Is Long-Term Disability Taxable in Ontario?
Long-term disability benefits can be a crucial lifeline, providing much-needed financial support during difficult times. If you’re unable to work due to a medical condition, these monthly payments offer a safety net that helps you focus on your health without the added stress of losing your income.
But when tax season rolls around, a common question arises: Do you have to pay taxes on your disability benefits in Ontario?
The answer isn’t straightforward. In most cases, yes, long-term disability benefits are taxable, but there’s a key detail to consider.
In a nutshell, if you’re the one paying the entire premium for your disability insurance, your benefits are generally considered tax-free. However, if your employer contributes to the premiums, the benefits you receive may be taxed as income.
Get a full explanation of whether your long-term disability benefits in Ontario are taxable below. Our long-term disability lawyers in Toronto explain when taxes must be paid, who pays them, and how you can reduce your tax liability.
Long-Term Disability Benefits Are Taxable in Ontario if…
Disability benefits are generally taxable if your employer pays part or all of the premiums for your long-term disability insurance. This is because, in Canada, income derived from employer-sponsored benefits is considered taxable. Whether it’s wages, bonuses, or even vacation pay, anything provided by your employer usually comes with a tax obligation, and long-term disability benefits are no different.
In contrast, if you pay the full premium yourself, the benefits you receive are tax-free, as you’ve already paid taxes on the premiums.
For some, the cost of insurance premiums may be shared between employer and employee. In those cases, you will only need to pay taxes on the portion of the benefits that correlates to your employer’s contributions.
For those who purchase their own disability insurance privately—such as self-employed individuals—the benefits they collect are not taxable, as they’ve paid the full cost of the premiums, including any applicable taxes.
Since disability benefits can often be taxed, it’s essential to prepare ahead and set aside funds to cover any tax obligations when you file your income tax return.
Who’s Paying Your Disability Insurance Premium: You or Your Employer?
If you’re unsure whether you or your employer is covering the premiums for your disability insurance, it’s important to find out, as this determines whether your benefits are taxable.
Start by reaching out to your plan administrator, who manages your employee benefits. This person or organization is often someone outside of your workplace, hired by your employer to handle benefit matters. However, in some cases, it could be your employer directly.
Another way to get clarity is through your insurance company. When you first become eligible for long-term disability benefits, insurers typically let you know if your payments will be taxable.
If they are, they will automatically deduct taxes from your monthly benefits. You should also receive documentation from them to help you report the correct amounts when you file your tax return. If you didn’t receive this information, it’s a good idea to contact your claim manager or your long-term disability lawyer in Toronto for clarification.
Are Canada Pension Plan (CPP) Long-Term Disability Benefits Taxable?
If you’re unable to work due to a severe medical condition, you may qualify for disability benefits from the Canada Pension Plan (CPP). To understand if you are eligible to receive CPP long-term disability benefits, speak to a long-term disability benefits lawyer.
CPP disability benefits are considered taxable income. In many cases, federal income tax is automatically deducted from the monthly payments you receive.
Additionally, if you are receiving both CPP disability benefits and long-term disability benefits from your insurance plan, your insurer may reduce your long-term disability payments through a process called “offsetting.” This means your total combined coverage won’t increase, as the amount from one benefit will be used to offset the other.
Here’s How You Can Reduce Your Tax Liability for Long-Term Disability Benefits
Managing your finances while relying on long-term disability benefits can be tough, especially when you’re only receiving a portion of your usual salary. However, there are tax credits and deductions available to help lighten your financial load.
The Canada Revenue Agency (CRA) offers several options that could reduce your tax liability and provide some much-needed relief.
If your disability prevents you from working, you may be eligible for the following:
- Disability Tax Credit (DTC): This credit (determined annually) reduces the total amount of income tax you owe.
- Medical Expense Tax Credit: Helps cover certain medical costs, such as prescriptions, treatments, or assistive devices.
- Disability Supports Deductions: Allows you to deduct the cost of personal care services from your taxable income.
- Federal Excise Gasoline Tax Refund: If you have a mobility impairment and can’t use public transit, you may be eligible for a refund on gasoline taxes.
- GST Exemptions: Some goods and services may be exempt from GST for individuals living with disabilities.
There are also specific programs designed to support those with long-term disabilities, such as:
- Child Disability Benefit (CDB): A tax-free monthly payment for families caring for a child under 18 with a severe disability. If you’re eligible for the Canada Child Benefit (CCB) and the DTC, you will automatically receive this benefit.
- Registered Disability Savings Plan (RDSP): A savings plan that allows individuals eligible for the DTC to save for their long-term financial security. While contributions to an RDSP are not tax deductible, the earnings on these contributions, along with government grants and bonds, will be taxed when withdrawn.
Do You Need to Pay Tax on Your Long-Term Disability Benefits?
For the most accurate, up-to-date advice you should approach your accountant or your long-term disability lawyer in Toronto. They can review your employment contract, insurance documentation, tax documents to better advise on your tax liability.
Moreover, if your benefits are taxable, your insurance provider will typically inform you upfront. In most cases, the taxable amount will be automatically deducted from your monthly payments, so you won’t need to calculate it yourself.
Additionally, your insurer will supply the necessary documentation to help you report the right amount when you file your tax return. If you haven’t received this information, reach out to your insurer to ensure you have everything in order before tax season arrives.
Speak to a Long-Term Disability Lawyer in Toronto
Navigating the complexities of long-term disability benefits and tax implications can be overwhelming, especially when you’re already dealing with a medical condition. Ensuring that you understand your rights, obligations, and opportunities for tax relief is crucial to maintaining your financial security.
If you have questions about your long-term disability benefits or need help reducing your tax liability, it’s essential to get the right advice.
Speak to our long-term disability lawyers in Toronto today and let us help you protect your financial future.
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