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 Are Disability payments taxable? By – Jim Cottreau FRPA
General Thoughts
If you received benefits from sickness, disability, or income protection insurance and you alone paid the contributions or premiums to the plan, you have no problems. The resultant insurance income will not be taxable.
However, if your employer paid all of the premiums or part of the premiums, different rules apply. A portion of the income paid to you must be included into your income.
The total to be included is the amount received less the total of the contributions you made to the cost of the plan sine the later of January 1st ,1968 and the last year you included income from the plan on your tax return.
Non-Group Plans
If you have a non-group plan and your employer pays the premium on the plan, then the premium is a taxable benefit to you and must be included on your T4 as taxable. However, because your employer did not contribute to the plan, you will not have to pay taxes on any benefits received.
Employee Decisions
The result of these rules is to have employees choose between having insurance premiums withheld from their pay but included in taxable income or having the employer pay and exclude in income.
Employer’s Decisions
For the employer the choice is pretty simple. They must ensure that any premiums they remit be reported as taxable income to the employee. Failure to do this will destroy the tax-free status of any future disability payments. What is a tax break at the moment can easily turn into a tax problem in the future.
Observations
There are a variety of variations to the foregoing and it is suggested you contact your accountant for advice before making decisions.
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