Introduction to taxation of group benefits

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Canada Revenue Agency (CRA) has a number of rules that apply to the taxation of Group Insurance benefits. Having an understanding of these rules and applying them appropriately are a vital part of advising your clients. The following common questions will provide an brief introduction to the what is and is not taxable, where having a plan can provide extra tax benefits to employees and how federal and provincial taxes are applied.

Are Group benefit costs a tax deductible expense for a business?
Yes they are. If an employer pays the premium on behalf of the employees, the premium paid by the business is deductible as a business expense.

Are Group benefits a taxable benefit to employees?
Only the Life Insurance and Dependent Life premiums paid by the Employer are considered a taxable benefit to the employee. To account for this taxable benefit, any premium paid by the employer in a tax year must be added to the employee’s income on their T4. Premiums paid by the Employer for other Group benefits (Extended Health, Dental, Vision etc.) are tax-free to the employee.

Are reimbursed Health and Dental claims taxable to the employee?
No, reimbursements received by employees for Health and Dental expenses are tax-free benefits. If there were no Group plan, employees would be paying these expenses with after-tax dollars, so this feature is a definite advantage to having a group plan.

Are Disability payments taxable to an employee when received?
If the premiums for Short and/or Long Term Disability benefits have been paid in full by the employee, then CRA states disability income benefits, when received by the employee, will be non-taxable income and need not be declared as income. If the Employer pays even any part of the disability premium, then any disability income payment received by the employee is considered taxable income and the Insurance Carrier will issue a T4A. If the Employer pays the disability premium, but includes all premiums paid as a taxable benefit on the employee’s T4 statement, then by convention CRA has considered that disability benefits received by the employee will be non-taxable income.

Summary of Federal and Provincial Tax

Group Insurance plans are subject to both federal and provincial taxes.

Federal Tax:

The Goods and Services Tax/Harmonized Sales Tax (GST/HST) is not charged on insured benefits. The tax is charged on the Administration Fee only, under self insured plans which contain no element of insurance.

Provincial Tax:

Premium Tax, is applicable to every insurance company in Canada and is built into the premium, or charged on plan costs for self-insured plans. This tax varies by province and is currently between 2% and 4%.

Retail Sales Tax (RST), or Provincial Sales Tax (PST), is only applicable in Ontario and Quebec. This tax is charged on the premium, or plan costs, on all plans.  This tax is 8% in Ontario and 9% in Quebec.

Group Benefit Taxation Table

The following chart outlines the current taxability status of employer contributions towards premium rates under group insurance plans and government programs as well as the taxability status of benefits received under these plans.

Group Insurance Benefit

Is the Employer’s Cost Tax Deductible?

Are Employer Contributions Taxable to Employee? Does the Employee pay Income Tax on the Benefit?
Life yes yes no
Dependent Life yes yes no
Critical Illness yes no no
AD&D yes no* no
Health yes no* no
Employee Assistance Programs yes no no
Health Spending Account yes no* no
Dental yes no* no
Weekly Indemnity yes no yes/no**
Long Term Disability yes no yes/no**
WSIB yes no no
Employment Insurance yes no yes
Canada Pension Plan yes no yes
Old Age Security n/a n/a yes
Guaranteed Income Supplement n/a n/a no

No, for all provinces and territories, except for Quebec.

** Disability benefits are taxable if the employer pays any portion of the premium.  If the employee pays the entire premium the benefits are not taxable.

Where the employer’s contribution is considered a taxable benefit the applicable Ontario or Quebec Retail Sales Tax on the premium must also be included on the employee’s T4 as a taxable benefit.

Some employee contributions may be eligible for a tax deduction or tax credit.

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