Are Long Term Disability Benefits Taxable? Here’s What You Should Know

When you become disabled, it is important to understand the details of your long term disability benefit payments. The insurance policy will set out the benefit calculation – usually a percentage of your pre-disability income sometimes with a maximum monthly benefit amount. The question of whether the disability benefit income will be subject to income tax depends on who paid for the cost of coverage (the insurance premiums).

Private Long Term Disability Insurance v. Group Insurance

If you purchased an individual or private disability income policy, your benefit will not be taxable income. This is because you paid for those premiums personally with after tax dollars. If your long term disability benefits are found in a group insurance policy provided as a benefit by your employer, the question of whether long term disability benefit payments are taxable income is determined by determining who pays the insurance premiums.

Group Long Term Disability Benefits – Employer-Paid Premiums

If your employer pays any portion of the premiums for long term disability insurance, your LTD benefits are taxable. Therefore, if your gross benefit amount is 60% of your pre-disability income, you will receive a lower payment because the insurance company will deduct income tax from your monthly payments and remit it to Canada Revenue Agency.

Group Long Term Disability Benefits – Employee-Paid Premiums

Where employees pay 100% of the insurance premiums associated with their disability insurance, the benefits are not considered taxable income. Therefore, the disability income does not need to be reported on the disabled person’s income tax return.

How to Figure Out Who Is Paying Your Premiums

In order to figure out the tax implications of disability benefits, the first step is to review whether the employer made payroll deductions for LTD premiums. Even if the employee paid a portion of the insurance premiums, if the employer pays any of the premium, the LTD benefits are taxable.

You can contact your insurance company or plan administrator to determine whether your long term disability income is taxable. Alternatively, you can request a copy of your policy or disability plan from the insurer.

Government Disability Benefits

Are Canada Pension Plan (CPP) Disability Benefits Taxable?

CPP disability benefits are taxable income. If you are awarded CPP disability benefits, it is wise to request that the government deduct taxes in order to satisfy the tax obligation which will result from receiving this income throughout the year and avoid a nasty tax bill when you file your income tax return.

Are Employment Insurance Benefits Taxable?

Employment insurance illness/sickness benefits are taxable. Many employers do not provide short term disability benefit plans and their disabled employees will need to apply for EI illness benefits during the waiting period for long term disability benefits.

Is Worker’s Compensation Taxable?

Workers’ compensation benefits are not usually taxable income. You will need to report the benefit amount on your income tax return and claim the benefits as a deduction. Therefore, while your benefits do not create a tax obligation, you do need to make sure to report your WSIB/WCB payments properly to Canada Revenue Agency.

Canada Pension Plan Disability Benefit Offset/Reduction

Most group insurance plans provide that CPP disability is an offset or benefit reduction from long term disability benefits. A question which often arises is how that benefit reduction is calculated when long term disability benefits result in a tax free monthly payment while CPP disability is taxable income. Generally, the long term disability policy will set out benefit calculation rules which provide that even though the disability insurance benefits are not considered taxable income, the gross CPP disability benefit is deducted from the nontaxable LTD benefit amount.

Tax Credits You May Claim

In order to reduce your tax obligations, you may be able to claim one of several tax credits or other benefits such as:

• the disability tax credit (DTC);
• if you have the DTC, you can open a registered disability savings plan which allows you to tax shelter income you earn on your deposited savings and receive bonds or grants from the government to supplement your savings;
• medical expense tax credits relating to medical expenses for which you are not reimbursed by an insurance plan;
• the Canada Disability Benefit.

It is important to obtain advice from a qualified tax professional in order to determine whether you have applied for all of the benefits to which you are entitled and claimed all available tax credits.

Contact Our Disability Lawyers at Burn Tucker Lachaîne, PC

If you have questions about your disability benefit plan terms and whether you need to pay tax on your benefits, contact of our experienced long term disability lawyers for a free consultation.