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Personal Tax -> Disability insurance premiums

Disability insurance - Pay your own premiums!

Income Tax Act s. 6(1)(f)

If you receive disability insurance, it will be tax-free if you and all other employees in the plan have paid for the insurance, or if the insurance costs for all employees was paid by the employer, and included in the taxable income of each employee.  If the employer pays for all or part of the insurance and does not include the insurance cost in the taxable income for all employees, then disability insurance received will be taxable, net of any premiums paid into the plan by the employee after 1967.  The following is a quote from the Canada Revenue Agency bulletin IT-428 Wage Loss Replacement Plans:

Where an employee-pay-all plan exists and provides for the employer to pay the employee's premiums to the plan and to account for them in the manner of wages or salary, the result is as though the premiums had been withheld from the employee's wages or salary.

Disability insurance costs are not tax deductible for employees.

Excerpts from IT-428 Wage Loss Replacement Plans:

14. For benefits received by an employee under a wage loss replacement plan to be subject to tax in his hands under paragraph 6(1)(f), the plan must be one to which the employer has made a contribution out of his own funds. An employer does not make such a contribution to a plan if he merely deducts an amount from an employee's gross salary or wages and remits the amount on the employee's behalf to an insurer. In these circumstances, the employee's remuneration for tax purposes is not reduced by the amount withheld and remitted by the employer to the insurer.

17. It is a question of fact whether or not an employee-pay-all plan exists. An employer cannot change the tax status of a plan by adding at year end to employees' income the employer contributions to a wage loss replacement plan that would normally be considered to be non-taxable benefits. Where an employee-pay-all plan exists and provides for the employer to pay the employee's premiums to the plan and to account for them in the manner of wages or salary, the result is as though the premiums had been withheld from the employee's wages or salary.

If you are collecting benefits under a disability insurance plan, when the benefits are tax-free, you will not receive a T4A.

If you have paid a portion of the premiums, the T4A you receive will be for the gross amount of the benefits received, but you can deduct your contributions to the plan.  Instead of entering the T4A amount from box 107 on Line 104 of your tax return, you would enter the net amount after deducting contributions you made to the plan after 1967, if you did not use them on a previous year's return.

CRA Resources:

bulletLine 104 Other employment income - see income-maintenance insurance plans
bulletIT-428 Wage Loss Replacement Plans

Tax Tip:  Pay for your own disability insurance, or make sure your employer adds the cost to your taxable income.

 

Revised: March 07, 2014

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