keep this website free for you. TaxTips.ca does
not research or endorse any product or service appearing in
ads on this site.
Before making a major financial decision you
should consult a qualified professional.
Canadian Tax and
If you use an ad blocker, please consider a
small contribution to
help keep TaxTips.ca free for everyone.
Disability Insurance - Pay Your Own Premiums!
Self-employed? - Get Disability Insurance!
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 employees, reimbursed by the
employer, and the reimbursement was included in
the taxable income of each employee.
If the premiums is deducted from the employee's income and remitted by the
employer, it is considered paid by the employee. If the employer pays
for all or part of the insurance, 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. Even so, if your employer doesn't
have a short or long term disability plan, it is wise to purchase one yourself,
especially if you have debt or dependants.
any case, make sure you buy disability
insurance, so that you will be covered in the case of medical emergencies which
result in you being unable to work and earn income.
Excerpts from IT-428 Wage Loss
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 10400 (line 104
prior to 2019) 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.
Premiums Paid by a Business
Disability insurance costs paid by employers are deductible as salaries,
wages and benefits, and are included as a taxable benefit on the T4 of
employees. As mentioned above, insurance proceeds received by the employee
in this case will be taxable to the employee.
If you are a self-employed sole proprietor, disability insurance costs
for yourself are not
tax deductible, but if you make a claim on the insurance, the proceeds will not
be taxable. The same is true if you are an employee paying for your own
disability insurance plan because your employer doesn't provide one.