With tax season upon us, we thought it would be a good idea to provide a refresher on how tax may apply to your employee group benefits plan in Canada. A typical employee benefits package includes extended health & dental benefits, life and accidental death & dismemberment insurance (AD&D), as well as disability and critical illness coverage. We will also touch on the taxability of healthcare and wellness spending accounts.
Taxability of Extended Health & Dental Benefits
Extended health & dental benefits are not taxable to the employee. When it comes to premiums, many group benefits plans in Canada have both the employer and employees contributing to the premiums. Premiums paid by the employer are a tax deductible business expense. However, premiums paid by the employee (deducted from their paycheque) are paid with after-tax dollars. For example, the monthly premium for dental benefits could be $25 per month. However, when the employee receives a dental bill (say $300), that is a tax-free benefit. This tax advantage explains why most workers in Canada would prefer benefits over a salary increase.
Employee & Dependent Life Insurance and AD&D
The insurer pays out life, dependant life and AD&D to the beneficiary tax free regardless of who pays the premium. However, the employer’s contribution to life insurance premiums are a taxable benefit and must be reported on an employee’s T4.
Critical Illness Benefits
Similar to life insurance, critical illness benefits are paid out to the insured employee tax-free. However, if it’s the employer that pays the premium, then the amount of the premium must be reported as income. On the other hand, when the employee is responsible for critical illness premiums, the company would simply deduct it at each pay period (from after-tax income).
Disability Insurance
Disability coverage typically includes Long Term Disability (LTD) and Short-Term Disability (STD). If an employee is unable to work due to disability, benefits can be taxable or tax-free, depending on who pays the premium.
If it’s the employee who pays 100% of the disability premium, they receive the funds tax free.
On the other hand, when the company pays all or a portion of disability premium, the benefits become taxable to employee when they receive the funds (in the event of disability). One way to avoid this situation is for the employer to report the premium paid as “income” on employee paycheques. This way the employee pays the tax on the premium itself, thus making the disability benefit non-taxable.
Healthcare and Wellness Spending Accounts
Some benefits plans may have a Healthcare Spending Account (HSA) or a Wellness Spending Account (WSA). The main difference between these two accounts is the type of expenses they cover and how taxation applies. HSA covers medical expenses that are over and above the basic health plan as long as CRA approves them. WSA’s can cover wellness related expenses such as vitamins, exercise equipment, fitness classes etc. When it comes to taxability of these benefits, HSA funds are non-taxable to the employee. WSAs are considered a taxable benefit.
Conclusion
From a tax perspective, the easiest way to set up a benefits plan is to have the employee pay for 100% of disability benefits. The rest of the premiums can be split between the employee and employer. It’s important to keep in mind that for a benefits plan to be successful, the employer should pay for at least 50% of the overall premium. If you have any questions about the taxability of your benefits plan, feel free to get in touch with us. We’d be happy to help!
