Taxation of Disability Payments

Sep 15, 2014

If disability premiums are paid by an employer, any disability claims payment received by an employee is a taxable benefit. Many claimants of such taxable plans are surprised in April when they receive their T4 or T4A because many assume that income tax has already been removed, similar to their employer’s regular paycheques. This may not be the case, since withholding income tax is still optional for all provinces except Quebec.

The good news is that this will change effective January 1, 2015.

The Canada Revenue Agency (CRA) has recently announced that effective January 1, 2015, it will be a requirement to withhold income tax at source. Depending on your disability insurance carrier, steps may have already been put in place to deduct income tax at source for new disability payments but most certainly, in 2015, this will become the new standard for both new and existing taxable disability claims.

Your insurance provider has likely produced communication pieces to those currently on disability but if you have questions on how this impacts your policy and your current disabled members, we would encourage you to contact your benefits consultant.

A separate but relevant note is that both Employment Insurance (EI) and Canadian Pension Plan (CPP) disability payments are taxable income. Some claimants may be surprised at income tax time as they were not aware of having to pay tax on these government benefits. If a request is formally submitted to Service Canada, income tax can also be withheld from these monthly payments.

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