The Tax Court of Canada has decided a recent trio of cases, each involving the entitlement to the clergy residence deduction by rabbis teaching at religious day schools. The Court, consistent with prior decisions, confirmed that these teachers were not entitled to the deduction.
The clergy residence deduction provides for a limited deduction for housing provided to a member of the clergy or supplied by a member of the clergy. It is a deduction that has existed for a long time and seems to have been designed to address the situation of a member of the clergy who is provided with a manse by a local congregation, but who may be expected to use the house in the course of clergy duties. To be more specific, the deduction is available to someone who meets a status test and a function test. The status test requires that a taxpayer be: (i) a member of the clergy; (ii) a member of a religious order; or (iii) a regular minister of a religious denomination. The function test requires that the taxpayer either: (i) minister to or be in charge of a parish, diocese or congregation; or (ii) be engaged exclusively in full-time administrative service by appointment of a religious order or religious denomination.
In the 1980s and 1990s, Revenue Canada (as it then was) had been engaged in a deliberate campaign to narrow the availability of the clergy residence deduction by reassessing those who claimed the deduction without regard to previous court decisions or Canada Revenue Agency (“CRA”) determinations. However, with the assistance of the Canadian Council of Christian Charities (an umbrella group for religious charities), a series of test cases culminated in a significant number of Tax Court of Canada decisions in 1998 in which Justice Bowman set out the tests for the various elements of the deduction in a way that preserved the deduction for most of the taxpayers who had been claiming it based on Revenue Canada’s earlier position. As an aside, the first couple years of my legal career were spent almost exclusively as the junior lawyer assisting John Campbell and Susan Manwaring (Miller Thomson LLP) and Patrick Boyle (now himself a Justice of the Tax Court of Canada) with these cases.
In the 1998 cases, Justice Bowman decided that seminary professors were not engaged in ministering to a congregation both because they were not ministering in the course of their teaching and because their students were not a congregation. In coming to the conclusion, Justice Bowman was supported by the fact that the function test was added (according to Hansard) specifically to overturn an earlier court decision that allowed seminary professors to claim the deduction.
In the 2017 decisions (indexed as Lichtman v. R), Justice Campbell was presented with the argument (complete with dueling rabbinical experts) that a rabbi engaged in teaching at a Jewish day school was ministering to a congregation of students. An attempt was made to distinguish the 1998 Bowman decisions on the basis that Torah education is a spiritual exercise rather than an intellectual one, however Justice Campbell concluded that the evidence did not demonstrate this. An argument was also made that while a class at a post-secondary seminary is not a congregation, a class of students studying religion at the elementary school level is a congregation.
The conclusion of the Court in Lichtman is not surprising, based as it was on the conclusion of Justice Bowman in his 1998 cases. That said, it seems that no decision on whether Lichtman will be appealed further has been made. Interestingly, it may be possible for a school and rabbis in a situation like this to restructure their arrangements to allow the rabbis to qualify for the deduction, perhaps by documenting the rabbis as employees of a synagogue, pursuant to somewhat different job descriptions that still involve being responsible for teaching Torah to day school students.
By Robert Hayhoe, Miller Thomson
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