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Employer Paid Insurance

In many cases, employers also contribute in respect to group disability insurance on behalf of their employees. The plan may be formal or informal and premiums may be paid entirely by the company or split between the company and the employee on some pre-determined basis.

The distinction as to who exactly paid the premium becomes important in the unfortunate situation where a claim is made on the policy.

A portion of any amount paid to you on a periodic basis in respect of loss of income under a sickness, accident, disability or income maintenance insurance plan must be included in income if your employer contributed to the plan on your behalf. If you and your employer both contribute, your contributions are considered to be returned to you first, on a tax free basis, and all remaining benefits then received are taxable. In the event of a disability, benefits received from such a policy will not be included in income if the employer has made no contribution to the plan.

Where your employer pays a premium on your behalf under a non-group plan, the payment of the premium is a taxable benefit to you. However, these payments are not considered to be a “contribution” under the plan and any claims received under it are not subject to income tax.

The result of these rules is that employees of a company are faced with a collective decision. The choice is between having disability insurance premiums withheld from their pay but included in taxable income each year, or having their employer remit the premiums directly and not have these payments included in income. If they as a group decide on the former, any benefits paid out under the policy will be tax free. If they select the latter, there will be income tax implications on any claims. Typically, most employees feel that the tax-free status of benefits is the more important consideration and pick that option.

It is important to note that same position must be taken by all employees in the group since the payment of any premiums by the employer will contaminate the plan for all employees and render all disability payments taxable.

Death Benefits

Under terms of the Income Tax Act, the deceased, in his lifetime, must have rendered services to the company in the capacity of officer or employee. Any payment to the survivors of a deceased shareholder will not automatically qualify unless the shareholder took part in corporate activities in those particular roles, although sitting on the Board of Directors should, at a minimum, qualify him for inclusion under this provision. The recipient must bring any amounts in excess of the first $10,000 in payments into income in the year of receipt. The benefit may be spread out over a period of several years and the $10,000 exemption will hold until that amount has been reached or exceeded. Today it is not uncommon for a death benefit to be paid to more than one party. Often it is split between a surviving spouse and children of the marriage. In this case, the spouse is entitled to use up to the entire $10,000 amount and the remainder, if any, is divided amongst the children.

An anomaly of the Income Tax Act occurs when the deceased leaves behind two surviving spouses (as defined in the Act). In these cases, the common-law spouse and the legal but undivorced spouse must share the exemption on a pro-rata basis. This may result in a situation where spouse #1 receives $10,000 in the year of death from the employer and claims the full exemption. Should spouse #2 receive her $10,000 in the next taxation year, it will be within her rights to claim fifty per-cent of the exemption and force spouse #1 to be re-assessed to disallow the extra exemption she claimed the year before.

Article ©1998 The Quarterly Dividend
Reprinted with permission