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

• T4A(P) Statement of Canada Pension Plan Benefits
• RL-2 Relevé 2: Retirement and Annuity Income

DISABILITY TAX CREDIT (DTC)

• Form T2201

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.

On November 6 and 7, 2018, Morgan Rowe presented to University of Ottawa students as part of two panels on careers in labour law. Morgan spoke specifically about her experiences working on behalf of unions and individual employees. Morgan would like to thank Professor Ravi Malhotra and the Employment and Labour Law Student Society for inviting her to participate on these panels.

Please note our office will be closed from December 22, 2018 until January 1, 2019. We will reopen for regular business hours on Wednesday, January 2, 2019 at 8:30 am.

Warmest wishes for a happy holiday season and a wonderful new year.

On December 4, 2018, Lancaster House presented its 2018 Bargaining in the Broader Public Sector Conference at the Sheraton Centre Toronto Hotel. The conference tackled current issues facing unions and their members when dealing with collective bargaining in the broader public sector, including such key issues as the role of politics and the Charter at the bargaining table, the changing face of the workforce, and the future of work.

David Yazbeck was pleased to be selected as the union-side co-chair for this conference and to assist in organizing the conference and moderating various panels during the day.

RavenLaw is pleased to announce that David Yazbeck has been appointed to the Board of Directors of Copyright Visual Arts – Droits d’outeur Arts visuels (COVA-DAAV). COVA-DAAV is the business operating name of CARCC, which is a copyright collective founded by Canadian Artists’ Representation – Le Front des Artistes Canadiens (CARFAC) in 1990 to assist artists in administering their copyrights. David is also a member of the Board of CARFAC and, as part of the governance structure for COVA-DAAV, CARFAC is entitled to appoint board members to the COVA-DAAV Board.

David is excited for this opportunity to continue his advocacy efforts on behalf of visual artists in Canada, particularly as it relates to protecting and promoting artists’ copyright in Canada and Quebec. Any interested artists from Canada and Quebec may affiliate with Copyright Visual Arts.

In 2017, the Public Servants Disclosure Protection Tribunal rendered its first decision on the merits of a reprisal complaint under the Public Servants Disclosure Protection Act. As the first decision on the merits, a number of critical issues of legal principle were raised by the parties. Ultimately, the Tribunal ruled on several of these issues, a ruling which had significant implications for future Tribunal cases. In particular, the Tribunal concluded:

• Intent, in the sense of vengeance, must be proven in order to establish reprisal;

• Minor or insignificant reprisals were not protected by the Act, effectively imposing a de minimus standard; and

• An employee cannot receive reprisal protection for subsequent disclosures of the same wrongdoing.

In addition to these legal rulings, the Tribunal dismissed the complaint on the facts, concluding that the employee had not proven that she experienced negative effects as a result of the alleged reprisal measures.

The employee sought judicial review of the Tribunal decision. In a judgment rendered this month, the Federal Court of Appeal dismissed the application, concluding that the Tribunal’s findings that there was no negative effect on the employee could not be set aside.

Counsel had urged the Court to address the legal issues given their impact upon other cases. The Court declined to do so, because this would take it “too far into a law-making role”. In spite of this, the Court went on to comment upon the Tribunal’s analysis as follows:

“But we wish to add that many of the legal conclusions reached by the Tribunal in this case warrant critical scrutiny. As a matter of administrative law, other members of the Tribunal are not bound by the legal conclusions reached here… If the particular case requires it, and until this Court settles the matter, a member of the Tribunal is free to conduct her or his own analysis and reach different legal conclusions.”

By this language, it would appear that the Court has signaled that the reasoning of the Tribunal on these legal issues need not be followed in the future, a conclusion which represents significant progress for complainants who are victims of reprisal.

The employee in this matter was represented by David Yazbeck and Michael Fisher of our firm.

On September 29, 2018, Julia Williams was a panelist at the Ontario Region – Canadian Association of Labour Lawyers’ second annual conference (OnCALL2) in Kingston, Ontario. Julia participated in the “Ten Minute Labour Lawyer” panel, presenting on the recent arbitral decision in City of Kingston v CUPE 109. Julia would like to thank the organizers of OnCALL2 for inviting her to participate in this event.

Ask most healthy working people to name their greatest financial asset, and more than likely, they will say ‘my house.’ A fair response. After all, maintaining and paying for a home is where a significant chunk of our income and time is spent. 

