Tax court rules against rabbis claiming clergy residence deduction

National Post


A trio of Orthodox Vancouver rabbis didn’t quite get the Hanukkah gift they were hoping for this past week when the Tax Court of Canada handed down its decision denying the rabbis’ claims to the clergy residence tax deduction.

Clergy residence deduction

The purpose of the clergy residence deduction is to provide a subsidy for the use of a clergyperson’s home. This is an exception to the basic rule in the Income Tax Act which generally restricts the ability for individuals to deduct personal and living expenses. While some exceptions do exist for certain employment expenses, such as work space in the home, the clergy residence deduction is more generous in that it allows a qualifying person to deduct their actual rent and eligible utilities paid or, if the clergyperson owns their home, the fair market rental value (plus utilities), up to a maximum of 1/3 of their clergy income.

Under the Tax Act, to claim the clergy residence deduction, there is a two-fold test: the status test and function test, both of which must be met in order to qualify for the deduction.

The status test requires individuals seeking to claim the deduction to be “members of a clergy or of a religious order or a regular minister of a religious denomination.” The function test is whether the individual is in charge of, or ministering to a diocese, parish or congregation or is “engaged exclusively in full-time administrative service by appointment of a religious order or religious denomination.” 

The Vancouver Rabbis

The three individuals involved in the case are all ordained rabbis in the Vancouver Orthodox Jewish community. During the tax years under review, they each taught Judaic studies curriculum to children attending the Vancouver Hebrew Academy, the only Orthodox Jewish elementary day school in the Vancouver Jewish community. In computing their net incomes, each rabbi claimed the clergy residence deduction which the Canada Revenue Agency denied on the basis that the rabbis were not in charge of or ministering to a congregation.

The trial, which began in February 2017, lasted a total of eight days over the course of five months and involved detailed testimony from seven witnesses, each of whom is an Orthodox Jewish Rabbi. It also included testimony and reports from various experts in the laws and practices of Orthodox Judaism, one of whom is the current head of the “Beit Din,” a Hebrew term for a Rabbinical Court, the authority in Jewish law for the Orthodox Rabbinical Council of British Columbia.

Legislative history

Before coming to her decision, the judge reviewed the legislative history of the clergy residence deduction. When it was first introduced in Parliament in 1949, that version did not contain the “function test,” as it does today. The original intent of the tax rule was to allow any member of the clergy or a religious order to deduct the cost of their residence because their home often served as the place where clergy worked, carrying out functions connected to their employment.

A review of the legislative history and Parliamentary debates reveals that the deduction was not intended to be applicable in the case of all members of clergy or ministers and that, originally, it was meant to apply to those “whose regular occupation was the ministry concerned with full-time religious or pastoral activities.”

The “function test” was added to the provision in 1956 as the result of a court case in which the deduction was granted to a minister of the United Church of Canada whose sole occupation was teaching. As the then Finance Minister said in the House of Commons, “The present amendment provides that any clergyman, whether he be in fact a pastor in charge of a congregation or a member of the church body in the higher level, if I may put it that way, who engages in church work exclusively including acting as pastor from time to time, would have the benefit of the deduction.”

Judge’s analysis

The judge reviewed the two-part test above and found that while the Vancouver rabbis clearly satisfied the first test, the status test, in that they are “members of a clergy or of a religious order or a regular denomination,” it was the second part, the function test, that was the issue to be decided in court. In other words, could the rabbis’ activities and functions at the VHA and in the greater Vancouver Orthodox Jewish community be considered as “ministering to a … congregation.”

The judge found that while the three rabbis were indeed encouraged to provide spiritual leadership to the Jewish community, “they are neither expected nor contractually obligated to engage in any of the outreach activities that would involve the potential use of their residence, including hosting students and families in their homes.”

In fact, the uncontradicted evidence was that all of their activities were performed on a voluntary basis, other than teaching at the VHA, which was a contractual obligation for which they received compensation. The judge compared this to the duties of the rabbi of the Orthodox synagogue’s congregation, whose employment contract typically requires that he invite members of the community to his home for meals and for overnight stays.

Reviewing both the legislative history and prior jurisprudence, the judge concluded that Parliament never intended for this deduction to be made available to members of the clergy, whatever the religion or denomination, who are engaged in full-time teaching duties. She further concluded that “students gathered in a religious school cannot be considered a congregation nor can the teachers of religious studies be considered to be ministering to those students within the meaning of” the Tax Act.

In a comprehensive 72-page, 216-paragraph written ruling released on Monday, the judge rejected the rabbis’ claims on the basis that they do not meet the required tax test of “ministering … to a congregation.”

As the judge concluded, the rabbis “cannot be considered to be ‘ministering’ when they are teaching Judaic studies curriculum at VHA and neither can the students, gathered for religious instruction, whom they teach, be identified as a ‘congregation.’”