Long term disability insurance is a benefit that provides regular monthly payments if you are unable to work for an extended period due to injury or illness. You may get LTD coverage either through group employee benefits at work or by purchasing a private disability insurance policy as an individual or self-employed person.

When it comes to taxes, whether your LTD benefits are taxable depends on a key detail: who pays the premiums for your coverage. If your employer pays the premiums, your benefits are usually taxed as income. If you pay the premiums yourself with after-tax dollars, your benefits are generally tax-free. Understanding who pays for your policy can make all the difference when tax season comes around.

When Are Disability Benefits Taxable in Canada?

The big question: is long term disability income taxable in Canada?
The answer depends on two main things:

• Type of Policy: Is it a group plan or a private plan?
  

• Who Paid the Premiums: Did the employee or the employer pay the premiums?

Key Principle:

• If your employer pays all or part of the premiums for your disability insurance, then your disability benefits are taxable.
  

• If you (the employee or the policy holder) pay 100% of the premiums with after-tax dollars, your benefits are not taxable.
  

Understanding If Your Benefits Are Taxable

Use this checklist to see if your disability income is taxable:

• Do you have group or individual/private disability insurance?

• Who paid the premiums — your employer, you, or both?

• Check your pay stubs or ask HR, “Did I pay disability insurance premiums with after-tax dollars?”

  • If you paid all premiums yourself, your disability benefits are likely tax-free.

  • If your employer paid all or part of the premiums, your benefits are taxable.

• Keep all policy documents and T4A tax slips.

If you’re feeling unsure, speak to a disability lawyer or accountant — it’s better to double-check than to guess.

Who Pays the Premiums: Employee vs. Employer

Example: If your employer pays 50% and you pay 50%, then half your disability income is taxable.

Taxation of Lump Sum Payments

If your case is settled with a lump sum payment, tax treatment depends on how the settlement is structured:

• Arrears/Back Benefits:
  If your disability benefits are taxable, any lump sum payment for past benefits is also taxable.
  

• Non-Taxable Plan:
  If your regular monthly benefits are non-taxable, your lump sum will also be non-taxable.

Legal fees for taxable lump sum payments may be deductible; consult with a tax adviser for details.

Disability Tax Credit and Tax Forms

• The disability tax credit is a federal non-refundable credit for people with severe and prolonged impairments.
  It is separate from your disability income and does not make your benefits taxable or non-taxable.
  

• Tax Forms:
  

  • If your benefits are taxable, you’ll receive a T4A slip from your insurer.
    

  • For lump sums, you may also get a T1198 statement.

Moving Forward After a Disability: Steve’s Story

Steve, 50, built his life as a truck driver in the Northwest Territories, navigating the open road and supporting his family. When chronic pain forced him off the job, everything changed. Suddenly, Steve had to figure out how to manage both his health and his financial responsibilities. Fortunately, he had private disability insurance—but he wasn’t sure what that meant for his taxes, or what his next steps should be.

Steve’s main concern was whether his monthly disability payments would be counted as taxable income. After reviewing his situation, he found that because he had paid all the premiums for his private disability insurance himself, his disability income was not taxable. Had his employer covered any part of the premiums, the benefits would likely have been partially or fully taxable.

A lawyer experienced in disability insurance can play a critical role in situations like Steve’s, providing guidance and clarity at a time when it’s needed most. Here’s how legal support helps:

• Policy Review: Lawyers can interpret complex policy documents and break down how benefits work, including who paid the premiums and the resulting tax implications.
  

• Answering Questions: They provide clear, practical answers about income taxation, benefit eligibility, and next steps.
  

• Protecting Rights: If there are any disputes, delays, or complications with the insurance company, a lawyer can advocate for the client’s best interests.
  

• Empowering Decision-Making: By explaining rights and options, a lawyer helps people like Steve plan financially and avoid surprises come tax time.

Now that Steve knows his benefits are not taxable, he can focus on recovery and adapting to his new circumstances. Here are some practical moves someone in Steve’s situation should consider:

• Stay Organized: Keep all insurance-related paperwork, especially documentation of who paid the premiums.
  

• Consult a Tax Professional: Double-check your situation to avoid unwanted surprises at tax season.
  

• Plan Financially: Create a new budget based on disability income and expenses.
  

• Consider Future Needs: If it’s unlikely that you’ll be returning to work soon, look into other support programs or adjustments to long-term plans.
  

• Reach Out for Help: Legal professionals can assist not only with the insurance claim but also with negotiating settlements and clarifying ongoing obligations.

Common Questions About Disability Income & Taxation

Q: Are all disability benefits taxable in Canada?
A: No. It depends on the type of disability insurance policy and who pays the premiums.

Q: What if my employer and I split the premiums?
A: The portion paid by your employer is taxable. The part you pay with after-tax dollars is non-taxable.

Q: Can I deduct disability insurance premiums from my income?
A: Usually not, except in specific cases for self-employed business expenses, but this can make benefits taxable later.

Q: Will I get a tax slip?
A: You’ll get a T4A form for taxable disability income. If you don’t receive one and think your benefits might be taxable, contact your insurance company or accountant.

Q: What’s the difference between disability tax credit and disability income?
A: The disability tax creditis a federal tax deduction, while disability income is the money paid to you while you cannot work.

If you have more questions about your disability insurance, disability benefits, or if you’re unsure about whether your disability income is taxable, connect with our experienced disability lawyers for a free consultation.

Why Legal Guidance Matters

Disability insurance, taxation, and workplace policies can be complex and overwhelming, especially when you’re unwell. Let Share Lawyers is a resource to make sense of contracts, answer tough questions, and offer peace of mind. Legal support helps people move forward with confidence and security.

Steve’s experience highlights a crucial lesson: Understanding your disability coverage and the tax rules that apply equips you to make smarter decisions and have greater financial stability in uncertain times.