Sunday, September 25, 2022

Are Disability Insurance Benefits Taxable In Canada

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What Is A Benefit

When thinking about all of this, it helps to understand what a benefit is.

defines a benefit as an advantage or profit gained from something. Benefits are not always measured in terms of their value in money or currency. They can be tangibles, intangibles, material or immaterial. Traditional health insurance benefits are measured in monetary terms. They are most often an arrangement between an employer and an employee and are in addition to salary and wages. In Canada, an insurance benefits plan can be paid from an employer to an employee tax-free. The prerequisite is that the benefit must be to an employee. As mentioned above, this arrangement is permitted under the Canada income tax act under PHSP legislation. Its important to note, most health insurance benefit plans also include dental and vision benefits and other services.  

Can I Claim Disability Insurance Premiums On My Taxes

You made the decision to buy disability insurance or already have coverage. Now, you want to know whether premiums are deductible, like other business expenses.  It’s a simple “no” answer. Individuals can’t claim disability insurance premiums on their taxes. According to Dave Dineen, who writes about retirement issues for Sun Life, “deductibility of insurance premiums is a complicated maze of specific rules for specific scenarios.”  If your small business offers a group insurance plan and pays the premiums for its employees, claiming those premiums for tax purposes by an employee is not allowed. In fact, premiums that employers pay for employees get treated as taxable income.  Grant Thornton is one of the largest accounting firms in the country. Their tax-planning guide states that self-employed workers may be able to deduct health plan premiums from income for themselves and their dependents. Furthermore, the guide also explains that disability insurance premiums do not qualify as a personal expense deductible that is from income.  The tax-deductibility of premiums is a complex issue. It’s best to consult with a tax professional to discuss your specific situation. That way, you can review any insurance proposals you have and their tax consequences at the same time.

Reporting Payments On Your Tax Returns

To claim the payments of your health plan premium, include them with your other eligible medical expenses and claim the credit on line 33099 of your return.

If you are paying premiums under a plan managed by your employer, you will find the exact amount paid on your T4 Statement of Remuneration slip in Box 85 of the other information section. If you do not have the information on a T4 slip, keep your receipts to be able to prove the amounts you paid in the event of a CRA audit.

If you have retired or left a job where your employer still pays for your health plan premiums, you will receive a T4A Statement of Pension, Retirement, Annuity and Other Income slip with the amount shown in Box 135.

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How Does It Work

  • Choose the amount you want and add optional benefits to customize your coverage.
  • Pay your monthly premium.
  • File a claim if you become disabled.
  • Receive your monthly payments when the waiting period ends. The waiting period is the number of days from the date youre disabled until the benefit start date.
  • Your payments stop when your benefit period ends or you return to work.

Your Income And The Canada Pension Plan

Are Social Security Disability Benefits Taxable Income ...

A long term disability benefit through the Canada Pension Plan is considered income and is taxable, meaning that people who receive benefits may have to file them as part of their income tax return. But a good idea is to ask Service Canada to withdraw taxes from the monthly benefit, rather than paying at the end of the tax year.

Certain people may be eligible for the Disability Tax Credit, which could reduce the amount of tax that has to be paid.

Decide If You Need Disability Insurance

Disability insurance can help protect you and your family from an unexpected illness or accident that leaves you unable to work and earn an income.

Generally, disability insurance replaces between 60% and 85% of your regular income, up to a maximum amount, for a specified time if you:

  • temporarily can’t work
  • are permanently disabled due to an injury or illness

Permanent refers to the nature of the disability. It does not mean that you’ll get benefits for the rest of your life.

Many employers offer disability insurance. However, you can get your own disability insurance plan through a life and health insurance agent.

If you’re self-employed, you can also get disability insurance that will cover many of your business expenses if you’re unable to work.

Ontario Disability Support Program Benefits Are Not Taxable

Disabled Ontarians may qualify for the Ontario Disability Support Program. This support program is designed to help disabled people with every day costs like food and shelter. It also covers certain medical expenses and assistance with finding a job or growing your career. The province funds the program

The ODSP program is intended as a support program of last resort. This means that to receive benefits you must have attempted to find support from every other avenue. This would include looking for a job, claiming from the Workplace Safety and Insurance Board and made application for the Canada Pension Plan Disability Benefit.

To qualify you must

  • Live in Ontario
  • Prove that you are financial needy
  • Have a substantial disability either mental or physical that will take at least a year to heal and that makes it difficult to work

The substantial impairment must be such that the person claiming ODSP must find it difficult to work, take car of themselves or take part in community living. Under certain circumstance you can claim if you are working.

You will not have to pay tax on ODSP benefits. You do, however, have to declare them on your tax return. This is why you will receive a T5007 showing how much you have received during the year. You must insert this amount onto Line 115 of your T1. You can then deduct them again on line 250.

