Do I have to pay taxes on Long-Term Disability or a Wage-Loss Replacement Plan income?
The taxability of disability benefits paid to employees depends on who pays the premiums for the plan. If an employee pay 100 per cent of the premium cost, the plan is considered an employee-pay-all plan, and benefits are not taxable. If the employer makes any contribution towards the premium cost, any payments received by an employee under the disability income benefit plan are subject to income tax.
In order for disability benefits to be non-taxable, a legal obligation for employees to pay the full premium must be in place. The Canada Revenue Agency may ask an employer for a plan document or other material that confirms employees are required to pay 100 per cent of disability premiums. An insurance company contract is a supporting document only and forms part of the plan, but it is not necessarily evidence of the complete plan itself.
The employer must also show that, in actual practice, the plan is employee-pay-all. If the employer remits premiums on behalf of employees, the premium amounts should be reflected as additional salary on employees’ regular pay stubs and on their T4s.
For example, an employer with a 100 per cent employee-pay-all plan might, after discussion with an accountant, make arrangements to increase employees’ gross salary to account for their monthly premium costs. The employer would then reflect the employees’ premium contribution as payroll deduction and forward the premium amounts to the insurance company.
If an employer remits premiums on behalf of employees in this way, the additional gross salary paid and corresponding payroll deductions should be reflected on employees’ payroll stubs and T4s. The employer may also be paying the retail sales tax for employees in those jurisdictions that assess retail sales tax on premiums to benefit plans. To maintain a plan’s employee-pay-all status, the retail sales should should be assessed to employees as a taxable benefit.
Posted in: TAX FREE INCOME
