Understanding the Taxability of Benefits

Avoid unnecessary surprises during next year's T4 season. Here is a summary of Canada's tax rules regarding group insurance plans:

Group Life Insurance: Employees should pay 100 per cent of the group life insurance portion of their benefit plans so they don't have to pay taxes at the end of the year. Introduced in 1994, premiums for life insurance benefits that aren't paid by the employees must appear on their T4s as additional taxable income.

Dependent Life Insurance: Again, employees are advised to pay the premiums on their dependent life insurance or it must appear on their T4s as a taxable benefit.

Accidental Death and Dismemberment (AD&D): Employers are free to pay the premium on this portion of the benefit plan and it is NOT considered a taxable benefit on the employees' T4s.

Short- and Long-term Disability: STD and LTD can be set up in one of two ways:

• If the benefit is set up as taxable, the employer should be paying the premium for the benefit. When an employee is disabled, the benefits received will be taxable.
• If the benefit is set up as non-taxable, the entire premium should be paid by the employee. If an employee becomes disabled, any benefits received would be non-taxable.
• Special Note: If the billing shows that the employer paid any portion of the premium, then the benefits will be taxable; however, the employee would receive a tax deduction for the portion of the premium that he or she has paid.

Health care and Dental Care: Premiums for health and dental care are not considered a taxable benefit and can be paid in their entirety by the employer without penalty.

For example:

*Consider the following benefits and rates:

Calculate the premium for the benefits which must be paid by the employee to avoid a taxable benefit:

Group Life Insurance
Benefit x Rate/1,000
= $80,000 x .26/1,000
= $20.80 per month

Dependent Life Insurance
Rate x units of benefit
= $3.10 x 1 unit
= $3.10 per month

Short Term Disability
Benefit x Rate/10
= $500 x .51/10
= $25.50 per month

Long Term Disability
Benefit x Rate/100
= $2,500 x 1.62/100
= $40.50 per month

Based on this example, the employee's share of the cost of the group insurance plan must be at least equal to $89.90 per month ($20.80 + $3.10 + $25.50 + $40.50).

*Information hereby supplied is not guaranteed accurate. Please refer to the Canada Revenue Agency website for the latest and most accurate information.