Are These Benefit Plans Taxable

Private health insurance benefit plans provided and 100% paid by an employer – are tax-free benefits for the employee. The premium paid by the employer is a before-tax business expense. These plans are technically called Private Health Services Plans or PHSPs. The Canada income tax act describes the way these plans must be set up in order for benefits paid to be tax free.

Personal health insurance plans marketed and sold by private insurance companies are taxable benefits. They are taxable because premiums are paid by individuals out of their after tax income.

Disability Insurancepremiums Paid By A Business

Disability insurance costs paid by employers are deductible as salaries,wages and benefits, and are included as a taxable benefit on the T4 ofemployees.  As mentioned above, insurance proceeds received by the employeein this case will be taxable to the employee.

If you are a self-employed sole proprietor, disability insurance costsfor yourself are nottax deductible, but if you make a claim on the insurance, the proceeds will notbe taxable.

The T2125Statement of Business or Professional Activities includes line 8690 forInsurance – this includes commercial insurance premiums for insurance on anybuildings, machinery and equipment you use in your business.  See 

It is always best totalk to your professional tax advisor regarding tax implications.

Is Long Term Disability Income Taxable

Long term disability income MAY be taxable if your employer paid the premium or if you are receiving Canada Pension Plan disability. If, on the other hand, you paid for private disability insurance or the provincial government of British Columbia has categorized you as a Person With Disability, you do not need to pay tax.

Since the law can be very confusing, it may help to speak with a long term disability lawyer at Preszler Law Firm.

When Long Term Disability Income Is Taxable

Your employer paid for your disability insurance. Employees are taxed on any compensation they receive from their employers, whether its base wages, over-time, salary, one-time bonuses, or business per diems. However, employees have not been taxed for the number of premiums their employers paid on the group long-term disability insurance policy. That means taxes must be paid on disability benefits received during the course of the year just as they were regular income.

Fortunately, insurance carriers notify benefits recipients when their benefits are taxable. Typically, they withhold the appropriate amount from the payments sent to you. However, the reduced compensation you receive can be an unwelcome surprise if you were counting on the full amount.

You can request that your taxable income be automatically deducted from your disability benefits, so you dont have to worry about it come tax time.

When Long Term Disability Income Is NON-Taxable

What If I Negotiated a Settlement Through a Lawyer?

Three Things You Must Know Before You Mention A Buyout Of A Disability Insurance Policy To Your Insurance Company:

Lump-sum buyouts are something that you need to handle very delicately. If you dont, then the whole situation can blow up in your face. Following are three things you must know before you ever mention the words lump sum buy-out to your insurance company:

1. How insurance companies calculate the value of lump-sum buyouts for disability benefits cases

A lump-sum buyout is a negotiation. Insurance companies are in the business of making or saving money. For your insurance company to agree to a buy-out, it has to make financial sense for them to do so.

With this in mind, you have to understand that you are never going to get 100% of the value of your future benefits. Think about it. Why would an insurance company ever do that? People would get fired. For example, at the very least, there is a chance you would die before the end of the benefit period. Long-term disability insurance benefits do not pass on to your family after your death. If you died tomorrow, the insurance would no longer have to pay you.

So, insurance companies decrease the value of future benefits to reflect your mortality risk.

When calculating the value of a lump-sum buy out amount, the insurance company will consider the following factors:

Present value is a key concept that most disability claimants do not understand. Most disability claimants vastly overestimate the value of their future benefits.

For example:

Wrong way: $3,500 / month x 12 months x 15 years = $630,000

Employment Insurance Sickness Benefits

The Employment Insurance program offers temporary financial assistance to people unable to work because of sickness, injury or quarantine. These benefits are usually the first benefits received by an employee after they have exhausted their sick leave and they are unable to return to work because of continued injury or illness.

Employment Insurance benefits are taxable, which means that federal and provincial taxes will have been deducted from your EI payments prior to receipt. Depending on your total income for 2020, you may be required to repay a portion of EI benefits received when you file your taxes.   

If you were in receipt of EI benefits, you will receive a T4E, Statement of Employment Insurance and Other Benefits slip, which will indicate if you are required to repay a portion of the EI received. The T4E is issued by Service Canada. 

Home Office Set Up And Expenses Update

Disability Insurance: Everything You Must Know

Allowances provided by an employer to purchase home office equipment are taxable but there is a new Covid-19 exception for the purchase of computer equipment..

A reimbursement received by an employee from an employer for the purchase of home office equipment would generally be a taxable benefit due to the employee benefiting from purchasing and owning it.  However, the CRA has acknowledged that due to COVID-19 in Canada, a number of employees may not have the necessary tools and equipment to work from home successfully. 

