A question we frequently encounter as personal injury lawyers is: “Is long-term disability income taxable in Canada?” The answer, like many legal matters, is: “It depends.”
This blog will look at what the long-term disability benefits (often called LTD benefits for short) are in Canada, the difference between who is paying the premiums and the impact on the disability benefits under the Canada Pension Plan (CPP), and also have a look at the Ontario Disability Support Program (ODSP).
While we are not tax professionals and recommend you consult with one for any income tax-related matters, we hope the information below is informative based on our experience as personal injury lawyers.
Long-Term Disability Benefit
Long-term disability benefits are available to individuals who have coverage, either through a group benefits policy (i.e. work policy) or a private policy.
If you become disabled, long-term disability insurance pays benefits for as long as you meet the test of “disabled” or “totally disabled”, depending on the wording of the policy. The insurance company will typically pay about 60% to 70% of your income when you cannot work because of illness or injury. Still, the specific terms can vary significantly depending on the policy.
There are two ways in which you can pay long-term disability insurance premiums. You may pay these premiums entirely by yourself, or your employer may pay part or all of the premiums. And it is this difference that will determine if your long-term disability income in Ontario is taxable or not.
Let’s look at these two options.
Employer Paid Premiums (Taxable)
Any compensation you receive from your employer is taxable, whether your salary, bonuses, or expenses. One of the significant exceptions for this is long-term disability insurance premiums. While it is a welcome reprieve from taxation when these premiums are paid, the trade-off is that if you become disabled and receive long-term disability income through the insurance, these benefits are taxable.
Employee Paid Premiums (Non-Taxable)
Conversely, if you pay for 100% of your premiums (and it must be indeed the complete 100%) your LTD benefits will not be taxable. Because you pay for these premiums from your income, with “after tax dollars, you are not reducing your income tax to compensate for the amounts paid for disability.
Generally, this means that if you receive long-term disability income under an insurance policy for which you paid all the premiums, the benefits are not taxed.
How Do I Find Out If My Long-Term Disability Income Is Taxable?
You can check with your plan administrator to determine if your employer is paying your premiums. But generally, once you become eligible for long-term disability income benefits, your insurance company will advise you whether your benefits are taxable.
If your benefits are taxable, your provider will withhold the tax amount from the payments you receive. They will also supply you with the proper documentation to correctly declare your income and tax deductions for your annual tax return.
Disability Benefits Under CPP
You may also be eligible for disability benefits under the Canada Pension Plan (CPP). The CPP pays a monthly amount intended to replace the income a disabled individual can no longer earn. To be eligible for CPP disability benefits, a person must:
- Have a severe and prolonged disability;
- Be under 65 years old; and
- Have contributed enough to the CPP to qualify.
Like most CPP benefits, their disability benefits are also taxable. Generally, the income tax will not automatically be deducted from your CPP benefit, so you have to file a request through your My Service Canada Account to ask Service Canada to automatically deduct the federal income tax from your long-term disability income.
The taxable CPP disability benefits you received during a year will be reported to you in box 20 of a T4A(P) slip.
Ontario Disability Support Program (ODSP)
There is another public benefit that disabled Ontarians can apply for, the Ontario Disability Support Program or ODSP. This program provides qualifying residents with different types of income and employment support.
To be eligible for ODSP benefits, you must:
- Be at least 18 years old;
- Be a resident of Ontario;
- Demonstrate your financial need; and
- Live with a substantial mental or physical disability.
ODSP benefits, unlike CPP disability benefits, are not taxable. The program will still send you a T5007 showing the amount of your ODSP benefits for the year, which you then report on line 115 of your T1. However, you can deduct them later in the form, on line 250.
Consult With a Long-Term Disability Lawyer Today
If you or a loved one has been denied LTD benefits, please call the disability lawyers of Beyond Law today for a free and confidential consultation. Call us at 416.613.1225 or fill out our convenient online form.
Beyond Law offers free, no-obligation consultation sessions to identify potential compensation paths and help you understand the law and your rights.
Wherever you live in Ontario, Beyond Law is here to help in your time of need.
