It’s almost April, and that can mean only one thing: It’s tax season in Canada! By the end of the month, tens of millions of Canadians, including millions of us here in Ontario, will file their T1s for last year with the Canada Revenue Agency. For many Ontarians, this will be the first year in which they must file their taxes while receiving long-term disability benefits, which raises an important question: Are those benefits taxable?
The answer is a little complicated. As we’ve discussed before, long-term disability benefits can come from any of several sources, including private disability insurance that you or your employer pay for, the Canada Pension Plan (CPP), and the Ontario Disability Support Program (ODSP).
To make matters even more complicated, each of these types of disability benefits is subject to different tax rules. So, we have to answer the question whether long-term disability income is taxable by looking at each option separately.
Of course, this is just a surface look at the tax issues raised by long-term disability benefits. For more information or answers regarding your specific circumstances, you should contact a knowledgeable Ontario tax professional.
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Long-Term Disability Insurance Benefits May Be Taxable, Depending on Who Paid the Premiums
Long-term disability insurance pays benefits to covered Ontarians in the event that they become disabled. Typically, that means the insurance pays about 60% to 70% of a covered individual’s income when he or she becomes unable to work because of illness or injury, but the specific terms vary depending on the policy.
There are generally two ways in which Ontarians pay the premiums for long-term disability insurance. First, they may pay those premiums entirely by themselves. Second, their employer may pay part or all of the premiums. Who paid for the premiums for a long-term disability insurance policy in Ontario makes a difference in whether benefits under that policy are taxable.
When Benefits Are Taxable: Employer-Paid Premiums
Normally, you are taxed on any compensation you receive from your employer, regardless of what form it takes. That includes your wages or salary, of course, but it can also include things like one-time bonuses, lodging, and even employer-provided parking.
However, some types of compensation are excluded from your income. Most relevant here, you are not taxed on the amount of premiums paid by your employer to cover you under a group long-term disability insurance policy.
But that exclusion comes with a tradeoff. Although you don’t have to pay taxes on the premiums your employer pays, you will generally have to pay taxes on any benefits you receive under that policy if you become disabled.
When Benefits Are Non-Taxable: Employee-Paid Premiums
The flip side features a similar tradeoff. When you pay the premiums for your own long-term disability insurance, you do so using “after-tax” dollars. In other words, you don’t get to reduce your income tax to account for the amounts you paid for disability insurance.
On the other hand, when you receive disability benefits under an insurance policy for which you paid all the premiums, those benefits are generally not taxed.
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Determining Whether LTD Benefits Are Taxable or Not
Fortunately, you don’t have to strain yourself trying to remember who paid your disability insurance premiums. If you become eligible for benefits, your insurance carrier will notify you whether your benefits are taxable and, if so, will withhold the appropriate amount of taxes from the payments it sends you.
Canada Pension Plan Disability Benefits Are Taxable
In addition to private long-term disability insurance, disabled Ontarians may also qualify for disability benefits under the CPP. The CPP pays a monthly amount of money intended to replace the income that a disabled individual can no longer earn. To be eligible for CPP disability benefits, a person must:
- Have a severe and prolonged disability;
- Be under 65 years old; and
- Have contributed enough to the CPP to qualify.
Unfortunately, CPP disability benefits are taxable. The amount of taxable CPP disability benefits you received during a year will be reported to you in box 20 of a T4A(P) slip. You can request that your income tax be automatically deducted from your CPP benefit so that you won’t have to worry about paying in at year’s end.
Ontario Disability Support Program Benefits Are Not Taxable
Another public benefit available to disabled Ontarians is the ODSP. The ODSP provides various types of income supports and employment supports for qualifying residents.
To be eligible for ODSP benefits, you must:
- Be at least 18 years old;
- Be a resident of Ontario;
- Demonstrate your financial need; and
- Live with a substantial mental or physical disability.
Unlike CPP disability benefits, ODSP benefits are not taxable. However, you will still receive a T5007 that shows the amount of your ODSP benefits for the year. You will report them on line 115 of your T1, but you’ll be able to deduct them later in the form, on line 250.
Conclusion: Treatment of Benefits and Taxes is Complex
The Income Tax Act’s treatment of long-term disability benefits is as complicated as any other part of that infamously dense statute. Sometimes, benefits are taxable, as when you receive payments under a long-term disability insurance policy for which your employer paid the premiums, or when you’re receiving CPP disability benefits. At other times, your benefits are not taxed, such as when you paid for your own insurance or receive ODSP benefits.
If you still have questions about the tax treatment of disability benefits you’ve received during 2017, you should contact an experienced Ontario tax professional. And if you need help qualifying for disability benefits or obtaining the coverage you deserve under a long-term disability policy, contact the experienced Ontario disability lawyers of Preszler Law Firm.