We tend to focus on the status and function tests when dealing with the clergy residency deduction (CRD), and for good reason. Set out in s. 8(1)(c) of the Income Tax Act (ITA), meeting these two tests is essential to successfully claiming CRD. But in a recent decision, Schroeder v The King, 2024 TCC 56, the Tax Court of Canada instead considered s. 8(1) of the ITA to determine whether Mr. Schroeder was an employee or independent contractor of an organization when providing chaplaincy services.
This highlights a third component to successfully claiming CRD, found in s. 8(1) of the ITA – the claimant’s remuneration must come “from an office or employment”. The Minister of National Revenue (Minister) had denied the $22,000 deduction Mr. Schroeder claimed via the CRD on the basis that he had not been an employee, nor had he earned any employment income during the 2021 taxation year. Mr. Schroeder appealed that decision to the Tax Court of Canada, which found that Mr. Schroeder had been an employee of the organization and properly claimed the $22,000 under the CRD.
BACKGROUND
Mr. Schroeder was a certified and ordained clergyman who was interested in providing chaplaincy services to the RCMP. He approached the Kelowna Trinity Baptist Church Legacy Foundation (Foundation) to see if they would fund his chaplaincy work with the Royal Canadian Mounted Police (RCMP). The Foundation agreed to pay him directly through an agency agreement. Mr. Schroeder provided services to over 300 RCMP personnel for 110 hours every month. The RCMP paid some costs, including meals and travel arrangements, while the Foundation covered his cell phone and other expenses. Mr. Schroeder claimed his CRD under s. 8(1)(c) of the ITA based on his work funded by the Foundation, but he did not report any income from an office or employment for the 2021 taxation year. The Minister denied his CRD claim based on his lack of reported employment income and argued he was not an employee at all, but instead an independent contractor of the Foundation.
Mr. Schroeder appealed the denied CRD claim from his 2021 taxation year assessment.
ISSUE & ANALYSIS
The only real issue was whether Mr. Schroeder income during the 2021 taxation year came from an “office or employment” to make him eligible to claim the CRD under s. 8(1)(c) of the Act.
Mr. Schroeder argued that he was an employee of the Foundation, not an independent contractor, because he performed the same or similar duties as he had as a pastor at the Kelowna Trinity Baptist Church. He claimed, in the alternative, that he fulfilled an “office” and was thus entitled to claim CRD.
The Minister argued that the subjective intent and objective reality of the employment relationship was as an independent contractor, not employee, and therefore Mr. Schroeder was not entitled to claim his CRD.
No one disputed that Mr. Schroeder met the status and function tests required to make a CRD claim. So, the court turned its attention to whether the remuneration received was from an office or employment, or as an independent contractor. The sole question here was whether Mr. Schroeder was performing the services “as a person in business on his own account”; in other words, was he acting as an employee of the Foundation, or as an independent contractor? The Tax Court used a two-step approach to determine the answer to this question.
First, what was the parties’ subjective intent?
To do this we can look at the parties’ written contract(s) and the actual behaviour between the parties – if there were any invoices for services rendered, registrations for sales tax purposes, and income tax returns files as an independent contractor.
The court held that, on a balance of probabilities, the parties’ subjective intent was to establish an employer and employee relationship. While Mr. Schroeder had claimed self-employment income and deducted expenses for using his personal vehicle, factors which lean toward independent contractor, the T1223 form had been signed by the Foundation’s executive director as “employer”, he did not issue any invoices to the Foundation for services rendered to RCMP personnel, and the Foundation had substantial control over several aspects of Mr. Schroeder’s activities.
Second, does the objective reality of the situation correspond with the subjective intent, determined above?
This will involve things like the degree of the employer’s control over the worker, whether the worker provided his own equipment, the degree of financial risk taken on by the worker, and other factors.
Again, on a balance of probabilities, the court held that the objective reality did correspond with the parties’ subjective intent. Mr. Schroeder had to provide 110 hours of chaplaincy services every month at specific locations and regularly report back to the Foundation. Given the nature of chaplaincy work, it made sense that the Foundation exercised less control over him compared to a regular employee. While he provided his own equipment, there was little equipment to provide, and his chance of profit and risk of loss – the degree to which a worker can earn more money by working more efficiently – was low. This involves the idea that independent contractors may work for several different organizations at the same time. The more efficiently they work, the more money they can make. Here, it did not matter how efficiently Mr. Schroeder worked; the Foundation paid him twice a week regardless of his efficiency. There was no evidence that he could complete his projects any faster and earn additional money that way.
FINDINGS
Based on the above, the court concluded that Mr. Schroeder was an employee of the Foundation and he received remuneration from employment. Therefore, he satisfied all of the elements required to claim the CRD under s. 8(1)(c), and both his appeal and his claim for $22,000 CRD were allowed.
KEY TAKEAWAY
This case invites us to consider aspects of CRD other than the function and status tests. While those remain essential to a successful CRD claim, the claimant must ensure they meet every element of s. 8(1)(c) of the Act, including remuneration from employment or fulfilling an “office”.
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