But for most healthy working people, it’s the wrong answer: A far greater financial asset is their ability to earn an income over the course of their career, often a long period of time. The consequences of not being able to do so can be financially devastating.

Most people have only a hazy understanding of the financial consequences of being unable to continue working due to mental or physical illness. We know that during our working lives, there is always the possibility of being laid off from one job and having to find another, but if chronic illness or a serious accident prevents us from working at all, the option of finding another job disappears. In fact, there are limited options for those employees; one of the options is Long Term Disability (LTD). 

As employment lawyers, we understand that few people think about the possibility of their working lives coming to a premature end. When it does happen, the questions are inevitably many. Here are answers to just a few basic LTD questions:  

How Do You Obtain Long Term Disability Benefits?

Most people who have Long Term Disability benefits have them through their employery, and typically, the cost of these benefits is shared between the employee and the employer. Having the employer pay for some (or all) of the benefits, while superficially attractive, also results in the benefit being taxable. Meaning if you ever receive money under the LTD policy, you will have to pay tax on the amounts you receive.

If, on the other hand, you pay for the full cost of the LTD policy, any money received would be non-taxable. Having a non-taxable benefit can make a huge difference in the event you need to rely on LTD benefits, as you are often receiving only a portion of your prior income and may be struggling to live off significantly reduced income. 

It is important to explore with your employer or your union whether your salary can be increased by the value of the employer contribution, and then you can make the full payment for the  LTD policy.

Another option is to buy full LTD insurance yourself if your employer does not offer this benefit as part of your remuneration package. 

Do You Have Sufficient Long Term Disability Benefits?

The answer to this question will depend on a variety of factors, including age, savings, cost of benefits, number of dependents, etc. It is also probable that the answer will change over time as your personal circumstances change. Given the importance of the benefit, should you be unable to work, it is important to seek advice from an LTD insurance expert.

What Happens To Your Long Term Disability Benefit If You Lose Your Job?

It is extremely common for people to lose their LTD benefits shortly after they lose their jobs. Termination letters typically contain provisions ending Long Term Disability benefits after the statutory notice period found in the Employment Standards Act. This period is often a matter of weeks rather than months.

After this period, former employees are frequently left with no LTD benefits while they look for other work. Insurers will often not sell LTD insurance to the unemployed, and that compounds an already stressful situation.

One way to avoid this scenario is to purchase LTD insurance independently. (See next question).   

How Can You Protect Yourself, such that Long Term Disability Benefits Are Not Lost?

One method of ensuring LTD protection in the face of uncertain job security is to have your own LTD benefits policy that you have arranged for outside of your employer. That way, should you lose your job, your coverage continues. This type of arrangement will be particularly important for those with precarious employment.

Own Occupation Disability Insurance – The Gold Standard, but what is it?

Most LTD policies provide for “own occupation” disability insurance coverage for a period of two years. This means that should you be unable to perform the essential functions of your own job, you would meet the definition of disability and should receive benefits.

After that initial period (usually two years), in most insurance policies, the coverage definition changes to “any occupation.” This means that even if you continue to be unable to complete the essential functions of your own job, say as a teacher, if you can do any work, you may no longer be entitled to benefits. If this other occupation is something for which the employee is suitable by reason of their background, the insurer can insist they take the job or risk having their benefits cut off.

It is possible to independently purchase “own occupation” disability insurance coverage at an increased cost. This will provide you with LTD benefits, should you be unable to perform the essential duties of your own occupation. It will typically last until age 65.

[This article is for informational purposes only and does not constitute legal advice, which cannot be given without consideration of your individual circumstances.]

On October 12, 2018, Morgan Rowe presented as part of the Union of Taxation Employees’ National Health and Safety Conference. Morgan’s presentation addressed the proposed changes to federal harassment protections introduced by Bill C-65, as well as recent cases on harassment and work place violence in federal workplaces.

On January 28, 2019, RavenLaw appeared before the Québec Court of Appeal to argue in support of a challenge under section 2(d) of the Canadian Charter of Rights and Freedoms to restrictions on collective bargaining in the Federal Public Sector Labour Relations Act. Appearing for the intervener, the Public Service Alliance of Canada, RavenLaw argued that section 113 of the Act, which excludes pension and staffing issues from collective bargaining, violates the freedom of association, including by preventing workers from exercising their constitutionally protected right to strike on important workplace issues.

PSAC was represented by Andrew Astritis from RavenLaw.