Is Long Term Disability Income Taxable?

Long term disability income MAY be taxable if your employer paid the premium or if you are receiving Canada Pension Plan disability. If, on the other hand, you paid for private disability insurance or the provincial government of British Columbia has categorized you as a “Person With Disability,” you do not need to pay tax.

Since the law can be very confusing, it may help to speak with a long term disability lawyer at Preszler Law Firm.

When Long Term Disability Income Is Taxable

Your employer paid for your disability insurance. Employees are taxed on any compensation they receive from their employers, whether it’s base wages, over-time, salary, one-time bonuses, or business per diems. However, employees have not been taxed for the number of premiums their employers paid on the group long-term disability insurance policy. That means taxes must be paid on disability benefits received during the course of the year – just as they were regular income.

Fortunately, insurance carriers notify benefits recipients when their benefits are taxable. Typically, they withhold the appropriate amount from the payments sent to you. However, the reduced compensation you receive can be an unwelcome surprise if you were counting on the full amount.

You are receiving Canada Pension Plan disability. The Canada Pension Plan sometimes pays to supplement the income of a disabled person who is under 65 with a severe and prolonged medical condition, provided that he or she has contributed enough to the system to qualify for benefits. The amount of taxable CPP you received over the course of the year can be found in box 20 on your T4A slip.

You can request that your taxable income be automatically deducted from your disability benefits, so you don’t have to worry about it come tax time.

When Long Term Disability Income Is NON-Taxable

  • You paid for your own long-term disability insurance. When an employee pays out of his or her own pocket for a private disability insurance policy, after-tax dollars are used to pay the premiums. Therefore, no additional tax payments are necessary when the benefits are received.
  • You are a designated “Persons With Disability” receiving provincial benefits. The province of British Columbia may cover long-term disability costs of B.C. residents with a severe mental or physical disability who are at least 18 years old, with demonstrable financial need. You will receive a T5007 detailing the amount of benefits paid for the year and you will report them on line 115 of a T1, but you can also deduct them on line 250.

What If I Negotiated a Settlement Through a Lawyer?

Many British Columbians choose to work with a lawyer when negotiating their long-term disability insurance benefits to ensure the best possible outcome. You may be wondering whether it is more advantageous to receive a lump sum or monthly payments.

  • Monthly benefits – The insurance company is required to report 100% of the income they pay out to Revenue Canada for tax purposes. That means you will pay tax on whatever you are paid each month, regardless of whether it’s considered a past, present, or future benefit.
  • Lump-sum benefits – The insurance company is required to issue a T4A for the portion owed prior to settlement for “past benefits,” which does not include the amount of “future benefits” due after the settlement. This technicality will likely reduce the amount of overall income tax owed. Claimants may still prepare a T1198 to spread the taxable portion of the settlement over a number of years.

Taxable Income Is Complex

The treatment of benefits by Revenue Canada can be incredibly complex. The courts have upheld that “I didn’t know” is an unacceptable defence – even in cases where insurers provided misinformation to their clients. It is always wise to consult with tax consultants and a legal team to ensure you are in compliance with the law so you don’t get hit with backpay or tax evasion charges – which can result in additional fines of up to $25,000 and one year behind bars.

Experienced long-term disability attorneys at Preszler Law Firm provide free initial consultations to anyone interested in learning more about how disability benefits affect their tax obligation. Call today to speak with a dedicated and compassionate personal injury lawyer.