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Is Disability Insurance Taxable In Canada

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Private Disability Policies Are Individual Disability Benefits Taxable

Disability Insurance Income- Do I Have To Pay Tax On it? Canada

Disability benefits received from an individual disability policy you bought personally, with post-tax dollars, are not taxable.

However, the choice of paying for an individual policy with pre-tax vs. post-tax dollars is up to the policyholder. Using after-tax money is the preferred method, as you pay more now but have maximum funds available should you become disabled. If long-term disability becomes the reality, all taxes will have been paid.

If your premiums are paid with pre-tax dollars, you would need to pay taxes on your long-term disability benefits.

Disability Benefits Taxable Implications

With the month of April just around the corner, you may be getting ready to prepare and file your taxes for 2020. Many people ask us whether their Long Term Disability premiums are a taxable benefit in Canada. While there is no easy yes or no answer here, we have provided the important information you may need below.

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.

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Situations Where You Are Not Considered To Have Collected The Gst/hst

You are not considered to have collected the GST/HST on taxable benefits provided to employees in any of the following situations:

  • the property or services that give rise to a taxable benefit are GST/HST-exempt or zero-rated
  • a taxable benefit results from an allowance included in the income of the employee under paragraph 6 of the Income Tax Act
  • you are restricted from claiming an input tax credit in the situations described in section “ITC restrictions” for the GST/HST paid or payable on the property and services that give rise to the taxable benefit
  • the property or services that give rise to a taxable benefit are supplied outside Canada

Example

You, as an employer who is a GST/HST registrant, would like to reward an employee for outstanding performance, and you have agreed to pay for hotel accommodations and three meals a day, for one week, in London, England. An amount will be included in the income of the employee as a taxable benefit. However, you will not be considered to have collected tax in respect of the benefit provided to the employee, since the supplies were made outside of Canada.

Also, if the taxable benefit is for the standby charge or operating expense benefit of an automobile or an aircraft, you are not considered to have collected the GST/HST on this benefit in the following situations:

Note

It Comes Down To Whether Premiums Are Paid With Pre

Is Long

Generally, whether you pay long-term disability benefit premiums with pre- or -post-tax dollars is largely what determines if your long-term disability benefits will be taxable. Be aware of how you are making your payments, of your plans policy, and what portions of the payment you are responsible for.

If your long-term disability benefits are taxable, there are tax forms you can submit to the insurance company to have them withhold taxes from your monthly disability benefits so that you will not owe taxes later. An accountant or other tax professional can help you determine how much you should withhold.

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What To Consider When Buying Disability Insurance

If you’re considering disability insurance, make sure you:

  • check with your employer to see if you already have group disability coverage with your employer’s plan
  • shop around, especially if you’re considering private disability insurance

Consider group insurance offered through a union, guild, or professional or alumni association. Premiums for this type of coverage usually increase as you get older. You’ll need to renew your insurance every few years.

Tool Reimbursement Or Allowance

If you reimburse or provide an allowance to your employees to offset the cost of tools that they need for their job or you pay for their tools, the amount of the payment is a taxable benefit and should be included in the employees’ income.

When employed tradespersons file their income tax and benefit return, they may be able to deduct part of the cost of eligible tools they bought to earn employment income as a tradesperson.

Employers have to fill out and sign Form T2200, Declaration of Conditions of Employment, to certify that the employee must acquire these tools as a condition of, and for use in, their employment.

For more information, see Guide T4044, Employment Expenses.

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When Disability Insurance Payouts Are Not Actually Tax

When it comes to benefits received under a disability insurance policy, the tax rules can get a bit murky

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Registered Retirement Savings Plans

Contributions you make to your employee’s RRSP and RRSP administration fees that you pay for your employee are considered to be a taxable benefit for the employee. However, this does not include an amount you withheld from the employee’s remuneration and contributed for the employee.

If the GST/HST applies to the administration fees, include it in the value of the benefit.

