In Canada, your long-term disability benefits are taxable if your employer paid the policy premiums. Payments are taxed as they are issued rather than when filing annual income tax returns with the Canada Revenue Agency (CRA).
However, it is vital that you review your long-term disability policy with an Ontario disability lawyer to confirm or deny the benefits you receive are taxable.
Long-Term Disability Is Taxable if Your Employer Paid
Long-term disability premiums are either paid by your employer, or they come out of your wages. When employers pay insurance premiums, you are responsible for paying the taxes on your benefits received. It does not matter what you used the benefits for, since they are issued under the premise that they are for your living expenses.
The employer does not pay taxes on premiums to provide coverage for you under a long-term disability policy. However, there is a trade-off to this benefit, which means that you must pay tax when receiving long-term disability benefits.
If you are receiving a non-taxable, employee-paid plan, then you are required to pay the premium full or in part. Your employer’s payroll department or bookkeeper may track your premium payments so that you may verify that your long-term disability benefits should not be taxed.
Determining if Your Long-Term Disability Is Taxable
The general rule-of-thumb is that if you paid the premium, then your long-term disability benefits are not taxable. If your employer paid for it, then you are responsible for covering taxes. Matters are further complicated if you and your employer shared the costs of premiums.
However, you may contact the insurance provider to determine if you are responsible for taxes. The carrier may tell you if your benefits are taxable and may withhold the appropriate tax amount from the payments it sends to you.
Tax Advantages of Negotiating a Lump-Sum Settlement
There are potential tax advantages if you are able to negotiate a lump-sum settlement for your long-term disability benefits on a taxable policy. You should carefully discuss your options with an Ontario disability lawyer before agreeing to a settlement to guarantee that what you are receiving is fair and reasonable.
If you determine that a lump-sum settlement is right for you, then the insurance provider must issue a T4A for past benefits paid. Thereafter, it does not have to issue you one for future benefits and the future benefits (if lumped out) will be non-taxable.
This process may likely reduce the amount of income tax you owe to the CRA for your future long-term disability payments. You should also discuss the structure of any lump sum payments with an Ontario disability lawyer to ensure that you are paying the proper tax amount.
Other Taxable Long-Term Disability Programs in Canada
There are other taxable disability programs in Canada, of which you should be aware since you might receive benefits in conjunction with your long-term benefits.
These other taxable disability programs include:
- Employment insurance (EI) sickness benefits: EI benefits are for people who have used their sick leave but are still unable to work. You may draw benefits for up to 15 weeks. These benefits are taxable.
- Canada pension plan disability (CPPD): When you qualify for CPPD benefits, you should anticipate that these payments may be tax-deductible.
There is no doubt that Canada’s tax law is vast and complicated. However, the consequences are significant if you do not get it right. This information is not presented as a scare tactic, but rather it is to help you stay aware of the very real tax implications on your long-term disability benefits.
If you need help understanding how to address the tax issues of your long-term disability benefits, it is critical that you speak with a qualified tax expert to avoid making any costly mistakes. Otherwise, you could face tax penalties that may result in fines and jail time.
Help Getting Long-Term Disability Benefits
For more information about the taxability of your long-term disability benefits, you should contact a tax expert or accountant. However, a disability lawyer may be able to help you understand the terms of your disability policy while properly filing a claim or appeal on your behalf.
If you need help obtaining disability benefits, contact an Ontario disability lawyer at Preszler Injury Lawyers. You may request your free initial consultation with our team today by calling (416) 364-2000.