Are long-term disability benefits taxable in Canada? Group LTD tax rules with examples

In Canada, whether your long-term disability (LTD) benefits are taxable depends on who paid the premiums. If your employer paid any part of the premium for a group wage-loss replacement plan, the benefits are taxable, but you can subtract the premiums you paid yourself since 1968 that you have not already used to reduce taxable benefits. If the plan is employee-pay-all, meaning you paid the entire premium with after-tax money, the benefits are tax-free. Employer-paid LTD premiums are generally not a taxable benefit federally while you work, which is why many plans are set up that way, but the price is paid at claim time. The same logic applies to short-term disability plans. Individual disability policies you pay for personally give tax-free benefits.

This guide belongs to the calculations section led by how much life insurance do I need.

The rule, in a table

The federal rule is in paragraph 6(1)(f) of the Income Tax Act, which covers benefits from sickness, accident, disability and income maintenance plans to which the employer contributed. The insurer issues a T4A slip for taxable benefits and usually deducts tax at source.

Worked example 1: a shared-cost plan

Illustrative figures. Lina's plan is paid 50% by the employer and 50% by employees. Over 12 years she contributed $3,600 in premiums and has never had a claim. She becomes disabled and receives $4,000 a month, or $48,000 in her first full year of claim.

• Taxable amount in year 1: $48,000 - $3,600 = $44,400.
• From year 2, her past contributions are used up, so the full $48,000 is taxable.

Keep your old pay stubs or ask human resources for your contribution history; the insurer may not have it.

Worked example 2: employer-paid versus employee-paid

Illustrative figures. Salary $84,000; LTD pays 66.7% = $4,669 a month. The premium is $70 a month.

The employee-paid version costs about $840 a year and yields about $840 a month more during a claim. Some employers offer a choice, or a flexible benefits plan in which you can allocate credits; ask how the plan treats your choice for tax.

In some arrangements, the employer pays the premium but reports it as a taxable benefit on your T4, with the intention that the plan is treated as employee-pay-all. Whether that achieves tax-free benefits depends on how the plan is set up; confirm with the plan administrator and CRA guidance before relying on it.

Lump sums, repayments and CPP offsets

• Retroactive lump sums. If a denied LTD claim is later approved and paid as a lump sum for prior years, the whole amount is reported in the year you receive it. CRA may recalculate it as if received in the earlier years when the portion for prior years is $3,000 or more and this lowers your tax; this is the qualifying retroactive lump-sum payment rule.
• Repaying the insurer after CPP arrears. If you repay LTD benefits because CPP disability was approved retroactively, you may be able to deduct the repayment of previously taxed benefits. Keep the insurer's letter.
• CPP disability benefits are taxable on their own T4A(P), and EI sickness benefits on a T4E.

Group life insurance: the taxable benefit you already pay

Employer-paid premiums for group term life insurance are a taxable benefit, shown on your T4, including any provincial sales tax charged on the premium in provinces such as Ontario and Quebec. The death benefit itself is tax-free to the beneficiary. Optional life you buy through payroll is paid from after-tax income.

Quebec differences

Quebec has its own income tax and reports benefits on the RL-1 slip. For Quebec tax, employer contributions to group health and accident plans are generally a taxable benefit even where they are not federally, so your Quebec taxable income can include employer contributions that your federal income does not. How this applies to the disability portion of your coverage depends on the plan; check the codes on your RL-1 and ask your employer. Revenu Québec publishes the rules for employers.

How this changes your planning

1. Find out who pays your LTD premium; it is often in the booklet or visible on a pay stub as "LTD".
2. If benefits would be taxable, compare the after-tax benefit with your take-home pay, as in the disability income gap guide.
3. If you can choose employee-paid LTD, the trade is usually a small premium for a much larger after-tax benefit.
4. When shopping for an individual top-up, remember its benefits are tax-free if you pay the premium personally, which can make a modest benefit worth more than it looks. See self-employed income protection for individual policy details.

Frequently asked questions

Is my employer's short-term disability taxable?

Under the same rule: taxable if the employer contributed, tax-free if employee-pay-all. Salary continuance paid directly by the employer is employment income and fully taxable.

Can I deduct the LTD premiums I pay?

Not against employment income. Instead, they reduce the taxable part of benefits if you ever claim under a plan the employer also funds.

Are benefits from my union or association plan taxed?

It depends on whether an employer contributed. A plan funded only by members' after-tax dues is usually treated as employee-pay-all; confirm with the plan.

Should I get tax advice?

For lump-sum settlements of disputed LTD claims, yes: the way a settlement is structured, including legal fees, affects the tax. Speak with an accountant or the lawyer handling the claim.

Sources

• Canada Revenue Agency — taxable benefits guide for employers and wage-loss replacement plans
• Income Tax Act (Justice Laws) — paragraph 6(1)(f)
• Revenu Québec — Quebec taxable benefits and RL-1 slips
• OmbudService for Life and Health Insurance — questions about group plan claims