“Confronting a Taxing Question” by John Bird

NOTE: The following article was discovered on the internet, and printed verbatim from: United Church Observer, February 2000, http://www.ucobserver.org/archives/feb00_chu.htm.

Rev. Stephen Willey is already financially penalized for being married to another minister. Now, with the federal government=s proposed cap on housing allowances for clergy, the situation is about to get worse. And it will affect many clergy now claiming the housing allowance deduction on their income taxes, including the 340 United Church ministers who the national Division of Ministry Personnel and Education says are married to other clergy.

Willey is a personnel officer with Toronto Conference, part of the United Church=s national staff system. As an ordained minister, his gross pay is less than a layperson=s in the same position, although in theory his take-home pay should be the same. Because ministers have been able to claim housing as a tax deduction, they pay less income tax and end up with take-home pay equivalent to the layperson=s. The church has long taken advantage of that tax anomaly to save money.

But Willey is married to Rev. Carol Hancock, pastor at Humbercrest United Church. They live in the manse C housing provided by the pastoral charge as part of Hancock=s compensation package C so Revenue Canada won=t let Willey claim the normal clergy housing deduction. That leaves him with less net income than if he were doing the same job without being ordained and receiving the larger gross pay.

Now, federal Finance Minister Paul Martin has announced a cap on the amount that ministers can claim as housing allowance deduction on their income tax C the amount of the actual housing allowance up to $10,000, or up to 50 percent of the minister=s regular remuneration. The cap will likely be "significantly lower" than what many clergy have been claiming, says Willey. That will increase the financial penalty for some clergy couples, and could cut into the after-tax pay of other clergy who receive the housing allowance.

While Presbytery-approved housing allowances are supposed to reflect the rental cost of adequate housing C usually seen as a three-bedroom house in the area C some home-owning clergy currently calculate the deduction for "fair rental value" at an amount higher than their actual housing allowance. The current tax practice allows clergy to deduct either the actual rent they pay, or if they own their own home, its "fair rental value." It means clergy who own large homes or pay high rent get larger housing deductions and therefore pay less tax.

Clergy in more expensive (usually urban) rental areas, or with higher housing allowances, will be most seriously affected by the new ruling, according to a memo to Conference personnel officers from national legal counsel Kathy McDonald.

Hypothetical illustrations McDonald provides with the memo show that:

*For someone paid $24,377 with a housing allowance of $7,920 and actual rent or "fair rental value" of $10,000, the deductable amount would drop from $10,000 to $7,920.

*If the same person paid rent of $6,000, the deduction would actually rise under the new system from $6,000 to $7,920.

*A person paid $26,300 with a housing allowance of $24,000 and actual rent or "fair rental value" of $25,000 would see his or her deduction drop significantly from $25,000 to $13,150 (50 percent of the salary).

The United Church tradition of counting "the housing allowance as part of compensation for labor" for its ministry personnel is already severely compromised for clergy couples like Willey and Hancock where the housing allowance can only be claimed by one person although both pay levels are based on being able to make the claim.

Martin=s proposed changes reflect a continuing shift in the relationship between church and state. "It=s not hard to see housing allowances as a form of state support for the church," says Willey. "It=s like church-state relations under >Christendom= when the state recognized the social benefit of clergy in communities and church property was not taxed. But that mindset of church and state has come apart." The public now, he says, is coming to believe that the state "shouldn=t subsidize churches in terms of tax relief."

Willey suggests it may be time for compensation packages that are "more consistent with who we are as a post-Christendom church. We need to get our act together and make up our minds whether we need to get out of the housing-allowance business" and compensate ministers solely through taxable salaries.

It=s a position that Willey favors as more in accordance "with our true relationship to Canadian society. And I think congregations will respond if challenged."

Last year, General Council Executive rejected a call by its human resources committee to offer immediate compensation to clergy couples who were disallowed the double claim for housing exemptions. Instead the Executive opted for a "long-term examination of the compensation system."

The legislative changes, which are expected to be implemented beginning in 2001, may also make manses a more popular alternative once again for congregations, "for the first time in a long time," says Willey. Many congregations, particularly in urban areas, have been selling off their manses for the alternative of the housing allowance, which also allows the clergy to invest in their own homes.

Martin has invited individuals and organizations to submit their reactions to the proposal before legislation is introduced to Parliament.