Are Bonuses, Overtime, and Commissions Included in Long-Term Disability Benefits in Canada?

Long-Term Disability (“LTD”) benefits can be hard to understand. Many people know that LTD benefits replace part of their income when they cannot work, but they may not know what income is actually counted.

This matters a lot. The income used to calculate the benefit may not be the same as the employee’s total employment income.

Some workers earn more than just a base salary. They may earn overtime, bonuses, commissions, shift premiums, or other extra pay. If they become disabled, they may expect their LTD payment to be based on all of that income.

In practice, that is not always what happens. In many LTD plans, the benefit is based only on regular salary or insured earnings. Extra pay may be left out unless the policy clearly says it is included. This can lead to a much lower monthly payment than the worker expected. There is no single formula that applies to every LTD plan in Canada. Each plan must be reviewed individually.

However, the general principles and explanations provided in this guide act as a helpful tool on your journey to understanding how your LTD benefits are calculated.

What Are Long-Term Disability Benefits?

Long-Term Disability benefits, commonly called LTD benefits, “provide income support to eligible people who are unable to work because of illness or injury.

Coverage may be provided through various avenues, including:

  • An employer-sponsored group benefits plan;
  • An individual disability insurance policy;
  • A union or jointly administered benefits plan; or
  • A public-sector disability plan.

These benefits are usually paid each month. The goal is to replace part of the person’s income while they are disabled.

The insurance policy is usually the starting point. It explains who is covered, what qualifies as a disability, how the benefits are calculated, when payments begin, how long benefits may continue, what income is included in the calculation, and what other income may reduce the benefit.

A benefits booklet or summary can be helpful, but it may not contain every applicable term, definition, amendment or limitation. Employees should request the complete policy or governing plan documents whenever possible.

Why the Definition of Income Matters

When someone applies for LTD, the insurer must calculate the monthly benefit. This is commonly calculated by applying a percentage to an amount defined by the plan.

That amount may be described as:

  • Salary;
  • Base pay;
  • Monthly earnings;
  • Covered earnings;
  • Insured salary;
  • Pre-disability earnings;
  • Regular earnings; or
  • Gross income.

These words may sound similar, but they can mean different things depending on the definitions in that particular plan. For example, one plan may define earnings as base salary only. Another plan may include regular overtime and bonuses, but exclude commission. Another may have a separate calculation for commissioned employees.

This is why workers should not assume that all income will be counted. The fact that compensation appears on a pay stub or T4 does not automatically mean that it is insured under the LTD plan.

Base Salary Is Often the Starting Point

Many LTD plans use base salary as the starting point.

Base salary means the regular amount a person earns before extra pay. For example, if someone earns $60,000 per year as their regular salary, the LTD plan may use that number to calculate benefits.

If the plan pays ⅔ of salary, the gross LTD amount may be based on ⅔ of $60,000, equalling $40,000.

But if the worker also earned $10,000 in overtime, the plan may not count that overtime unless the policy says it is included. This can make a big difference in your monthly benefit payout.

Example: Why Extra Pay Matters

Imagine a worker earns: $60,000 base salary + $8,000 overtime + $5,000 annual bonus. Their total yearly income is $73,000.

However, the plan defines insured earnings as base salary only, the benefit may be calculated using $60,000 rather than $73,000. 

At a benefit rate of ⅔, the difference would be significant:

  • Benefit based on $60,000: approximately $3,333 per month.
  • Benefit based on $73,000: approximately $4,056 per month.

That is a difference of approximately $723 per month before any maximum benefit, offsets or taxes are applied. The person’s disability payment may be much lower than expected, which is why it is important to always read the policy carefully to avoid being let down.

Why is Overtime Often Excluded?

Overtime is extra pay for working more than normal hours. Many workers depend on overtime. In some jobs, overtime can be a large part of yearly income, but overtime is included in the calculation of LTD benefits only if the plan’s definition of earnings includes it.

Many policies specify that benefits are based on regular salary or basic earnings. Under this definition, overtime is often treated as extra pay, not regular pay. This means the insurer may not count overtime when deciding how much to pay-out for monthly disability benefits.

