Which Group Benefits Are Taxable, and to Whom

Every January a certain number of employees look at a slip, see an amount they never received, and conclude that a mistake has been made. It usually has not. Group benefits are one of the places where the tax system distinguishes carefully between value received and money received, and the rules governing which benefits are taxable are not intuitive, because they turn less on what the benefit is than on who paid for it. And they cut in opposite directions: on one benefit, having the employer pay is worse for the employee, and on another it is better. That is why nobody remembers the rules and why plans are sometimes structured, deliberately and correctly, in a way that looks like the employer being ungenerous. This article sets out how the main benefits are treated, why the structure is often chosen on purpose, and what an employee and an employer should each be asking.

The principle, and why it points both ways

The general idea is symmetry. Where a premium is paid with pre tax dollars, by the employer, the benefit that premium buys tends to be taxable when it is received. Where a premium is paid with after tax dollars, by the employee, the benefit tends not to be.

Stated that way it sounds tidy, and the reason it does not feel tidy in practice is that the two situations arise at different times. A disability benefit is received years later, if ever, and by then nobody remembers who paid the premium. A life insurance premium is paid every month and the benefit is received once, by somebody else. And a health claim is reimbursed the same week, which makes it feel like nothing to do with tax at all.

There are also exceptions to the symmetry, which is what makes the subject genuinely confusing rather than merely unfamiliar. The sections below take the main benefits one at a time.

Disability coverage, where it matters most

This is the one with the largest consequences, because a disability benefit is monthly income that a household may live on for years.

Where the employer pays the premium for a group disability plan, benefits are generally taxable to the employee. Where the employee pays the premium with after tax dollars, benefits are generally not taxable. The difference between a taxable and a non taxable benefit at the same stated replacement share is substantial in the household’s bank account.

That is why many plans are deliberately structured so the employee pays the disability portion, and it is why an employee looking at a deduction on their pay statement for a benefit their employer otherwise covers should not read it as stinginess. It is usually the arrangement that leaves them better off in the situation the coverage exists for.

Two practical points follow. If your employer pays the disability premium, the replacement share your plan quotes is a gross figure and the household should budget on the net. And if the arrangement changes at some point, which happens at plan renewals, the treatment can change with it, which is a question to ask rather than assume.

Group life insurance, and the amount on the slip

This is the one that produces the January phone call. Where an employer pays the premium for group life insurance on the employee, the premium on coverage above a threshold is generally a taxable benefit to the employee, reported on the slip even though the employee never saw the money.

The logic is that the employer has bought something of value for the employee, and the value is the premium rather than the eventual death benefit. The death benefit itself, when it is paid, is generally received tax free by the beneficiary, which is the treatment people are more familiar with and the reason the two get confused.

Where coverage is on a spouse or a dependant, or where the employee pays, the treatment differs, and the details are plan specific. The useful instruction for an employee is simply that an amount on a slip for group life is normal and is not an error, and that it is worth understanding rather than disputing.

Health and dental, and the Quebec difference

Federally, premiums paid by an employer for a private health services plan providing health and dental coverage are generally not a taxable benefit to the employee, and reimbursements received under such a plan are generally not income.

Quebec treats the employer paid premium differently for provincial purposes, and an employee in Quebec can therefore see a benefit included for provincial purposes that is not included federally. It is not an error and it is not unique to any employer.

That difference is the single most useful item on this page for a reader in this province, because it explains a discrepancy between two slips that otherwise looks like a mistake, and because it affects the real value of a benefit package when comparing offers between employers in different provinces. The amounts and the mechanics belong with a qualified tax professional, and the fact of the difference is what belongs here.

There is a second consequence worth naming. Because the medical expense tax credit exists, premiums an employee pays personally may be eligible for it, which means the choice between employer paid and employee paid coverage is not purely a question of who writes the cheque. That is a calculation rather than a rule.

The rest of the package, briefly

Critical illness coverage offered through a group plan raises the same who pays question as disability coverage, and the treatment of premiums and benefits depends on how the plan is arranged. It is worth asking specifically, because a lump sum received at a difficult moment is not a benefit anyone wants a surprise about.

Accidental death and dismemberment coverage, employee assistance programs, and health spending accounts each have their own treatment, and a health spending account in particular is a structure whose whole appeal is the tax treatment, which is why it is used by small businesses and why its rules need to be followed exactly.

And the group retirement plans, a group registered savings plan, a deferred profit sharing plan or a pension plan, are a different subject with different rules, covered in their own article on this site.

What to ask, on each side

An employee has three questions, and the answers are in the booklet or a phone call away. Who pays the premium for each benefit, and has that changed. Is the disability benefit taxable or not, since that decides what actually arrives each month if it is ever claimed. And what is the amount that appears on the slip for group life, so it is expected rather than alarming.

An employer has a different set. What is deductible to the business, which is usually the straightforward part. What must be reported on employee slips, which is where errors happen. Whether the plan is structured to put the tax treatment where it is wanted, particularly on disability. And whether the business is in a province whose provincial treatment differs, since payroll systems are not always configured for it.

For both, the answer is not on a general page like this one. It is in the plan documents, and it is confirmed by a qualified tax professional. What this page can do is tell you that the questions exist and that they have real answers.

The deduction that depends on records nobody keeps

One rule sits underneath the disability question above. Where an employer paid plan makes the benefit taxable, an employee who also contributed to that plan can generally reduce what is taxable by the contributions they made and have not already used.

It applies to a wage loss replacement plan and it turns entirely on records. The employee needs to know what they contributed, across every year they contributed it, and that history sits with payroll. Plans change carriers, employers change payroll providers, and the number gets harder to reconstruct every year.

The instruction is small and costs nothing. Keep the annual statement showing what you paid toward the disability benefit with your tax records, for as long as you are in the plan. If a claim happens, hand the file to a qualified tax professional. Nobody will raise it for you.

Owner managers, and the reason the wording matters

A person who owns the business and works in it is two things at once, and the treatment of their benefits depends on which of the two the coverage was provided to.

Where coverage is provided because the person is an employee, on terms comparable to what other employees receive, the employee rules described above generally apply. Where it is provided because the person is a shareholder, the Canada Revenue Agency can treat it as a shareholder benefit instead, which is a different and worse result and is not deductible in the same way.

What usually settles it is whether comparable coverage is available to other employees on comparable terms, which is why a plan covering only the owner attracts more attention than one covering everyone. A health spending account in a very small business has its own conditions for the same reason. Set the arrangement up with a qualified tax professional rather than copying it from another business.

What changes when you leave, and in retirement

The treatment of a benefit follows the payer, so when the payer changes the answer can change with it. This is where people carry an old assumption into a new situation.

A retiree plan where a former employer pays is not automatically treated the way the same coverage was treated during employment, and the Quebec inclusion described above continues to apply to a resident of that province. Coverage bought and paid for personally after leaving is entirely on the personal side of the line, and a group life conversion exercised on leaving produces an individual contract rather than a group benefit.

The question to put, once, is simple: after this date, who pays each premium and what is reported to me. Ask the employer before the last day and confirm the answer with a qualified tax professional.

Frequently Asked Questions

Continue Learning

Read Is Group Life Insurance Enough for what the coverage does and does not do, Group Benefits When You Leave a Job for what happens on the way out, and What Reduces a Disability Benefit for the other half of the disability question. The Group Insurance guide sets out the whole picture.