Due to this reasoning, the CRA has stated that an employer reimbursing an employee for the purchase of any home office equipment up to an amount of $500,with the presentation of a purchase receipt, will not result in a taxable benefit to the employee as the equipment purchase mainly benefits the employer. 

 

What Is Disability Insurance And How Does It Work

What would you say if someone asked you, Whats your most valuable asset?

You might say your home, or maybe your car. But, have you considered that its your ability to earn a living? Over your lifetime, thats worth far more than your home or car. While you likely have insurance to protect both your home and car, do you have insurance to replace your income if the unexpected strikes?

Reporting Disability Insurance Benefits On Your Tax Return

You do not have to pay taxes on disability benefits you receive if you purchased your policy with after-tax dollars. But those who receive their policy through their employer may have to. Taxable disability insurance benefits are classified as âsick pay,â so if you anticipate receiving benefits, you have to submit IRS Form W-4S, titled âRequest for Federal Income Tax Withholding From Sick Payâ to the insurance company. You can also make estimated tax payments using Form 1040-ES, âEstimated Tax for Individuals,â which youâll file directly to the IRS.

If you start receiving taxable benefits, you need to include the amount of benefits you receive on your tax return as part of your salary or wages when you file. As with reporting traditional wages and salaries, if the amount you paid in estimated tax or via income tax withholding is higher than what you actually owe, youâll receive a refund. If you paid too little tax, youâll have to pay more to make up the difference on Tax Day.

The IRS will let you deduct qualified out-of-pocket medical expenses if youâre eligible to itemize your deductions, so if your disability benefits cover medical care and you owe taxes on them, those medical expenses may negate the tax.

Buyer Beware: Mortgage Disability Insurance

Big banks and other mortgage lenders offer to bundle life and disability insurance with mortgages. But these plans only pay your mortgage if you become disabled. Also, you can expect higher premiums and features that benefit the lender instead of you. This Globe and Mail article explains why standard disability policies are better and cheaper.

Ontario Disability Support Program

Living in Ontario means you may be able to benefit from the Ontario Disability Support Program. If youre a resident of Ontario and are at least 18 years old, you may be eligible for this plan. Youll also need to prove your financial need and youll have to show that you have a mental or physical disability. With the Ontario Disability Support Program, you do not have to worry about your benefits being taxed.

However, you will get a T5007 in the mail and this will show the amount of ODSP benefits you receive during the year. This information needs to be reported on line 115 of your T1. You can deduct this amount later on line 250.

 

Free Income Tax Advice

We offer a free 10 minute income tax consultation with one of our students. We will identify your tax problem and advise you if you need assistance from a tax lawyer to solve it and if so we will suggest a one hour consultation with one of our lawyers, the fees if you wish to consult and a rough estimate of the legal fees if you choose to retain us.

The Employer Pays A Portion And The Employee Pays The Balance With Post

If the employer pays a portion of the premium, and the employee pays the balance with post-tax dollars, then the benefits are taxable in the same proportion as the percentage of the premium paid by the employer. For example, if you paid for 50% of your premium with post-tax dollars, you would only be taxed on 50% of the benefit that your employer had been paying.

Disability Insurance Features And Costs

What Is The Best Option

Are Health Insurance benefits taxable in Canada?

So, is it more profitable to go with taxable or non-taxable disability benefits? Generally, in Quebec, when employers want to maintain the same contribution to the total cost of their group insurance plan in either case, going with taxable disability coverage is more profitable for everyone. As employer-paid premiums for health and dental coverage are a taxable employment benefit in Quebec whereas employer-paid long-term disability premiums are not, it is indeed more tax-effective for an employee to have the employer pay for long-term disability insurance rather than for health/dental coverage. However, the precise answer will depend on the replacement formulas used and the salaries of the employee groups covered.

In the other provinces, the health/dental premiums are not taxable, and the most profitable option is generally the opposite, i.e. non-taxable long-term disability insurance.

Choosing the right type of long-term disability benefits is not always easy. If you are wondering what would be the best option for you, contact your AGA Advisor who will analyze the overall picture of your group insurance plan and recommend the course of action most suited to your situation!

Health And Dental Benefits

Provincial and territorial governments provide basic health coverage. To help pay for expenses beyond basic care, many firms offer private, employer-sponsored group insurance plans which are usually considered non-taxable employee benefits.

As an employer, the premiums you pay for these plans count as business expenses and, outside of Quebec, the premiums you pay on your employees’ behalf are not considered to be a taxable benefit.

You can also offer health care spending and wellness spending accounts as employee benefits.

