LTD and STD Benefits

Summary:

STD and LTD benefits is typically a reference to income replacement benefits provided through employment-related disability plans, whether the payments are made by an employer or an insurance company.

If payments are reportable and taxable an individual will receive a T4A or T4. The slips are entered into UFile and generally no special steps are required, except in one case.

If an individual does not receive a tax slip and the payments originate from a Canadian payer, this indicates that the benefits are not taxable or reportable (however, the absence of a tax slip does not by itself establish that the payments are non-taxable).

LTD benefits are most commonly paid under an insured group disability plan, with the insurer paying the benefits directly. Some employers instead self-fund LTD benefits. Self-funding is considerably more common for STD benefits. STD benefits may be paid directly by an employer or under an insured plan.

In general:

• If disability benefits are funded directly by an employer, they are taxable as employment income. The actual payment will be made by the employer, or sometimes by an insurer that is acting as an administrative agent for the employer (but not as an actual insurer). The employer or insurer will issue a T4 and report the income in box 14.
• If benefits are paid under a group insurance plan to which the employer contributed, the benefits are generally taxable. But the taxable amount may be reduced by contributions that the employee made to the plan. The insurer will issue a T4A and report the income in box 107.
• If an individual paid the entire cost of a group or individual disability insurance plan, benefits received under the plan are generally not taxable and are not reported on the individual's income tax return. An employee may pay the premiums directly to the insurer, or through payroll deductions with the employer remitting the premiums to the insurer on the employee's behalf. No T-slip is issued.^[1]

Calculating and reporting the deduction in UFile:

As noted above, if an employee received benefits and the employee partially contributed to the plan, then the employee can deduct, from the benefit income, all of the contributions they made, except to the extent they were already claimed as a deduction.

For example:

• Employee contributed $600 annually for 10 years: $6,000.
• Employer also contributed to the plan.
• After the ten years the employee is disabled for the first time and receives $30,000 in LTD benefits in the first year of disability.

An amount of $30,000 will be reported on a T4A, box 107. The Ufile entries will be:

UFile will report a net amount of $24,000 on Line 10400 as other employment income.

But the $6,000 contribution amount will not be reported on the T4A.  Some extra work is needed to get this amount.  Ideally, the individual should request the amount from their employer.

A deduction must be claimed in the first year up to the amount of income. If there is a leftover amount, that unsued amount can be used the next year. For example:

• Employee contributed $600 annually for 10 years: $6,000.
• Employer also contributed to the plan.
• After the ten years the employee is disabled for the first time and receives $4,000 in LTD benefits in the first year of disability.
• In the second year the employee receives $10,000 in LTD benefits.

The individual will claim a deduction of $4,000 in the first year, and claim the unsued amount of $2,000 in the second year.

References:

• Income Tax Act, s.6(1)(f)
• IT-428 Wage Loss Replacement Plans (archived)
• CRA webpage - Payments from a wage-loss replacement plan
• CRA webpage - Wage Loss Replacement Plans