Are Long Term Disability Benefits Taxable?

Traditionally, STD and LTD benefits would be taxed when you file your annual income tax returns. This meant income tax was not deducted during issuance of STD or LTD payments. From January 2015, CRA requirements are now that STD and LTD payments have to be taxed at the time the payments are issued.

Are Long Term Disability Benefits Taxable?

In 2015, the CRA (Canada Revenue Agency) updated its disability benefit tax withholding requirements. The changes impacted the method of calculating taxable disability benefits for both STD (short-term disability) and LTD (long-term disability) plans.

Traditionally, STD and LTD benefits would be taxed when you file your annual income tax returns. This meant income tax was not deducted during issuance of STD or LTD payments. From January 2015, CRA requirements are now that STD and LTD payments have to be taxed at the time the payments are issued.

STD and LTD Wage Loss Replacement Plans (WLRPs), which insures employees against loss of employment income following disability, accidents, or sickness, are generally subject to tax when the employer is the one making contributions and are to be reported on line 104 of your T1.

On the other hand, STD and LTD plans that fall under income-replacement benefits, which are payments made to persons who are unable to work as a result of auto accidents, are normally not taxed. Income replacement benefits are offered as part of SABs (Statutory Accident Benefits), which are a requirement in Ontario with all auto insurance.

Employee-Paid Premiums

If the employee is making the full premium payments for his/her STD or LTD plan, they are not taxed. When you are paying your own LTD insurance premiums, you are using “after-tax” dollars. This means you do not get to reduce your income tax to cater for the premiums you have paid for disability insurance.

When you get disability benefits under an insurance plan for which you were paying all the premiums, the benefits will generally not be taxed.

Employer-Paid Premiums

In Canada, you are normally taxed on all compensation you receive from your employer. It does not matter what the compensation was for. This includes salaries, wages, employer-provided parking, and one-time bonuses.

Although the employer does not have to pay tax on premiums paid to cover you under a group LTD or STD insurance policy, there is a trade-off. You will have to pay tax on any benefit you get under such a policy in case of disability.

To account for this, the premiums the employer pays for you need to be added to your income through payroll deductions or as a lump sum on your T4 at the end of each year.

Note that if group disability insurance premiums are shared between you and your employer, then you are entitled to get benefits equal to your own contribution on a non-taxable basis.

If you qualify for a non-taxable plan, you must be legally obliged to pay the full premium and this must happen in practice. To demonstrate that the payment of premiums is happening in practice, your employer must show the premiums are accounted for through payroll deductions/records.

Hire a lawyer when in doubt

LTD benefit taxation is clearly complex. Good long term disability lawyers in Toronto will have the training and experience necessary to get the most out of your LTD insurance plan and to appeal to the insurer in case you feel you have been denied your dues.

Additional articles:

Determining Whether LTD Benefits Are Taxable or Not

Tax law governing long term disability benefits can be quite confusing. This is because the payment of tax on long term disability benefits depends on who paid the premiums. Companies often offer long term disability insurance to their employees as part of the group life plan.

For disability benefits to qualify as non-taxable, you and all the other employees on the plan must pay 100% of your premiums. If your employer pays any portion of your premiums, your benefits will be taxable. That is unless your employer includes the premiums in your taxable income.

If your employer has not purchased a disability insurance on your behalf or if you are self-employed then you should buy your own LTD insurance to ensure that you are covered.
Thankfully you don’t have to worry too much about your tax liability. If you are currently receiving benefits from a private disability pension, your insurance carrier will provide details of your tax liabilities. They will deduct your tax that you owe from your monthly benefits.

Given the tax implications, employees, unions and employers should consider the cost advantages to both parties of who pays the premiums on LTD insurance that is offered as part of a group benefit.

If you receive your benefits tax free it could help to bring your disability benefit closer to your take home pay before you became disabled. This could make a big difference to your living standards.

Canada Pension Plan Disability Benefits Are Taxable

Disabled Canadians can, in addition to their private disability benefits, apply for benefits under the Canadian Pension Plan. The CPP pays out benefits to disabled people to make up for lost earnings. The benefits are paid out monthly. Dependent children of CPP beneficiaries may also be eligible for a child benefit under the CPP.

To qualify for these benefits the you must

• Have a substantial, long-term disability. The disability must preclude you from working in any job.
• Have made enough contributions to the CPP before you became disabled
• Be under 65.

If your application for CPP disability is declined you have the right to appeal the decision. Before you appeal you must ensure that you clearly understand the reason that you were declined. While occasionally applicants are declined because they have not contributed enough, more often than not the reason is that the disability is not considered severe enough. If you are going to appeal it must be submitted within 90 days of being declined.

CPP disability benefits will be taxed, but if this is your only income, you may pay less in in both federal and provincial taxes due to your basic personal tax credit. You will receive notification of the amount of taxable benefits that you have received over the tax year on the T4A(P) slip in box 20. It is also possible to have the tax deducted throughout the year so that you don’t have to worry about it when it gets to the end of the tax year.

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

• Be 16 or older
• 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.

Learn more about Short Term and Long Term Disability.