Payroll deductions

Contributions you make to your employee’s RRSPs are generally paid in cash and are pensionable and insurable. Deduct CPP contributions and EI premiums.

However, your contributions are considered non-cash benefits and are not insurable if your employees cannot withdraw the amounts from a group RRSP before the employees retire or cease to be employed.

Although the benefit is taxable and has to be reported on the T4 slip, you do not have to deduct income tax at source on the contributions you make to your employee’s RRSPs if you have reasonable grounds to believe that the employee can deduct the contribution for the year. For details, see Chapter 5 of Guide T4001, Employers’ Guide Payroll Deductions and Remittances.

Administration fees that you pay directly for an employee are considered taxable and pensionable. Deduct CPP contributions and income tax. These are considered a non-cash benefit, so they are not insurable. Do not deduct EI premiums.

What Is A Business Overhead Expense Insurance Policy

Business overhead expense policies or riders help cover business expenses if a disability prevents or limits the owner of one of the owners from working. BOE is a necessity if you are a partial or full owner of a medical practice.

You can typically get BOE coverage that pays a maximum monthly benefit between $15,000 and $25,000. The maximum benefit period on BOE is typically two years. If you obtain BOE that is bundled with your personal disability policy, the maximum benefit may be a factor of that benefit amount. For example, the BOE benefit maximum might be equal to 12 times the benefit on your personal policy.

BOE benefits can help you cover:

  • Rent or mortgage payments on your business facilities
  • Utilities

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Recreational Facilities And Club Dues

The use of a recreational facility or club is a taxable benefit for an employee in any of the following situations:

  • You pay, reimburse, or subsidize the cost of a membership at a recreational facility, such as an exercise room, swimming pool, or gymnasium.
  • You pay, reimburse, or subsidize the cost of memberships to a business or professional club .
  • You pay, reimburse, or subsidize the cost of membership dues in a recreational facility of the employee’s choice, up to a set maximum. In this case it is the employee who has paid for the membership, owns it, and has signed some kind of contract with the company providing the facility.
  • You pay, reimburse, or subsidize the employee for expenses incurred for food and beverages at a restaurant, dining room lounge, banquet hall, or conference room of a recreational facility or club.
  • You provide recreational facilities to a select group or category of employees for free or for a minimal fee, while other employees have to pay the full fee There is a taxable benefit for employees who do not have to pay the full fee.

However, the use of a recreational facility or club does not result in a taxable benefit for an employee in any of the following situations:

For more information, see Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment.

Employment Insurance Premium Rebate

Are Your Long Term Disability Benefits Taxable or Non ...

As an employer, you may be eligible for a reduction in the employer EI premium rate that you use to calculate your share of the EI premiums if you offer income protection coverage, such as a wage loss replacement plan or other income maintenance plan, to your employees that reduce the EI benefits payable to an employee. For more information, go to How to reduce the EI premium rate if you provide your employees with a short-term disability plan.

If you are granted an EI premium reduction, you will calculate your employer’s EI premiums using a rate that is lower than the standard employer rate of 1.4 times the employees’ EI premiums.

You have to return 5/12 of any savings to your employees in the year in which you received the EI premium reduction, or within the first four months of the following year. This savings can either be given to your employee in cash, such as a cash allowance or a cash rebate, or indirectly through increased employer contributions to an employee’s health and welfare trust, group sickness or accident insurance plan, private health services plan, or in any other manner. These indirect benefits will only be tax-free if they are given to the employee in the form of a benefit specifically exempt from taxation under paragraph 6 of the Income Tax Act.

Note

If the benefit is taxable you must include it in your employee’s income in the year the employee received it. For more information, see Benefits chart.

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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.

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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What Are The Benefits Of Disability Insurance

People may incorrectly assume what qualifies as a disability. For example, they may believe the term applies to catastrophic conditions, such as paralysis from a car accident or a debilitating stroke. However, disabilities typically are the result of less severe injuries and more common conditions such as pregnancy, back pain, depression, and digestive disorders.

