Before you know it, April will be here again. Then, you’ll find yourself worried about your taxes. Unfortunately, millions of Canadians will be required to file their T1s with the Canada Revenue Agency and many will need to pay taxes to the government. For some Canadians, it will be the first time they’ll need to file taxes while receiving long-term disability benefits. That can create a new hassle since many are not sure how long-term disability income works.
Will that income be taxed? Ultimately, the answer is not straightforward. Long-term disability benefits can be obtained from various sources including the Ontario Disability Support Program, Canada Pension Plan, or a private disability insurance plan. Furthermore, consumers have to be careful since each type is going to be subject to certain tax rules. Before you can find out if your disability income is taxable, you need to look at the type of disability income you’re working with.
Since this subject can be very complicated, it is best for some Canadians to work with a tax professional. This may be the best way to get the answer you’re looking for.
Who Pays The Premium For My Long-Term Disability Insurance?
First and foremost, you need to find out who is paying your long-term disability insurance. It could be taxable but it will depend on the payer. Long-term disability insurance provides benefits to Canadians when they become disabled. In most cases, the insurance will cover approximately 60 to 70% of your income when you’re no longer able to work due to an injury or illness. However, it should be noted that the specific terms may vary from one policy to another.
Most Canadians receive long-term disability insurance in one of two ways. For instance, some are going to pay the premiums. If you’ve signed up for an insurance plan without your employer, you’re going to pay those premiums and you’ll fit into this category. Other Canadians receive disability insurance that is paid for by their employer. The one paying the premiums will make a big difference when it comes to whether or not your benefits will be taxable.
Employer Paid Premiums
When working for a company, you’re going to be taxed for any compensation you receive from that company. Even if you’re receiving a bonus or insurance benefits, this compensation will likely be taxed. One-time bonuses and parking provided by your employer can be taxed. However, certain forms of compensation may be excluded from the employee’s income.
Thankfully, you are not going to be taxed on the premiums your employer has paid while you’re covered by a long-term disability insurance policy. However, you’re not out of the woods yet. While the premiums won’t be taxed, the benefits will be. If you get injured and begin receiving disability benefits, those benefits will be taxed because your employer is paying the premiums.
Employee Paid Premiums
There is always a chance that you’re going to sign up for a disability insurance plan and pay your premium. If this is the case, you have to pay but there are some benefits. You will not be able to reduce your income tax to make up for the amount you spend on disability insurance. The benefit is that you won’t have to worry about the benefits being taxed. As long as you paid all of the premiums, your benefits are usually not going to be taxes.
How To Find Out If My LTD Benefits Are Taxable
Thankfully, you won’t have to jump through too many hoops to find out if your benefits are going to be taxed. Once you’ve become eligible for long-term disability benefits, your insurance carrier will contact you. They’ll let you know whether the benefits are going to be taxed or not. If the benefits are going to be taxed, the insurance company will withhold the specific amount from your payments before sending them.
Some Canadians receive disability benefits under the Canada Pension Plan. With this plan, you’ll receive a specific amount each month. The money is meant to replace the income you missed while you’re disabled. Before you can become eligible for CPP disability benefits, you have to be 65 years or older and have a severe or prolonged disability. Furthermore, you need to have contributed enough to the CPP.
Sadly, benefits from the CPP are taxable.
Ontario Disability Support Program
Living in Ontario means you may be able to benefit from the Ontario Disability Support Program. If you’re a resident of Ontario and are at least 18 years old, you may be eligible for this plan. You’ll also need to prove your financial need and you’ll have to show that you have a mental or physical disability. With the Ontario Disability Support Program, you do not have to worry about your benefits being taxed.
However, you will get a T5007 in the mail and this will show the amount of ODSP benefits you receive during the year. This information needs to be reported on line 115 of your T1. You can deduct this amount later on line 250.
A Complex Situation
Unfortunately, taxes and disability insurance benefits are complex. In some cases, the benefits will be taxed. This happens when you receive long-term disability insurance benefits and your employer paid the premiums. If you receive CPP disability benefits, it will be taxed too. The benefits will not be taxed when you pay the insurance premiums or you obtain ODSP benefits.