This can be frustrating for workers who regularly worked overtime before becoming disabled.

The key questions for the governing plan wording are:

  • Does the plan expressly include or exclude overtime?
  • If overtime is included, what period is used to calculate the average?
  • Does the plan include the entire overtime payment or only part of it?
  • Was the overtime reported to the insurer as insured earnings?

Why are Bonuses Often Excluded Too?

Bonuses are also often excluded from LTD calculations.

The treatment may depend on the type of bonus, including whether it is discretionary; guaranteed under an employment contract; based on individual performance; based on company performance; a sales incentive; a retention payment; or a signing bonus.

A plan may exclude all bonuses, include certain contractual bonuses or average eligible incentive compensation over a defined period.

The timing of a bonus payment may also create complications. A bonus paid after disability may relate to work performed before disability. Whether it is included in insured earnings will depend on the plan’s definitions, calculation period and measurement date.

Some plans clearly say bonus payments are excluded. Other plans may use wording that leaves out “extra compensation” or “supplementary payments.” If the bonus is not part of covered earnings, it may not be included.

Commissions Can Be Treated Differently

Commissions can be more complicated, particularly because it may change significantly from month to month. Some workers earn only commissions. Others earn salary plus commissions.

A plan covering commissioned employees may calculate insured earnings using:

  • Base salary only;
  • Base salary plus commissions;
  • Average commissions over the previous 12, 24 or 36 months;
  • Total target compensation;
  • Earnings reported by the employer to the insurer; or
  • A special formula for employees who are paid primarily by commission.

Other plans may exclude commissions entirely.

Because commission income can change from month to month, insurers often rely closely on the wording of the plan.

Workers who earn commissions should check not only the definition of earnings outlined in their plan but also review their plan generally. It should explain how commission income is handled including the averaging period; whether the calculation uses commissions earned or commissions paid; the treatment of chargebacks and cancelled sales; any annual or monthly cap; whether commissions received after disability affect ongoing benefits; and the earnings figure reported by the employer.

What Are “Covered Earnings” or “Insured Earnings”?

LTD policies may use terms such as “covered earnings,” “insured earnings,” or “insured salary.” These terms generally refer to the amount of income the plan uses to calculate disability benefits.

This amount is not always the same as your total income, taxable income, pensionable earnings, Employment Insurance earnings, or the gross income shown on your T4. You may receive several types of pay, but only some of that income may be insured under the LTD plan.

Depending on the policy, covered earnings may include base salary, regular earnings, or certain approved premiums. The plan may exclude overtime, bonuses, commissions, temporary pay, extra payments, or other supplementary compensation.

For example, a plan may calculate LTD benefits as a percentage of your insured annual salary. That amount may be rounded, averaged, capped, or adjusted under the policy rules.

The definition of covered or insured earnings should be read together with the benefit formula, maximum monthly benefit, employer reporting rules, and any offset provisions.

Offsets are amounts the insurer may deduct from the LTD payment. Depending on the policy, these may include CPP Disability benefits, workers’ compensation benefits, other disability payments, pension income, or other specified sources of income.

Because these terms directly affect the monthly benefit, it is important to review the exact policy wording rather than assuming the calculation will be based on your full employment income.

LTD Benefits Are Usually a Percentage of Income

Most LTD plans generally do not replace 100% of pre-disability income. Many plans replace part of income, such as 60%, 70%, or 85% of net salary; the exact amount depends on the policy. 

Some plans also have a maximum monthly benefit.

For example, suppose a worker earns $120,000 per year, or $10,000 per month. Their LTD plan pays two-thirds of covered earnings, but the policy has a maximum monthly benefit of $5,000.

Two-thirds of the worker’s monthly income would be about $6,667. However, because the plan has a $5,000 monthly maximum, the worker would receive no more than $5,000 per month before taxes, offsets, or other deductions.

The maximum benefit can therefore prevent a worker from receiving the full percentage stated in the policy, especially if they are a higher-income employee.

This means high-income workers may not receive the full percentage of their actual income.

Can LTD Benefits Be Reduced by Other Income?

Yes. A LTD plan may provide that income from specified sources reduces the amount payable. These deductions are commonly called offsets.

Depending on the policy, potential offsets may include:

  • CPP Disability benefits  
  • Workers’ compensation benefits  
  • Motor vehicle income replacement benefits  
  • Other group disability benefits, including some pension benefits.

The purpose is to avoid double payment for the same income loss. This means the amount shown in the policy may not be the final amount paid. For example, if a person receives CPP Disability, the LTD insurer may reduce the LTD payment by some or all of the CPP amount.

Offsets are contractual. An insurer cannot assume that every source of income is deductible without authority under the plan.

Tax Treatment Can Also Matter

LTD benefits may be taxable or non-taxable. This often depends on how the premiums were funded.

As a general rule: if the employer paid the premiums, LTD benefits are often taxable; but if the employee paid all the premiums, LTD benefits may be non-taxable. The precise result may depend on the structure of the plan and the history of employee contributions.

This can make a big difference in take-home income. A taxable benefit may look higher on paper but may be reduced by tax. A non-taxable benefit may look lower but may provide more money after tax.

Workers should check their plan and speak with a tax professional if needed. The fact that deductions appeared on a pay stub does not always establish that the employee paid the entire cost of the LTD coverage.

Why Are Workers Often Surprised?

Many people are surprised when they receive their LTD approval letter.

They may expect the benefit to be based on their full yearly income, but the insurer may calculate the benefit using only covered earnings. This can lead to shock and stress.

For example, a worker may think: “I made $85,000 last year. Why is my LTD based on $70,000?” The answer may be that the extra $15,000 came from overtime, bonuses, or commissions that were not covered by the plan.

Other possible explanations include:

  • The employer reported an outdated salary;
  • The plan used a different measurement date;
  • The plan averaged variable earnings over an earlier period;
  • A maximum monthly benefit applied;
  • The insurer deducted an offset; or
  • The employee misunderstood whether the stated benefit was before or after tax.

This is why the policy wording matters so much. Asking for a written calculation is usually the best starting point for identifying the issue.

What Should Employees Check?

Employees should ask for a copy of the full LTD policy or benefits booklet.

They should look for sections called:

  • Benefit amount
  • Covered earnings
  • Insured salary
  • Monthly earnings
  • Pre-disability earnings
  • Offsets
  • Maximum benefit
  • Tax status
  • Exclusions

They should also check whether the plan mentions:

  • Overtime
  • Bonuses
  • Commissions
  • Shift premiums
  • Supplementary pay
  • Temporary pay
  • Performance pay

Employees should compare the plan wording against their pay records, employment contract and the earnings information supplied by the employer. If the wording is unclear, it may help to ask Human Resources or the insurer for a written explanation.

What Should Employers Explain?

Employers and plan administrators should clearly communicate what compensation is insured, particularly when employees receive substantial variable/extra pay.

Employees should be told whether their LTD benefit is based on:

  • Base salary only
  • Base salary plus certain premiums
  • Total target compensation
  • Average earnings
  • Another formula

Employers should also update the insurer when an employee’s insured earnings change, as required by the plan. Clear reporting can reduce disputes and help employees determine whether additional private disability insurance may be appropriate.

What If the Insurer Calculates the Benefit Wrong?

Sometimes insurers make mistakes. As an employee applying for LTD benefits, you should always review the calculation carefully. If you believe the benefit was calculated incorrectly, you should compare the insurer’s calculation to the policy wording and supporting records.

Employees can always ask:

  • What income did the insurer use?
  • What income did the insurer exclude?
  • Did the insurer use the right salary date?
  • Did the insurer apply the right percentage?
  • Did the insurer apply offsets correctly?
  • Did the insurer use the correct maximum benefit?

If something seems wrong, the worker can ask for a written breakdown. The employee may also be able to pursue the insurer’s internal review or appeal process and obtain legal advice. Contractual and statutory deadlines may apply, so disputes should be addressed promptly.

What If the Policy Is Unclear?

Sometimes policy wording is not clear. 

If the policy is unclear, there may be a dispute about what income should count. For example, there may be an argument about whether a certain payment is regular earnings or extra compensation.

There may also be a dispute about whether commissions were part of normal income.

In these cases, the facts matter.

  • Useful evidence may include:
  • Pay stubs
  • T4 slips
  • Employment contracts
  • Bonus plans
  • Commission plans
  • Job offer letters
  • HR benefit booklets
  • Emails from the employer
  • Payroll records

The more records a person has, the easier it may be to understand the correct benefit amount.

Why This Matters for Disability Claims

When you are unable to work, every dollar matters. A lower-than-expected LTD payment can make an already stressful situation even harder.

Your regular bills do not stop just because your income has changed. You may still need to cover rent or mortgage payments, groceries, medication, childcare, transportation, and treatment costs.

That is why the way your LTD benefit is calculated matters so much. It is not just a number on a page. It can affect your ability to pay your bills, support your family, and focus on your recovery.

Key Takeaways

The amount of LTD benefits you receive depends on the wording of your insurance policy, not simply on your total income, T4 earnings, or most recent paycheque.

Many LTD plans calculate benefits using base salary, covered earnings, insured earnings, or another defined amount. These terms may exclude parts of your compensation even if you regularly received them before becoming disabled.

Overtime, bonuses, commissions, shift premiums, and other extra payments are not automatically included. The policy must be reviewed to determine whether each type of income is covered, excluded, capped, or averaged over a set period.

Workers with variable income should pay close attention to the calculation method. A commissioned employee’s benefit may be based on base salary, average commissions, total target compensation, or an earnings figure reported by the employer. The averaging period and measurement date can have a major effect on the result.

A benefit rate of two-thirds does not always mean you will receive two-thirds of your total employment income. The percentage is applied only to the earnings recognized under the plan. A maximum monthly benefit may reduce the payment further.

Other income may also be deducted from the LTD benefit. Depending on the policy, this may include CPP Disability, workers’ compensation, motor vehicle income replacement benefits, pension income, or benefits from another disability plan.

Tax treatment affects how much money you actually receive. LTD benefits are often taxable when the employer paid the premiums and may be non-taxable when the employee paid the full cost. The funding arrangement should be confirmed rather than assumed from a pay stub alone.

Employees should request a written calculation showing the earnings figure used, the benefit percentage, any averaging method, the monthly maximum, all offsets, and whether the payment is taxable.

The insurer’s figures should be compared with the full LTD policy, employment contract, pay stubs, payroll records, bonus or commission plans, and the salary information reported by the employer.

A calculation error may involve more than simple arithmetic. The insurer may have used an outdated salary, excluded covered income, applied the wrong averaging period, used the wrong disability date, imposed an incorrect maximum, or deducted income that the policy does not allow it to offset.

If the policy wording is unclear or the monthly benefit appears too low, ask the insurer for a written explanation promptly. Appeal and legal deadlines may apply, so a disputed calculation should not be ignored.

Conclusion

Long-Term Disability benefits can provide important income support when a person cannot work; however, the amount of an LTD benefit cannot reliably be determined from a pay stub, T4 or annual salary alone.

The most important rule is simple: read the policy. The governing insurance policy and plan documents determine what compensation is insured, which calculation formula applies, whether a maximum benefit limits the payment and what other income may be deducted.

Anyone applying for LTD benefits should obtain the complete plan documents and review the insurer’s calculation carefully. When the amount appears too low, the claimant should request a written breakdown and compare it with their compensation records and the plan wording.

Understanding these terms before a disability occurs can help employees identify gaps in their coverage and avoid unexpected financial hardship.

At NOVA Injury Law, we understand how stressful it can be to discover that your long-term disability benefits are lower than expected. You may be unable to work while still trying to manage your regular bills, medical expenses, and the financial needs of your family.

Our team helps people across Canada understand how LTD benefits are calculated and whether bonuses, overtime, commissions, or other earnings should be included. Whether you are applying for benefits, questioning the insurer’s calculation, or dealing with a denied or underpaid claim, we are here to help.