I haven't found much information on this, but is it permitted to use a hymn paraphrase for the Benedictus and Magnificat in celebration of the LotH, as is found in Worship hymnals?
Also, is it permitted to substitute the hymn listed in the breviary for another hymn, and is the hymn optional?
I don't know about the metrical paraphrases of the Canticles, so I can't help you there.
But, I do know that the hymn is not optional: it is an integral part of the office; however, if the hymn given is something like "Praise to the Lord", which is not an office hymn, I'd exchange it for the real hymn for the office in the "Liber Hymnarius", or Fr. Weber's "Hymnal for the Hours", or the office hymns in the second half of the "Lumen Christi Hymnal". E.g. the Hymn given for Evening Prayer, Sunday, Week II is "At the name of Jesus" which is not an office hymn: IIRC, it should be "Lucis creator optime".
(FYI: I am more familiar with the breviary of the Extraordinary Form of the Roman Rite.)
"... is it permitted to use a hymn paraphrase for the Benedictus and Magnificat in celebration of the LotH ...?"
This issue isn't handled explicitly by the rubrics of the LOTH or the GILH. One would have to research for a general rule if it is permitted to replace any biblical text as printed in the official liturgical books by it's different translation or a paraphrase. I suppose it's not permitted, but unfortunatelly my rubricist knowledge isn't deep enough to provide a real answer.
"is it permitted to substitute the hymn listed in the breviary for another hymn, and is the hymn optional? " No, the hymn isn't optional. And it isn't possible to freely replace it by another hymn. A corresponding hymn in another language, especially Latin, could be chosen. (GILH 276)
(Despite of being stated authoritatively, the statement above is just an interpretation of the rubrics by a not-really-skilled-enough liturgist; errors are possible and corrections welcome.)
Paraphrases of the Canticles are not appropriate. We are not free to replace one scriptural translation with another for liturgical use without ecclesiastical approval. However, I suppose if it is merely lay people praying the office devotionally, they can substitute anything they like, however they like, so long as it is not heretical/immoral.
On the other hand, as to the hymn, it is very difficult to get definite answers because the rubrics for the LotH are not as fully developed and there is less reliable commentary. (The General Instruction does contain some very good reading, even if it is a bit lacking in the way of exact rubrics.)
I can only tell you what I have seen is the nearly universal practice: the hymn, while an integral part of the office, is frequently omitted when the office is prayed privately, even by clergy. In public celebrations, the substitution of other hymns is a common practice.
I think substitution of another hymn is problematic from a strictly rubrical point of view, but is not really inherently objectionable (as long as prudently chosen). Nearly as I can determine, only the conference of bishops may approve a new hymn or even a hymn translation for use in the office (thus the "Hymnal for the Hours" or Mundeline Psalter hymns are not exactly entirely approved for liturgical use). It seems to be generally assumed that there is a sort of implied permission to substitute the hymns at least in the USA.
If you are praying the office privately and have no obligation to do so, I would say use your best judgement. If you are planning a public celebration, or are under obligation to pray the office, then seek the direction of the competent authority (pastor, etc.).
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