An analysis of Guardian disability claims shows mental health, which includes substance abuse, as one of the fastest-growing diagnosis categories in the past five years, along with digestive and circulatory.2

Computation Of Us Benefit Under The Agreement

Do you pay taxes on long-term disability benefits in Canada?

When a U.S. benefit becomes payable as a result of counting both U.S. and Canadian Social Security credits, an initial benefit is determined based on your U.S. earnings as if your entire career had been completed under the U.S. system. This initial benefit is then reduced to reflect the fact that Canadian credits helped to make the benefit payable. The amount of the reduction will depend on the number of U.S. credits: the more U.S. credits, the smaller the reduction and the fewer U.S. credits, the larger the reduction.

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Group Term Life Insurance Policies Employer

This section applies to current, former, and retired employees.

Note

Premiums you pay for employees’ group life insurance that is not group term insurance or optional dependant life insurance are also a taxable benefit.

A group term life insurance policy is one for which the only amounts payable by the insurer are policy dividends, experience rating refunds, and amounts payable on the death or disability of an employee, former employee, retired employee, or their covered dependants.

Term insurance is any life insurance under a group term life insurance policy other than insurance for which a lump-sum premium has become payable or has been paid. Life insurance for current employees would usually be term insurance, although it is sometimes provided for retired employees.

A lump-sum premium is a premium for insurance on an individual’s life where all or part of the premium is for insurance for a period that extends more than 13 months after the payment of the premium .

Calculating the benefit

If the premiums are paid regularly and the premium rate for each individual does not depend on age or gender, the benefit is:

  • the premiums payable for term insurance on the individual’s life

plus

  • the total of all sales taxes and excise taxes, excluding GST/HST that apply to the individual’s insurance coverage
  • any provincial insurance levies or sales tax that employers have to pay on some insurance premiums

minus

Reporting the benefit

Is The Canada Pension Plan Disability Benefit Taxable

Beyond private insurance, disabled Canadians can apply for the Canadian Pension Plan Disability Benefit. The CPP Disability Benefit is taxable and must be reported on your tax return. This benefit helps make up for lost earnings if you meet the criteria as defined by Service Canada.

You may be eligible for this benefit if you are:

  • Under 65 years old

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Airline Passes For Employees And Retirees Of An Airline Company

If you provide standby airline passes to a current airline employee for their personal travel, there is no taxable benefit for the employee.

If you provide space-confirmed airline passes to a current airline employee for personal travel, the passes are a taxable benefit. The value of the benefit to be included in the employees income is the fair market value of the pass , less any amount paid by the employee.

If you provide standby or space-confirmed airline passes to a retired airline employee for their personal travel, there is no taxable benefit for the retired employee.

Do You Pay Taxes On Disability Insurance Benefits

Disability Tax Credit Lawyers

The effect disability insurance payments have on your taxes depends on the type of policy, how premiums are paid, and who is paying the premium.

If you pay the policyâs premiums with after-tax dollars â meaning you donât receive a tax break for those premiums â then any benefits you claim from the policy will be tax-free income. If you become disabled, you will not owe income taxes on the benefits you receive from your disability policy. This is true whether youâre buying a group plan through an association or your own individual policy.

However, you must report as income any amount you receive for a disability through an insurance policy paid for by your employer.

If you and your employer split the premium cost, then you must report as income the amount that is attributable to your employerâs payments.

For example, say your employer provides long-term disability insurance and pays 75 percent of the premium. You pay the other 25 percent. You become disabled and receive a $60,000 benefit the first year. You would have to report $45,000 of that benefit as taxable income when you file your taxes. The remaining $15,000 is not taxable because you paid that share of the premiums with after-tax money.

However, if you pay part of the premium with pretax dollars, youâll owe income tax on any disability benefit you receive. You often pay premiums on disability insurance with pre-tax dollars when itâs through a cafeteria or medical reimbursement plan.

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