Taxes for religious clients

Why read this?

Your client:

• › is a member of the clergy or a religious administration; or
• › has taken a vow of poverty.

What to do

Your client is a religious leader or administrator

› If your client is paid by a religious order, report income listed in Box 14 of the T4: Statement of Remuneration Paid on Line 101 of the return.

› The value of free housing, a housing or utilities allowance may also be reported in Box 14 of the T4. They should be reported separately from regular income on the client’s return. To do that, subtract the amount in Box 30 of the T4 from the amount in Box 14, and report the difference on Line 101. Then report the amount in Box 30 on Line 104 of the return.

Your client has taken a vow of perpetual poverty

› Claim the earned income and pension benefits your client has given to the religious order on Line 256 of your client’s return, and write that your client is claiming a vow of perpetual poverty next to the amount.

› If filing a paper return, attach a letter from the religious order stating your client has taken a vow of perpetual poverty. If filing electronically, keep the letter in case CRA asks for it later.

TIP

When a client who has taken a vow of perpetual poverty dies, his estate must still file a terminal return, even if that person has no assets, says accountant Carole Rutwind.

Investment income isn’t eligible for the vow of poverty deduction, even if that income was given to the order. It’s rare for a client who has taken a vow of poverty to have such income, says Carole Rutwind of Rutwind Brar LLP in Edmonton, but if so, treat it as you would the investment income of any other client.

Your client’s home is provided for or paid by a religious order

› If your client is a member of the clergy; regular minister; member of a religious order and in charge of a congregation, diocese or parish; or a religious order’s full-time administrative employee whose home is provided by or paid for by the order, she can claim the Clergy Residence Deduction.

› Complete Parts A and C of Form T1223: Clergy Residence Deduction and enter the amount on Line 11 onto Line 231 of the return.

› Have your client’s employer complete Part B of Form T1223.

› Don’t file Form T1223 with the return, but keep it in case CRA asks for it.

› If your client received free accommodation, or a housing or utilities allowance for an accommodation he didn’t own or rent, enter the greater of either the amount in Box 30 of the T4 or the amount on Line 11 of Form T1223 on Line 231 of the return.

› The deduction can’t be greater than the client’s income during the year of religious work.

Determining the value of housing

For clients claiming the Clergy Residence Deduction or a housing allowance, but who aren’t paying rent, accountant Carole Rutwind instructs them to review local property listings. She uses the average rental prices of homes of similar size and location to determine an approximate rental value for the client’s house.

Reducing tax at source

If your client claims the Clergy Residence Deduction and is consistently getting money back, consider asking CRA to allow the religious order to reduce the amount of tax deducted from your client’s income. Another situation where this request would be useful is when your client tithes a portion of her income to a religious order every year, says Rutwind, because the client is eligible for the donation tax credit.

For clients who could benefit from the reduction, complete Form 1213: Request to Reduce Tax Deductions at Source, and send it to CRA along with a completed Form 1223. Before making the request, CRA says to ensure your client’s income taxes for the past two years are filed and paid in full. Once CRA approves the request, the client’s employer will subtract the value of the Clergy Residence Deduction from your client’s taxable income.

Estate beneficiaries and vows of perpetual poverty

For clients who want to leave money to someone who has taken a vow of perpetual poverty, there’s a more tax-efficient strategy than a simple bequest, says Rutwind. Since the beneficiary will be giving the bequest to her religious order anyway, she suggests the client donate directly in her will. “If I leave [money] to my cousin, I really get no deduction for it, but if I leave it to his order, I get the donation receipt,” she explains. This can be used to offset the donor estate’s tax bill.

Sources: Carole Rutwind, CA, Rutwind Brar LLP, Edmonton; CRA.

Jessica Bruno is a Toronto-based financial writer.