The Tax Court of Canada released a decision on May 2, 2024, concerning the clergy residence deduction. In Schroeder v The King, the Court considered an appeal of a Canada Revenue Agency ("CRA") tax assessment rejecting a claim in the 2021 tax return of the Appellant, Mr. Schroeder, for a $22,000 clergy residence deduction (the "Deduction"). The Minister of National Revenue (the "Minister") denied the Deduction claim on the basis that Schroeder did not earn any income during the 2021 taxation year from an "...office or employment..." as described at the end of paragraph 8(1)(c) of the Income Tax Act ("ITA").
The court recognized that Mr. Schroeder is a certified and ordained clergyman who had served as the lead pastor of Kelowna Trinity Baptist Church (the "Church") for over 40 years. Following his resignation from the Church after his many years of service, Mr. Schroeder provided chaplaincy services to the Royal Canadian Mounted Police (RCMP) members and personnel in Kelowna, British Columbia, but was paid for those chaplaincy services by the Kelowna Trinity Baptist Church Legacy Foundation (the "Foundation") pursuant to an agency agreement with the Foundation.
In total, Mr. Schroeder received $66,000 from the Foundation in 2021. In relation to his 2021 tax return, Mr. Schroeder reported the $66,000 to CRA as "self-employed professional income", and did not report any income as being derived from an "office or employment".
In order to be eligible for the Deduction, Mr. Schroeder is required to be able to meet the "status" and "function" tests set out in subparagraphs 8(1)(c)(i) and (ii) of the ITA, i.e. that he must be a "member of the clergy or of a religious order or a regular minister of a religious denomination" and be "in charge of a diocese, parish or congregation, ministering to a diocese, parish or congregation, or engaged exclusively in full-time administrative service by appointment of a religious order or religious denomination".
While the CRA agreed that Mr. Schroeder met the requirements of these tests, it argued that the Deduction can only be applied against remuneration from an "office or employment". The court noted that the sole issue in the appeal was whether Mr. Schroeder's income from the Foundation constituted remuneration from an "office or employment," as opposed to being derived from an independent contractor arrangement, such that Mr. Schroeder would be entitled to the Deduction under paragraph 8(1)(c) totaling $22,000.
In its analysis, the court considered whether Mr. Schroeder was engaged to perform his services "as a person in business on his own account". First, the court considered the subjective intent of Mr. Schroeder and the Foundation and, based on the facts before the court, found that the parties' "subjective intention was for their relationship to be one of employee/employer."
In examining the agency agreement between Mr. Schroeder and the Foundation, the court found aspects of both an independent contractor and employment relationship. In particular, the court found that the agency agreement gave the Foundation control over various aspects of Mr. Schroeder's activities, and gave the Foundation clear oversight over his work. Ultimately, the court held that the agreement was similar to agreements "usually entered into by charities to make sure they are complying with requirements of the [ITA] to carry out their own charitable activities when agents are hired to carry on a project of the charity outside of Canada", and gave "limited weight to the Agency Agreement in [its] analysis understanding the purpose of this kind of agreement".
The court then reviewed whether the relationship of the parties was, in reality, the one that they intended it to be. On one hand, the court found that Mr. Schroeder's use of his own personal vehicle to provide his chaplaincy services without reimbursement was indicative of an independent contractor relationship.
However, on the other hand, the court found that Mr. Schroeder's reporting requirements to the Foundation were minimal, but that it was "understandable" that the Foundation exercised less control over Schroeder's activities than it would over a typical employee, given the nature of his chaplaincy services. The court also noted that Mr. Schroeder was not required to submit time logs or schedules as a condition of being paid, and that he had no ability to complete his projects faster with the possibility of profiting from a more rapid completion. For these reasons, the court ultimately found that these factors weighed in favour of an employment relationship.
In light of the above factors, the court allowed the appeal, without costs. The court found that, on a balance of probabilities, Mr. Schroeder was a Foundation employee who had received remuneration from his employment with the Foundation, and that he was thus entitled to claim the $22,000 Deduction under paragraph 8(1)(c) of the ITA.
This case is a helpful reminder that clergy interested in claiming the Deduction will not only need to meet the status and function tests, but must also be able to demonstrate that the income from which they are claiming the Deduction is generated through an office or employment, and not through an independent contractor relationship.
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