Serious illness or injury might force you to leave your job. Long-term disability (LTD) insurance in Canada can help. Generally, employees must pay taxes on all wages, bonuses, vacation pay, and other compensation they may receive. If you experience an injury that allows you to take part in your employer’s long-term disability benefit plan then you may have to pay taxes on any benefits you receive from the plan.

LTD benefits will help replace lost income due to a long-term illness or injury to ensure that you can cover bills and expenses by providing monthly payments (usually 60-70% of your wages) to eligible individuals. However, you may need to exhaust other options such as sick leave, short-term disability, or Employment Insurance (EI) first.

The good news? LTD payments are a financial safety net during medical challenges. The not-so-good news? They’re usually taxable income. Exceptions exist, though. Understanding the tax implications of disability income is crucial. Tax treatment depends on who pays the premium for your LTD Policy. It is important to understand the difference in taxes since it could have a significant impact on your finances.

The two common situations are employer-paid benefits, where the employer pay the benefit premium, and employee-paid benefits, where the employee pays the premium.

What is the Difference Between Employer and Employee Paid Premiums?

There are various benefit plans that your employer may have set up for their employees. It is important to understand which scenario you fall into depending on who is paying your plan premiums to ensure you pay the correct taxes and budget accordingly.

Employer-paid LTD:
In this case, your employer will set up a play and pay the premiums on it. The benefits are taxable income. You’ll receive a T4A slip for tax filing. This reflects the gross benefit amount, meaning taxes likely were not withheld. So, you might owe additional tax when filing. It’s wise to double-check your T4A for any pre-deducted tax, but expect to pay some yourself. Since the individual employee has not paid any tax on the premiums then you will be expected to pay.

Employee-paid LTD:
In this case, you pay the insurance premiums for LTD benefits. If the premiums are 100% employee-paid, benefits are not taxable and you’ll keep the full amount. No tax slips are issued in this case. This is because you have already paid tax on the premiums.

What if I Am Partially Paying for My LTD Benefits?

There are situations where employees have the option to contribute to the cost of their LTD insurance through payroll deductions or other means. If you are a partial contributor, this will change your tax amount.

If you and your employer are both contributing to your benefits, then your Long-Term Disability will be taxable on the portion that your employer paid. This is because you have not paid any tax on the premiums that your employer paid for, and you have paid tax on the premiums you have contributed.

Who is Paying My Premium?

If you are unsure who is paying your long-term disability plan premium, the best course of action is to contact your plan administrator. Generally, your plan administrator will be a third-party person or company that manages the employee benefit plan.

Understanding LTD tax implications is crucial for budgeting, especially for individuals who are also balancing their injuries with a change to their income-earning capacity. Knowing how much you owe in taxes can help you create an accurate budget.

What if I am Self-Employed?

If you are self-employed, do not have access to employer-sponsored coverage, and have purchased a Long-Term Disability insurance plan directly from an insurance company then your tax situation may be different. Generally, this means the individual is responsible for paying the premiums, meaning the benefits are non-taxable. From a tax standpoint, self-employed disability insurance policies are treated the same as an individual plan.

While Long-Term Disability tax implications can vary by policy, insurers typically make it easy for recipients to understand their tax obligation. If you have any questions about your policy or LTD claim, do not hesitate to reach out to one of NOVA Injury Law’s accomplished LTD lawyers who can review your claim and provide a free consultation.

Other Tax Credits While on LTD

Good news! You might also qualify for tax credits while on Long-Term Disability. These credits can lower your tax bill. Some credits you may qualify for:

  • Disability Tax Credit (DTC): This credit reduces your total tax amount. To qualify, you must have a severe and prolonged impairment in physical or mental functions, as certified by a qualified medical practitioner. Being approved for DTC can lead to other benefits such as the Registered Disability Savings Plan (RDSP).
  • Canada Pension Plan Disability (CPPD): This is a monthly payment provided to individuals unable to work due to disability. To qualify, you must be under 65 years of age and have contributed to the Canada Pension Plan.
    Medical Expense Tax: Helps offset costs associated with disabilities, and can help cover costs of prescriptions, treatments, assistive devices and more.
  • Canada Caregiver Credit (CCC): Provides tax relief for those caring for a spouse/partner or dependent with a disability.
    Provincial/Territorial Credits: Many provinces offer additional disability-related tax credits. Check with your local tax authority for details.

Need Help With Your Long-Term Disability Claim? Contact NOVA Injury Law

Serious illness or injury shouldn’t add financial stress. Long-Term Disability benefits can help, but navigating the process can be confusing. We can help! Here at NOVA Injury Law, we’ll guide you through:

  • Qualifying for LTD: Understand the requirements and maximize your chances of approval.
  • Applying for benefits: We’ll help you navigate the application process.
  • Managing your claim: Learn about your rights and tax implications.

Don’t go through this alone. Call NOVA Injury Law today for a free consultation.