Disability Benefits: Changes to Canada Revenue Agency’s Tax Withholding Requirements

The Canada Revenue Agency (CRA) has recently updated their tax withholding requirements for disability benefits. The January 1, 2015 change will impact the way taxable disability benefit payments are calculated for insured short-term disability (STD) and long-term disability (LTD) plans.  

Both STD and LTD plans are a type of Wage Loss Replacement Plan (WLRP), which insures a group of employees against loss of employment income due to disability, sickness or accident. Income from both STD and LTD benefits is always taxable to the employee, except where the premium for these benefits is fully paid by the employee.

Historically, the CRA allowed taxes on STD and LTD benefits to be paid when a claimant’s annual income tax return was filed, which meant that income tax was not deducted from the STD or LTD payment when it was issued. However, effective January 1, 2015, the CRA will require that income tax be deducted from taxable STD or LTD payments at the time they are issued. It should be noted that many insurers were already deducting taxes from taxable LTD benefits—this change will have the biggest impact on taxable STD benefits where, due to the short-term nature of the payments, many insurers may not have previously withheld taxes.

If you have questions or require further information with regards to this change, please contact your Benefits Consultant.