Each year as employers complete T4s for their employees, we are asked about the taxability of the various benefits in their group benefits plan. When setting up a group benefits plan, it is important for employers to understand the manner in which this affects employee payroll deductions.
The following explanation is offered to help you understand taxation and employee group benefits. However, it should be noted that we do suggest you consult your accountant on all important taxation issues.
Group Life Insurance
Any premiums paid by the employer for an employee’s Group Life Insurance are considered taxable. Therefore, the premiums paid by the employer on behalf of an employee must show on the employee’s T4 as other income.
Payroll administrators must include the provincial sales tax with the taxable life premium amount. Total taxable life premium and provincial tax will be the amount recorded on the employee’ T4s.
Employee paid LTD premium must also include the provincial tax when deducting them from employee’s pay. The employer will be remitting that full amount when paying the invoice from their carrier.
The same rules apply as with Group Life Insurance.
For all benefits, any premiums paid by the employer are tax deductible to the business. Any premiums paid by the employee are paid out of after-tax dollars (i.e. these deductions do not reduce an employee’s taxable income.) However, the employee contributions to premiums for Health, Dental or Vision benefits do quality for a tax credit as medical expenses.
Accidental Death and Dismemberment and Critical Illness: Premiums for these benefits can be up to 100% employer paid. The portion of the premium paid by the employer is a taxable benefit bestowed upon the employee, and must show on the employee’s T4 as other income. This is a change that was made by CRA. Benefits are received tax-free.
Health, Dental, Vision Care and Health Care Spending Account
Premiums paid for these benefits can be 100% employer-paid and no taxable benefit is bestowed upon the employee. These benefits are the area of the program where the employer will want to focus their portion of the premiums in order to minimize the tax implications for employees. Any employee contributions to premiums for these benefits qualify for a tax credit as medical expenses. The exception is in the province of Quebec where these benefits are considered to be taxable when paid by the employer. The employer portion of the B.C. provincial health plan is also considered a taxable benefit to employees there.
Short and Long Term Disability
These benefits can be set up in one of two ways: taxable or non-taxable.
- Taxable: If the benefit is set up as taxable, premiums paid by the employer do not confer a taxable benefit upon the employee. However, when an employee becomes disabled the benefits received from the insurance company are deemed taxable income.
- Non-Taxable: If the benefit is set up as non-taxable, the employee must pay for the entire premium. If an employee becomes disabled, any benefit received would then be non-taxable.
Some companies choose to add the disability premiums to each employee’s T4 as is done with Life Insurance, however, the CRA may not find this an acceptable method of making the benefits tax free. Adding the premium to the taxable income of all employees at each payroll is a solution some employers have found successful. It is advisable that you consult your accountant. Insurers are required to deduct taxes at the time disability payments are made to employees.
- Government of Canada: Benefits and allowances chart
- Government of Canada: Group term life insurance policies – Employer-paid premiums
- Government of Canada: Remitting the GST/HST on employee benefits
ASSOCIUM Benefits is a very unique employee group benefits provider, focused on supporting benefits advisors and their employer clients. We provide Brokers and Plan Sponsors with a range of solutions from traditional group benefits to more customized, cost and tax effective employee compensation. Let’s connect to find out how we can help.