23 January 2014 External T.I. 2012-0467711E5 - 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: Whether an organization is a religious order for purposes of the clergy residence deduction provided by paragraph 8(1)(c) of the Act?

Position: See response.

Reasons: See response.

XXXXXXXXXX
2012-046771
T. Baltkois

January 23, 2014

Dear XXXXXXXXXX:

Re: Clergy Residence Deduction

This is in response to your letter dated August 30, 2012, concerning the clergy residence deduction provided for in paragraph 8(1)(c) of the Income Tax Act (Act). Specifically, you have asked whether XXXXXXXXXX (the "Organization") is a religious order for purposes of paragraph 8(1)(c) of the Act and whether its Executive Director ("Employee") is eligible to claim the clergy residence deduction. We apologize for the delay in responding.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). This Directorate does not provide determinations as to whether a particular organization is a religious order for purposes of paragraph 8(1)(c) of the Act. Such determinations would normally be conducted by the applicable tax services office during the course of an income tax audit or the resolution of a notice of objection, both of which would be carried out after the relevant income tax return has been filed for the year. In addition, a tax services office may also review the status of an organization following a request by a member to reduce income tax withholdings at source. However, we are prepared to provide the following comments that may be of assistance.

Paragraph 8(1)(c) of the Act provides a deduction in computing the income from employment of the clergy person in respect of his or her residence. In order to qualify for this deduction, a person must meet both a status test and a function test.

Status test

To satisfy the status test, an individual must be a member of the clergy or of a religious order, or be a regular minister of a religious denomination. You believe that the Organization is a religious order for purposes of the clergy residence deduction. As you are aware, the term "religious order" is not defined in the Act; however, six characteristics that indicate whether an organization (or a collectivity of persons therein) is a religious order have been identified through Canadian case law. These characteristics have been accepted by the CRA and are reproduced in paragraph 9 of Interpretation Bulletin IT-141R (Consolidated), Clergy Residence Deduction, dated May 4, 2000.

Since the case law and the legislation governing the clergy residence deduction have not materially changed since IT-141R was issued, the determination as to whether a particular organization is a religious order continues to be based on these six characteristics.

The 1st Characteristic – Purpose

The purpose of the organization should be primarily religious.

It may have other objects within the overall context of that religious purpose such as education, the relief of poverty, or the alleviation of social ills and suffering. A religious order may have objects that go beyond preaching the gospel and prayer and meditation, and extend to works beneficial to humanity such as running hospitals or helping the poor and homeless.

The 2nd Characteristic – Strict Moral and Spiritual Regime

The members must agree to adhere 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.

The courts have confirmed that members must exhibit some form of self-sacrifice or denial of material comfort or financial advancement beyond that which was expected of other lay members of an organization. While the examination of adhering to a regime of self-sacrifice is not necessarily restricted to a financial application, the courts have adopted such an approach when examining whether an organization exhibits this characteristic.

Generally, financial self-sacrifice or denial of material comfort is considered to exist where a member's pay scale is substantially less than that of an employee performing similar duties in a non-religious organization. An example of non-financial self-sacrifice would be where a member is required to work under more rigorous conditions than what is expected of a similar position in a non-religious organization.

The 3rd Characteristic - 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.

Evidence that may indicate that the commitment of the members is of a full-time and long-term nature, include:

• All members dedicate their working time exclusively to the pursuit of the objectives of the organization;
• An employment agreement that includes a requirement for a long-term commitment; or
• The nature of the employment positions held by members and the duties performed are of an ongoing and long-term nature.

The Organization states that the employment commitment made by the Employee is of a full-time and long term nature. However, it has not indicated whether other members have also made similar commitments.

The 4th Characteristic - 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 organization are expected to adhere.

Evidence that may indicate that members are required to live markedly stricter lifestyles than lay members, include:

• A formalized code of conduct document for the members and such requirements are codified in their employment contract;
• Specific rules or norms that unite all members;
• Policy that members may be dismissed if their work, lifestyle, or behaviour is unsuitable; and
• Requirement that the member abandon a secular lifestyle or otherwise commit to life as a member of a religious order.

The Organization requires all paid employees to sign and adhere to a Statement of Faith and a Lifestyle Agreement as a condition of employment. Subscribing to a Statement of Faith or a Lifestyle Agreement does not, in and of itself, demonstrate that members must live markedly stricter lifestyles than other employees or lay members.

The 5th Characteristic - Strict Standards of Spiritual and Personal Suitability

The admission of members must be in accordance with strict standards of spiritual and personal suitability.

An organization must demonstrate that the admission of members is based on strict standards of spiritual and personal suitability. Factors that should be considered include:

• Evidence that there is a documented assessment of methodology;
• Evidence indicating there is a probationary period;
• Evidence that there is a religious training period; and
• Evidence of public worship or prayer.

The Organization notes the experience and qualifications of one of its members. However, the Organization has not supplied any information to indicate what specific screening standards are used to ensure that its members have spiritual and personal suitability.

The 6th Characteristic - Sense of Communality

There should generally be a sense of communality.

There is very little guidance in terms of case law that specifically addresses what is contemplated by this characteristic. Where the legislation and courts do not define a term, we rely on the plain meaning (e.g. dictionary definition). Therefore, the following should be considered:

• The Concise Canadian Oxford Dictionary defines communality as the state of "relating or belonging to a community; . . . of or relating to ethnic or religious groups within a larger community". It further defines community as "a body of people having a religion, a profession etc., in common."
• The Merriam-Webster dictionary provides a definition of communality and states that the term refers to a "communal state or character; a feeling of group solidarity". It further defines solidarity as "a feeling of unity between people who have the same interests, goals, etc."

Summary

To be considered a religious order for purposes of paragraph 8(1)(c) of the Act, an organization or a group of individuals within an organization must embody all of the six characteristics outlined in paragraph 9 of IT-141R. Based on the information provided, the Organization does not appear to embody the 2nd, 3rd, 4th, or 5th characteristic, and would not be considered a religious order. Consequently, the Employee would not be considered a member of a religious order.

Assuming that the Employee does not otherwise satisfy the status test as either a member of the clergy or as a regular minister of a religious denomination, the Employee would not be eligible to claim the clergy residence deduction. Given that the Employee does not appear to satisfy the status test, we did not consider whether the Employee would satisfy the function test (i.e. ministering to a diocese, parish or congregation).

We trust these comments will be of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch