As Canadians prepare to file their taxes this spring, those paying long-term disability premiums may rightfully wonder if they are taxable or not. The answer relies upon several variables. A disability lawyer in Toronto can provide definitive guidance on what, if anything, is owed according to your unique circumstances.
This article provides a general glimpse into what to expect with taxable disability benefits in Canada; however, it is only a general review. This is because the question of what’s taxable and what isn’t in the realm of disability payments really should be looked at by a lawyer specializing in this area.
Is There Income Tax On Disability Benefits?
If you receive long-term disability benefits in Canada, just like with other benefits and income, it’s subject to the rules of the tax system. However, different rules apply to disability benefits, decided on by factors such as the type of benefit, who paid the premiums, and an individual’s annual taxable income.
Long-term disability benefits can come from several sources. For example, some could interpret EI sickness benefits to be disability benefits, though temporary. Long-term disability usually is applied to private disability insurance plans, the Ontario Disability Support Program, or the Canada Pension Plan disability, among other sources.
To truthfully answer the question of whether long-term disability benefits are taxable, one has to dig into each option independently.
Are Employment Insurance (EI) Sickness Benefits Taxable?
For people unable to work due to sickness, injury, or COVID-19 related quarantining, Canada’s employment insurance program offers up to 15 weeks of financial assistance. However, this applies after an employee has exhausted their sick leave and if they are still unable to work due to an injury or illness.
Any EI benefits received are fully taxable. Federal and provincial taxes are deducted from EI before you receive them. The way in which EI is calculated ties to your income. If your annual income exceeds a certain threshold, you may be expected to repay some of your EI benefits upon filing your taxes.
In any case, if you have received EI, you will receive a T4E aka ‘Statement of Employment Insurance and Other Benefits’. In this document, it will indicate whether repayment is required.
Are Short-Term Disability or Long-Term Disability Benefits Taxable?
You may have tapped into short-term disability or long-term disability benefits through personal insurance or a group insurance plan. In addition, STD and LTD benefits are available in many employee benefit plans as a means of protecting an employee’s income in the event of an illness or injury.
Typically, a long-term disability plan will mean the insurance pays out between 60 to 70% of an individual’s income when they are unable to work due to illness or injury. The exact details of income and length of the term vary from policy to policy.
Assuming you’ve filed a claim under short-term or long-term disability benefits on your insurance plan within the taxable year, the question of whether there are taxes applied to these benefits comes down to who paid the premium. The insurance premium is either be paid by you or your employer. If any percentage of the disability benefits were employer-paid, it is taxable. Alternatively, if you paid the premiums, the employee, generally these benefits aren’t considered taxable.
Why Are Employer-Paid Premiums on Disability Benefits Taxable?
Any compensation you receive from an employer is taxable. Wages and salaries are taxed. One-time bonuses are taxed. Even things like employer-provided parking are taxed. Some compensation, however, is notably excluded, and insurance premiums are one of them. For example, an employee doesn’t pay taxes on the premiums paid by the employer to cover you on a group long-term disability insurance policy which reduces your tax bill. Unfortunately, the other side of the coin is should an employee receive disability benefits under this insurance policy; it is considered taxable income at that time.
If you pay the insurance premiums out of your own pocket, the situation is somewhat flipped. Premiums on long-term disability insurance are collected after taxes. Though you are not able to reduce your income tax by deducting amounts paid for group long-term disability insurance, should you receive the benefits, they aren’t considered taxable income at that time.
If you aren’t sure who has paid your premium, contact your insurance provider. They are the recommended party to refer this question to, and they will be able to notify you on whether the benefits are taxable.
For further clarification and a more in-depth conversation about long-term disability taxes in Ontario, speaking with a disability lawyer in Toronto can outline what options may be available to you to help lower your taxable income and/or better prepare for the next tax season.
Are Pension Plan Disability Benefits Taxable?
The Canada Pension Plan Disability (CPPD) and Quebec Pension Plan (QPP) Disability Pension offer qualified individuals financial assistance when unable to work due to a long-term disability legally classified as ‘severe’ and ‘prolonged.’
CPP and QPP are considered taxable income. All amounts received under the CPPD or QPP plans must be reported on your tax return.
If you have collected any long-term disability on CPPD or QPP, you will receive a T4A(P) or ‘Statement of Canada Pension Plan Benefits’. This will indicate the total amount of benefits received within the stated year. In the case of QPP, you should also receive a second slip, RL-2 or ‘Relevé 2: Retirement and Annuity Income’.
Are ODSP Benefits Taxable?
No, ODSP is not taxable income. For disabled Ontarians registered under the Ontario Disability Support Program and receiving long-term disability income support through it, this is not taxable income.
To qualify for ODSP, an individual must be at least 18 years old, be a resident of Ontario, demonstrate a financial need to receive these benefits, and live with a substantial mental or physical disability. If you believe you qualify for ODSP financial assistance, have submitted an application and been denied, and are certain you meet the prerequisites, please speak with a disability lawyer in Toronto. They may be able to assist in getting your case appealed and approved.
For anyone already receiving ODSP, you will receive a T5007 slip identifying the total annual expense of your ODSP benefits. This number should be reported on line 115 of your T1 on your income taxes, later deducted on line 250, and thereby reducing your tax burden on ODSP benefits to zero.
Disability Tax Credits And Income Tax
The Disability Tax Credit, or DTC, is offered as a way to offset a disabled person’s tax liability. The DTC is a non-refundable tax credit available to qualified applicants who have a severe, prolonged disability. Through the DTC, the CRA acknowledges that a person with disabilities is facing unavoidable additional expenses, and this is a way to help reduce the tax burden on these individuals.
To qualify for the Disability Tax Credit, an entirely separate application has to be filed. If an individual’s already on long-term disability assistance, it does not mean they automatically qualify for the DTC, nor does it mean that they will. This is a separate department and a separate application. To apply, Form T2201 must be completed by a medical practitioner, such as an individual’s family physician and submitted to the CRA. It is then the CRA that determines if eligibility is met.
Being a non-refundable tax credit, nothing is owing tax-wise on DTC. It is purely a credit applied on one’s existing balance owing. However, suppose a person is found to have been eligible and should the Disability Tax Credit apply to prior years. In that case, you can choose to have prior tax returns reassessed through the CRA and potentially recoup some of the tax payments you’ve already made, applicable once again strictly as a credit.If this is your first year filing taxes in Ontario while receiving long-term disability benefits, a disability lawyer in Toronto can certainly help to verify that you are not overpaying and aren’t making mistakes in your tax return as it applies to your disability status.