1: (A) = greater of (A)(I) or $10,000 and (A)(II) or 1/3 of $15,000; then (A) = $10,000

Spouse 2: (A) = greater of (A)(I) or $10,000 and (A)(II) or 1/3 of $15,000; then (A) = $10,000

Therefore:

Spouse 1: (A) = $10,000 and (B) = $20,000 such that Spouse 1 deducts $10,000.

Spouse 2: (A) = $10,000 and (B) = $20,000 - $10,000 (deducted by Spouse 1) or $10,000, such that Spouse 2 deducts $10,000.

Combined deductions = $20,000 (which is not greater than the fmv)

Example 3:

Spouse 1 earns $51,000, Spouse 2 earns $36,000 and fmv = $25,000, # of months = 12,
office at home expense claimed by Spouse 1 = $3,000

Spouse 1: (A) = greater of (A)(I) or $10,000 and (A)(II) or 1/3 of $51,000; then (A) = $17,000

Spouse 2: (A) = greater of (A)(I) or $10,000 and (A)(II) or 1/3 of $36,000; then (A) = $12,000

Therefore:

Spouse 1: (A) = $17,000 and (B) = $25,000- $3,000 or $22,000 such that Spouse 1 deducts $17,000.

Spouse 2: (A) = $12,000 and (B) = $25,000 - ($17,000+$3,000) (total deductions claimed by Spouse 1) or $5,000, such that Spouse 2 deducts $5,000.

Combined deductions = $22,000 (which is not greater than the fmv)

We trust our comments will be of assistance to you.

Yours truly,

R.A. Albert, CA
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch