Provincial Retail Sales Tax
ln some provinces, a retail sales tax is levied on group insurance premiums:
- Manitoba - 8% on Life, Dependent Life and Optional Life premiums
- Ontario - 8% on all benefits
- Quebec - 9% on all benefits
Are Employer Paid Premiums Taxable to the Employee?
Employer paid premiums are typically considered a taxable benefit to the employee for any of the following benefits:
- Accidental Death & Dismemberment
- Dependent Life
- Optional Life
- Critical Illness
ln Quebec, the above benefits AND Health and Dental are provincially considered a taxable benefit to the employee.
Are Claim Payments a Taxable Benefit to Employees?
Most group insurance benefits received by employees are not taxable in the hands of the employees, with the exception of disability benefits.
- Disability benefits received ARE NOT subject to income tax when the employee pays the entire disability premium.
- Disability benefits received ARE subject to income tax if the employer pays any portion of the disability premium.
Many employers make a point of setting up the company’s benefit program so employees pay 100% of the disability premium. This not only offsets the employer’s cost of running the program, it offers employees the advantage of non-taxable benefits in the future.
In order for the disability benefits to be non-taxable, Canada Revenue Agency (CRA) looks at two things – that there is a legal obligation for employees to pay the full premium, and second, that in actual practice the employee IS paying the premium.
When you apply for coverage under the Chambers Plan, you choose either a taxable or non-taxable disability plan, and benefits are calculated accordingly. This would address the legal obligation issue. To satisfy the practice issue, employers need to show the disability premium is being accounted for in the payroll records (i.e. payroll deductions).
Employers can change the tax status of their disability plans at any time, but only on a go forward basis. Employers cannot make retroactive changes to the tax status of a plan. The obligation for employees to pay 100% of the disability premiums must be in place when the premiums are paid in order for the plan to be deemed a non-taxable plan.
Un-Incorporated Self-Employed Individuals
Sole proprietors or members of a partnership are entitled to deduct some of their group plan premiums from their business income.
Firms with arm's length employees: Where the business owner extends equivalent coverage to all fulltime arm's length employees with more than 3 months of service - owners can deduct the premiums the owner paid for coverage from business income.
The deduction will be limited to the portion of employees' premiums that are actually paid by the business. As an example: if the firm pays 75% of the premiums with employees expected to contribute the remaining 25%, the business owner's deduction will be limited to 75% ofthe premiums paid for himself, / herself.
Firms with no employees or where family members account for more than 50% of the employees: For one person firms or firms where less than 50% of the employees are arm's length, a dollar limitation is imposed on the amount deductible by the business owner. The amount eligible for deduction is equal to the lesser of:
- the actual premiums paid, and
- $1,500 times the number of adults included under the business
owner's coverage (i.e. the individual, the spouse, and any members
ofthe household aged 18 and over); plus $750 times the number of
covered household members under age 18.
lf the period covered is shorter than one year, the $1,500 and $750 amounts will be prorated by the number of days in the period covered by the calculation.
ln either situation, any non-deductible portion of the premiums paid would be eligible for the medical expense tax credit.