Taxation of disability insurance (DI) plans by Jeronohnson

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									Taxation of disability insurance (DI) plans
The main questions that need to be addressed when determining the taxation of benefits and premium for individual disability insurance policies are:
•	 Who is the premium payer — the insured or the employer?
•	 Who will receive the disability claim benefits — the insured or the employer?
•	 Are there a group of policies structured to provide an employee benefit?
•	 Does the policy provide reimbursement of overhead expenses during disability?
       Individually-Owned	Disability		                        Employer-Paid	Plan*                                      Grouped	Individual	Disability		                         Overhead	Expense	Plan
              Insurance	Policy                                                                                             Insurance	Policies*

  An individual owns and pays for a DI policy      An individual owns a DI policy and the                        Group of DI policies owned and premium                DI policy covering overhead expenses
  (including self-employed owners of an            employer pays the premium                                     paid by the employer with benefits payable to
  unincorporated business)                                                                                       the employee (Wage Loss Replacement Plan)

  The premium is considered “personal and          The premium for disability income insurance                   Properly implemented, the arrangement                 The premium for overhead expense coverage
  living expenses” which is not deductible for     paid by the employer on an employee-owned                     would be considered a group sickness and              is deductible as a business expense
  tax purposes.                                    policy must be included in the employee’s                     accident plan for tax purposes. The premium           regardless of whether the business is
                                                   income as an employee benefit.                                is deductible as an expense to the employer.          incorporated or not.
  An individual’s premium for disability income
  insurance is not an expenditure incurred for     The value of the premium is deductible to                     The premium payment will not be included              The disability benefits payable in the event
  the purpose of gaining or producing income.      the employer as a “salary” expense provided                   in the employees’ incomes as an employee              of a claim are taxable. In turn, the proceeds
                                                   it is reported as a taxable benefit to the                    benefit. Disability benefits received by the          are being used to pay expenses which are
  The DI benefits received are not taxable.
                                                   employee.                                                     employee will be included as taxable income           deductible as a business expense.
                                                                                                                 but reduced by any premium paid by the
                                                   The DI benefits received are not taxable.
                                                                                                                 employee.

* Where some insureds are both shareholders and employees, this summary assumes that coverage is provided to the insured in their capacity as employees, not as shareholders.
  The Canada Revenue Agency (CRA) presumes the benefit is received as a shareholder unless there is evidence to the contrary.

Taxation	of	Return	of	Premium	benefits
The CRA has not as yet provided a formal ruling regarding the tax treatment of Return of Premium (ROP) benefits contained in a disability insurance policy. The tax treatment of an
optional ROP feature is, therefore, subject to interpretation by the CRA.

This summary provides tax information of a general nature only. It should not be relied upon as providing legal or tax advice. Clients are encouraged to consult with their own professional tax and/or
legal advisor about their particular circumstances.


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                                                       Canada Life and design and “Helping people achieve more” are trademarks of The Canada Life Assurance Company.
Taxation of critical illness insurance (CI)

                                                                                                                                                  Personally-owned	CI	
          Structure                       Grouped	Individual	CI	                           Personally-owned	CI	                                                                         Corporately-owned	CI
                                                                                                                                         – structured as an employee benefit

                                   Group of CI policies owned and                 An individual owns and pays for a CI                   An individual owns a CI policy and the   CI policy owned by the corporation and
         Description               premium paid by the employer with              policy (this includes self-employed                    employer pays the premium*               premium paid by the corporation with
                                   benefits payable to the employee*              owners of an unincorporated business)                                                           benefits paid to the corporation
                                                                                                                                                                                  (“Key Person” Insurance)

                                   Properly implemented, the arrangement The premium is considered “personal                             The value of the premium is deductible   The premium is not deductible as a
        Deductibility		            would be considered a group sickness and living expenses” which is not                                to the employer as a “salary” expense    business expense.
                                   and accident plan for tax purposes. The deductible for tax purposes.                                  provided it is reported as a taxable
        of	Premium	                premium is deductible as an expense                                                                   benefit to the employee.
                                   to the employer.

    Tax	Treatment	of		             Premium payment not included in the            Not applicable                                         The premium paid by the employer on      The premium payment will not be
  Premium	Payment	for		            employees’ incomes as an employee                                                                     an employee-owned policy must be         considered taxable income to the
                                   benefit (except for Quebec policies for                                                               included in the employee’s income as     employee.
   Insured	Individual		
                                   Quebec tax purposes).                                                                                 an employee benefit.

                                   Lump-sum CI benefits received by the           Lump-sum CI benefits are not                           Lump-sum CI benefits are not             Lump-sum CI benefits received by the
                                   employee are not taxable.**                    taxable.**                                             taxable.**                               corporation are not taxable.**
    Lump-Sum	Critical		                                                                                                                                                           If the CI benefits are subsequently paid
    Illness	(CI)	Benefit	                                                                                                                                                         to the employee or shareholder, the
                                                                                                                                                                                  amount paid will generally be taxable
                                                                                                                                                                                  to the recipient either as an employee
                                                                                                                                                                                  or shareholder benefit or as a dividend.

* Where some of the insureds are both shareholders and employees, this summary assumes that coverage is provided to the insured(s) in their capacity as employees, not as shareholders.
  The CRA presumes the benefit is provided as a shareholder unless there is evidence to the contrary.
** Provided the policy is an accident and sickness policy for tax purposes. The CRA generally accepts that CI policies providing no Return of Premium (ROP) benefits are accident and sickness policies.
   The CRA has not provided its view regarding the tax treatment of CI policies containing ROP benefits. The taxation of optional ROP benefits is subject to interpretation by the CRA.

This summary provides tax information of a general nature only. It should not be relied upon as providing legal or tax advice. Clients are encouraged to consult with their own professional tax and/or legal
advisor about their particular circumstances.




                                                                      Helping people achieve more™
                                                           Canada Life and design and “Helping people achieve more” are trademarks of The Canada Life Assurance Company.                              92 CAN-4/08

								
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