 

1. Health Spending Account

Canada income tax act in order for

HSAs are simple to use and set up.  HSAs provide tax-free dollars that employees can use on any eligible health expense. As an employer, you can choose an annual limit for how much employees can be reimbursed through their HSA.  And while they do not involve payment of monthly premiums, an administration fee is paid by the employer to the HSA provider whenever an employee submits a covered expense.

 

2. Wellness Spending Account

Similar in set up and operation to HSAs, Wellness Spending Accounts differ in that they are taxable benefits. Still, many employers use them to attract and retain talent.

 

Many Insurance Advisors Are Familiar With The Taxation Of Life Insurance Products But Living Benefits Products Critical Illness And Disability Insurance May Be Less Familiar This Article Will Provide A Primer On The Tax Treatment Of These Living Benefits Products

To start, living benefits products are not life insurance. They are considered accident or sickness insurance. There is some uncertainty about this characterization where return of premium on death is added as a rider. The CRA has said that adding ROPD may well make these products life insurance. The industry takes the view that merely adding ROPD as a rider to a living benefits product does not make it life insurance. Living benefits can also be a rider that is added to a life insurance policy. In this situation the policy is clearly life insurance and is governed by the tax rules for life insurance policies. In this article, well talk about living benefits products that are not part of a life insurance policy.

What Edition Of Turbotax Is Right For Me

Answer a few simple questions on our product recommender and we can help guide you to the right edition that will reflect your individual circumstances.

You can always start your return in TurboTax Free, and if you feel the need for additional assistance, you can upgrade to any of our paid editions or get live help from an expert with our Assist & Review or Full Service*. But dont worry, while using the online version of the software when you choose to upgrade, your information is instantly carried over so you can pick up right where you left off.

*TurboTax Live Full Service is not available in Quebec.

 

With more than 20 years experience helping Canadians file their taxes confidently and get all the money they deserve, TurboTax products, including TurboTax Free, are available at .

Payments Of Premiums For Private Health Services Plans

As a rule, premiums that are paid to private health services plans including medical, dental and hospitalization plans are considered to be eligible medical expenses by the Canada Revenue Agency. Furthermore, any premium, contribution or other consideration including sales and premium taxes that you pay to a private health services plan for yourself, your spouse or your minor children, is an eligible medical expense.

However, the plan you make the payments to must qualify as an eligible private health services plan. When changes were made a few years back, the CRA adopted a less restrictive position regarding which plans are considered eligible. They now consider a plan to be eligible as long as all or substantially all of the premiums paid under the plan relate to medical expenses that are themselves eligible for the Medical Expense Tax Credit. The plan must also be an insurance plan, instead of another form of contract. To be considered as substantial, the CRA refers to approximately 90 percent or more.

Previously, the CRAs position was that 100 percent of the premiums had to be paid to be considered as eligible medical expenses. The rule now means that plans that offer some non-eligible benefits can still be considered eligible, if these benefits are less than 10 percent of the total benefits.

Plans that are paid by an employer and most mandatory provincial health plans are not eligible to be claimed as health expenses.

Can I Deduct Disability Insurance Premiums As A Business Expense

The answer is no in almost every situation. Although, this Sun Life publication, authored by Stuart Dollar, Director of Tax and Insurance Planning at Sun Life, explains the exceptions across the spectrum of business and personal insurance products.  He exhaustively covers the tax-deductibility of premiums for all types of insurance, including disability insurance premiums . The only noted exception that affects self-employed individuals deals with private health services plans . In a nutshell, medical and dental insurance plan premiums may be fully or partially deductible for the self-employed person and their spouse and children who live in the same household.  In summary, premiums may be deductible expenses in the following situations:

     

  • Health insurance plan premiums for self-employed individuals and their dependents, as mentioned above.
  •  

  • Group disability insurance premiums paid by an employer for an employee could be a deductible expense for the business.

Which Benefits Count As Taxable

Not sure whats taxable and whats not? Lets dive into some typical examples.

Typical taxable benefits include:

  • Boarding, lodging, and low-rent or rent-free housing
  • Expenses from personal travel
  • Personal use of a company car
  • Gifts over $500 per year
  • use of a company-owned vacation property

Typical non-taxable benefits include:

  • Subsidized meals in an onsite cafeteria
  • Meals or allowance provided for working overtime
  • Fees from personal use of the internet or a cell phone

 

When Benefits Are Taxable: Employer

Normally, you are taxed on any compensation you receive from your employer, regardless of what form it takes. That includes your wages or salary, of course, but it can also include things like one-time bonuses, lodging, and even employer-provided parking.

However, some types of compensation are excluded from your income. Most relevant here, you are not taxed on the amount of premiums paid by your employer to cover you under a group long-term disability insurance policy.

But that exclusion comes with a tradeoff. Although you dont have to pay taxes on the premiums your employer pays, you will generally have to pay taxes on any benefits you receive under that policy if you become disabled.

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