The Income Tax Act states that a member of the clergy or a similar individual may claim a housing allowance for income tax purposes. In order to qualify for the deduction, the individual must satisfy both a status and a function test.
Status Test - 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.
Function Test - The person who meets the status test must also be employed in the following capacity:
- 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 of religious denomination.
In 2001 new legislation went into effect requiring the employee and employer to complete a Clergy Residence Deduction form, T1223, which includes a calculation worksheet. The amount computed on this worksheet is the amount that can be used when computing taxable income, payroll tax and benefit expense for the taxation year. Form T1223 should be completed each year.
Whether the accommodation is provided, rented or owned by the individual, the clergy residence deduction is based on the fair rental value of the home. The new legislation also allows clergy to claim the cost of utilities.
The employee must keep a copy of the completed T1223 form with his income tax information. The employer should keep a copy of the form on file with the employee's payroll records to verify the calculation and the amount for payroll purposes and benefits calculation.
Clergy Residence Deduction - Payroll Calculation
In order for this benefit be to deducted at source and used by the employer in the payroll calculations, the employee (tax payer) must first get approval from CRA. The employee must complete form T1213 "Request to Reduce Tax Deductions at Source". The CRA will reply to the employee by letter with their ruling and this letter should be given to the employer. This request should be sent in to CRA in October or November requesting approval for the next taxation year. The request must be made annually.
Once approval is received the employer can keep the following in mind when calculating the regular payroll:
- the housing amount is subject to the standard Employment Insurance (EI) payroll calculation
- the housing amount is not subject to Canada Pension (CPP)
- the housing amount is not subject to income tax
Clergy Residence Deduction - Preparation of Annual T4
The amount of the clergy residence deduction should be included in the total income reported in Box 14, Total Employment Income, on the employee's T4. Box 26, CPP/QPP Pensionable Earnings, will be the employment income reported in Box 14 less the amount of the residence deduction being claimed.
Other than being included in the total employment income reported and as part of the adjusted Pensionable Earnings, the clergy residence deduction is not reported as an amount anywhere else on the employee's T4.