Understanding the Clergy Housing Deduction: A Guide for Pastors and Church Treasurers
If you’re a pastor or a church treasurer, you’ve probably heard about the Clergy Housing Deduction, but maybe you’re not quite sure how it works or how to apply it. This deduction is one of the best tax benefits available to clergy, but it needs to be handled properly. Inaccurate application of Clergy Housing is one of the most common errors we encounter as bookkeepers.
Let’s break it down in simple terms, with real-world examples, so you can see how it directly affects your pay—and your church’s finances.
What Is the Clergy Housing Deduction?
The Clergy Housing Deduction allows eligible pastors to reduce their taxable income by claiming a portion of their compensation as a housing allowance. And trust me—this can make a big difference in your take-home pay.
Why Should You Care?
Lower Taxes – Who doesn’t want to pay less in taxes? This deduction reduces your taxable income, meaning you keep more of your hard-earned money.
Lower CPP Contributions – Since your taxable income is lower, you’ll also contribute less to CPP (and so will your church!).
No Change to EI – Pastors still pay EI, this deduction does not impact EI premiums. You will contribute the same amount to EI whether you take the deduction or not.
Bigger Paychecks – Less CPP and income tax withheld means you get more money in each paycheck.
How to Apply the Clergy Housing Deduction on Payroll
Here’s what you need to do to make sure you benefit from this deduction right away:
Confirm You’re Eligible – You need to meet CRA’s criteria, which usually includes performing ministerial duties and leading religious services. CRA Criteria
Figure Out the Deduction Amount – This is usually based on the fair rental value of your home or your housing allowance.
Submit Form T1213 – This is a request to the CRA to reduce your taxes at source. Once approved, your church can adjust your payroll accordingly. CRA Form T1213
Update Payroll – Once you have CRA approval, your church’s bookkeeper should reduce your tax and CPP deductions accordingly.
Complete Form T1223 Every Year – When tax time comes around, fill out Form T1223 - Clergy Residence Deduction to confirm your eligibility and ensure you claim it properly.
Sample: You earn $60,000 per year and qualify for a $15,000 housing deduction.
Amounts Saved
· Taxes Saved $2250 ($9000 – $6750)
· CPP Saved $771 ($3171-$2400)
That’s a tax savings of over $3000!
Sample T1223 Filled Out
Part A: Conditions of Employment
Check all applicable boxes confirming the individual is employed as a clergy member and performs ministerial duties.
Part B: Calculation of Deduction
Line 1: Enter employment income → $60,000
Line 2: Enter fair market rental value of residence (including utilities) → $15,000
Line 3: Enter the amount of employer-provided housing allowance (if applicable) → N/A or actual amount received
Line 4: Deduction is the lesser of Line 2 or Line 3 → $15,000
Part C: Certification by Employer
Completed and signed by the church or employer.
Using the Clergy Deduction Only When Filing Taxes
If your church does not have the knowledge or willingness to do this, then you can still claim this deduction when you file your taxes. Fill out the T1223 form and then give it to your tax preparation provider. By filing this form with your tax return, you ensure that the deduction is applied, reducing your taxable income and resulting in a refund if you overpaid taxes throughout the year. The biggest difference in filing with your taxes as compared to your church taking the deduction off ‘at source’ (on each paycheque) is timing. Regardless the tax savings is the same, but one method results in higher take home pay received throughout the year and the other results in a lower annual tax bill.
Final Thoughts
If you’re a pastor, this deduction is one of the best ways to make sure you’re not overpaying taxes. And if you’re a church treasurer, making sure this is set up properly can be a huge financial blessing for your pastor.
If you need help getting this set up, don’t hesitate to reach out to a church bookkeeping expert. A little planning can go a long way in ensuring your pastor takes full advantage of this valuable benefit!