If you have been receiving disability benefits, you might be wondering if your long-term disability income is taxable or not. In this article, we will answer that question for you. After reading, you should be able to determine if you have to pay taxes on your long-term and short-term disability income as well as other government-sourced benefits.
Let’s dive in!
For more information about long-term disability benefits, check out our Guide to Long-Term Disability in Canada.
Is Long-Term Disability Income Taxable? Find out with one easy trick
The answer to the tax question is pretty easy: It depends on who is paying the premium for the benefits.
There are two possible scenarios. Either your employer pays the premium for the benefits, paying all or part of it, or you pay the premium.
Scenario #1: Employer-Paid Premiums (taxable)
If your employer pays the premium, then your benefits are taxable as income. You will receive a T4A slip to send in with your taxes. You receive the gross benefit amount. In this case, they usually don’t take money off for taxes, so you’ll probably have to pay some money back. You can double-check this because sometimes they will deduct taxes. But, in most cases, you can assume that they haven’t deducted anything.
Scenario #2: Employee-paid premiums (non-taxable)
If you pay the full premium (and this does need to be 100%), then your long-term disability benefit will not be taxable as income. In this case, you keep whatever money you receive. No tax slips are issued for the money you get.
So, it’s just that easy to figure out if long-term disability is taxable. All you need to do is figure out who pays the premium for your disability benefits. That should tell you if you have to pay income tax on them or not. Is Short-Term Disability Taxable?
The same principle applies to short-term disability. If you pay all of the premiums on your benefits, then your disability income would be tax-free. However, if your employer pays all or part of your premiums, then you will have to pay taxes.
How to Determine Who is Paying Your Premiums
If you are unsure if you or your employer pays the premiums on your disability insurance benefits, the best way to find out is to speak with your plan administrator. The plan administrator usually isn’t your employer, but it can be. However, in most cases, employers will select an outside person or company to manage its employee benefit plan(s). So, this person or organization should be able to tell you whether you pay your premiums or not.
You can also find out through your insurance company. Typically, when you first become eligible for benefits, the insurer will inform you whether your benefits are taxable or not. And if they are, they will deduct the appropriate amount of taxes from your monthly benefits. Along with this, they should also provide you with the documentation you will need to report the proper amount of your tax return. If they didn’t provide you with this information, contact your claim manager.
Are Government Benefits Taxable?
Canadians with disabilities can also receive disability benefits from provincial and federal sources. The most common are Canada Pension Plan, Workers’ Compensation and Employment Insurance (EI). In the section below, we will overview each program’s tax rules.
Is CPP Disability Taxable?
CPP disability is taxable and must be reported under the income section of your tax return. Taxes are not automatically deducted each month, but you can ask Service Canada to deduct the federal income tax from your payments. You can do this through your My Service Canada Account or by completing the request for voluntary Federal Income tax Deductions form and mailing it to or dropping it off at a Service Canada office.
To learn more about how to report this benefit on your tax return, check out our article: Paying Taxes on CPP Disability: Your Top 5 Questions Answered
Is Workers’ Compensation Taxable?
Generally, you will not have to pay taxes on your workers’ compensation benefits. However, you do have to report the amount shown on your T5007 slip as income on your income tax return and claim the corresponding deduction.
At the end of each year, workers’ compensation will send you your T5007 form. So you can find the amount to put in your tax return on that form — specifically in Box 10. Then input the amount shown in Box 10 in two places on your income tax return:
- Line 14400 (As part of your net income)
- Line 25500 (As a deduction)
Is EI Taxable?
EI benefits are considered taxable income. This means federal and provincial or territorial taxes are deducted when you receive them.
Tax Credits You May Be Eligible For
Maintaining financial independence can be challenging for those who solely rely on disability benefits for income. Luckily, however, the CRA offers several tax credits that are designed to reduce the financial burden associated with an inability to work.
If your disability prevents you from doing your job, you may qualify for the following tax credits:
- Disability tax credit is a non-refundable tax credit that helps people with impairments or their supporting family members by reducing the amount of income tax they may have to pay.
- Medical expenses provide compensation for certain medical expenses.
- Disability supports deduction: Deducts personal care providers’ expenses from your taxes
- Child disability benefit is a tax-free monthly payment made to families who care for a child under age 18 with a severe and prolonged impairment in physical or mental functions.
- Registered disability savings plan is a savings plan intended to help parents and others save for the long-term financial security of a person who is eligible for the disability tax credit (DTC)
- Federal Excise Gasoline Tax Refund Program: Provides a refund on the tax paid for gasoline if you have a permanent mobility impairment and cannot safely use public transportation
More Questions? Call Resolute Legal
Resolute Legal is one of the few law firms in Canada to focus exclusively on disability claims. We can represent you in all of your claims, including short-term disability, long-term disability, CPP disability, worker’s compensation, employment disputes, and the disability tax credit. So, if you have any more questions about taxes or your claim, call us today at (888) 732-0470.
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