Disability Benefits Taxable Implications

Disability Benefits Taxable Implications

With the month of April just around the corner, you may be getting ready to prepare and file your taxes for 2020. Many people ask us whether their Long Term Disability premiums are a taxable benefit in Canada. While there is no easy yes or no answer here, we have provided the important information you may need below. 

Do You Pay Income Tax on Disability Benefits in Canada? 

If you have been in receipt of disability benefits, you will need to understand the tax implications that apply to the disability benefit you have received. Different tax rules will apply depending on the type of benefit received, who paid the premiums for the benefit, and the total amount of income received by an individual in a given tax year.  

Below, you will find summary information about the tax implications when you have been in receipt of disability benefits. This information provides a general review and the implications for your specific situation will differ depending on your specific circumstances. For answers about your specific circumstances, you should consult with a lawyer specialized in this area of practice or a tax professional. 

EMPLOYMENT INSURANCE (EI) SICKNESS BENEFITS

The Employment Insurance program offers temporary financial assistance (up to a maximum of 15 weeks) to people unable to work because of sickness, injury or quarantine. These benefits are usually the first benefits received by an employee after they have exhausted their sick leave and they are unable to return to work because of continued injury or illness.

Employment Insurance benefits are taxable, which means that federal and provincial taxes will have been deducted from your EI payments prior to receipt. Depending on your total income for 2020, you may be required to repay a portion of EI benefits received when you file your taxes.   

If you were in receipt of EI benefits, you will receive a T4E, “Statement of Employment Insurance and Other Benefits” slip, which will indicate if you are required to repay a portion of the EI received. The T4E is issued by Service Canada. 

SHORT-TERM DISABILITY (STD) OR LONG-TERM DISABILITY (LTD) BENEFITS

Short-Term Disability (STD) benefits and/or Long-Term Disability (LTD) benefits provide some income protection when a person is unable to work due to an illness or injury. You may access STD and LTD coverage through purchasing personal insurance coverage and/or through accessing group insurance coverage. Group insurance coverage is generally accessed via an employee benefit plan. 

For more information on when and how to file a claim for Short-Term or Long-Term Disability benefits, please refer to our disability benefits page.

Whether tax is payable will depend on who has paid the premiums for the STD and/or LTD benefits. If any portion of the premiums for STD and/or LTD disability benefits were paid by your employer, the benefits are taxable. If all the premiums for your Short-Term or Long-Term Disability insurance were paid by you, the benefits are generally not taxed. 

Given the importance of the taxability of these benefits, employers, unions, and employees should all be concerned about who pays the premiums on these benefit plans.

If you are unsure as to who is paying the premiums for your disability plan, you can contact your insurance provider and they will notify you as to whether your benefits are taxable or not.

CANADA PENSION PLAN DISABILITY (CPPD) BENEFITS/ QUÉBEC PENSION PLAN (QPP) DISABILITY PENSION

The CPP disability benefit and QPP disability benefit are available to assist people who are unable to work in any capacity due to severe and prolonged disability. If you have qualified, and are receiving Canada Pension Plan Disability Benefits or Quebec Pension Plan Disability Pension, you should be aware that these benefits are taxable income. All the amounts received from CPP or QPP must be reported in your tax return. 

You would receive a T4A(P) “Statement of Canada Pension Plan Benefits” tax slip at the beginning of the year if you received benefits from the CPP or the QPP. The T4A(P) will indicate the amount of benefits you received in the previous year. If you received QPP benefits, you would also receive a RL-2 “Relevé 2: Retirement and annuity income” slip. 

DISABILITY TAX CREDIT (DTC)

The CRA offers several tax credits to offset a disabled individual’s tax liability. A common tax credit accessed by people receiving CPP Disability Benefits is the Disability Tax Credit (DTC). This is a non-refundable tax credit that is available to persons who are experiencing severe and prolonged disability. 

The DTC tax credit assists to reduce the amount of income tax payable for persons with disabilities. Acknowledging that there are unavoidable additional expenses for persons with disabilities helps to provide greater tax equity. 

Accessing this tax credit requires a separate application, and not all persons in receipt of disability benefits will qualify. To apply, a specific form (Form T2201) must be completed by a medical practitioner and submitted to the CRA. The CRA then determines eligibility based on the information provided by the medical practitioner. 

A notice of determination will be provided to the applicant and will indicate which year(s) the applicant is eligible to claim the DTC. If the notice indicates that an applicant does not qualify, it will explain why. The notice may also include information about other programs that are available to individuals who qualify for the DTC. 

If a person would have been eligible for the DTC in prior years, but had not applied when they filed those taxes, they can seek a reassessment of the prior tax returns through the CRA.  

IMPORTANT LONG TERM DISABILITY TAX FORMS

CANADA PENSION PLAN DISABILITY (CPPD) BENEFITS/ QUÉBEC PENSION PLAN (QPP) DISABILITY PENSION

DISABILITY TAX CREDIT (DTC)

HELP FOR PERSONS WITH LOW INCOME 

If your income is below qualifying thresholds, you may be able to access free assistance to complete your tax returns through a community organization. More information about free tax clinics to assist Canadians can be found by following this link

Consult one of our experienced Long-Term Disability lawyers at Raven, Cameron, Ballantyne and Yazbeck LLP if you have any questions.