Whether your long-term disability (LTD) payments are taxed comes down to one question: who paid the premium. This page is one of the guides to how each employment benefit is taxed, and it covers the premium rule, cost-shared plans, the premium election and how LTD income is reported at tax time.
The Key Rule: Who Pays the Premium Determines Taxability
| Premium Payer | LTD Benefit Tax Status |
|---|---|
| Employer pays 100% | LTD benefits are fully taxable income |
| Employee pays 100% | LTD benefits are completely tax-free |
| Cost-shared (e.g., 50/50) | Taxable, minus the premiums you paid into the plan after 1967 |
CRA authority: Income Tax Act s. 6(1)(f) includes LTD benefits in income when the employer contributed to the plan, reduced by the employee’s own contributions; s. 6(1)(a) leaves out the employer’s contributions to a group sickness or accident insurance plan.
Net Benefit Comparison: Tax-Free vs Taxable LTD
Assumption: pre-disability gross salary $90,000; LTD benefit 65% = $58,500/year = $4,875/month gross LTD benefit.
| Scenario | Gross Monthly LTD | Estimated Tax | Net Monthly | % of Pre-Disability Net |
|---|---|---|---|---|
| Employee-paid (tax-free) | $4,875 | $0 | $4,875 | ~78% |
| Employer-paid (taxable) | $4,875 | ~$1,100 | ~$3,775 | ~60% |
Pre-disability net salary on $90K ≈ $6,250/month after tax. Employee-paid LTD replaces ~78%; employer-paid replaces ~60%.
How Cost-Shared Plans Are Calculated
When your employer paid part of the premium, CRA taxes the benefits you receive minus the contributions you made to the plan after 1967. What you subtract is the total you paid in, not a share of each payment. Under the Income Tax Act (s. 6(1)(f)), once benefits have been included in your income for a year, later years only subtract contributions made after that year. So on a long claim, your own past contributions shelter the first part of the benefits and the rest is taxable.
An illustration, assuming you paid $3,000 into the plan over the years before your claim:
| Component | Calculation | Amount |
|---|---|---|
| Benefits received in the first year | 12 × $4,875 | $58,500 |
| Less your own contributions to the plan | −$3,000 | |
| Taxable benefits in the first year | $58,500 − $3,000 | $55,500 |
| Taxable benefits in later years (no new contributions) | All benefits received |
Your plan administrator or insurer can tell you the total you have contributed.
How to Determine Your Plan’s Premium Structure
| Step | Action |
|---|---|
| 1 | Check your pay stub for LTD/disability deduction line |
| 2 | If deduction exists, you are paying some premium: get the % split from HR |
| 3 | Review your group benefits booklet, premium contribution section |
| 4 | Ask HR directly: “Who pays the LTD premium?” |
| 5 | Check your T4: employer-paid premiums for a group LTD plan are normally not a taxable benefit, so they usually won’t appear in box 40, the line for taxable benefits |
Some plans let you choose who pays the premium, and the next two sections cover that choice. For buying an individual policy rather than relying on a workplace plan, see the disability insurance guide.
The Premium Election
Some employers offer employees a choice:
| Option | Monthly Cost to You | Future Benefit Tax Status |
|---|---|---|
| Employer pays premium | $0 | Taxable (less any premiums you paid in) |
| You pay premium | Your share of the premium | Tax-free |
The math at a $5,000/month benefit: If employer pays premium, you net ~$3,750/month after tax. If you pay a $50/month premium, you net $5,000/month. Over a 12-month disability period, the tax-free benefit is worth approximately $15,000 more. The premium cost is $600, a difference of about $14,400 per year of disability.
The trade-off: paying the premium yourself costs money every year whether or not you ever claim, while the tax saving only arrives if you become disabled.
Having employer-paid premiums counted as your pay
If your employer pays the LTD premium under a group plan (making benefits taxable by default), the exception is a plan set up from the start so that the premium counts as part of your pay, shown on your T4 as a taxable benefit. Because you are taxed on the premium as it is paid, the plan is treated as one you pay for yourself, so LTD payments stay tax-free. CRA does not accept adding the premium to your income after the fact.
This election must be set up through your employer and plan administrator before a disability occurs. Some employers allow it; others do not. The tax cost is the tax on the premium each year, while the benefit (receiving tax-free LTD payments during a disability) can be substantial.
Short-Term Disability and Other Income-Replacement Programs
| Program | Who Funds It | Taxable? |
|---|---|---|
| Employer-paid STD plan | Employer | Yes |
| Employee-paid STD plan | Employee | No |
| Employer SUB top-up (on EI) | Employer | Depends on plan structure |
| WSIB / WCB (workers’ compensation) | Provincial workers’ compensation board | Generally tax-free |
EI sickness benefits are always taxable, because they come from a government program with different rules from an insurance plan; the EI sickness benefits guide covers who qualifies and how long they last. LTD can also overlap with the CPP disability benefit, a separate government benefit with its own eligibility test.
Before You Go on LTD
- Confirm with HR whether your LTD benefit will be taxable
- If it is taxable, ask whether tax can be withheld at source, which avoids a large April tax bill
- Instalment payments to CRA are the other route if taxable LTD is your primary income
- If you first collected EI sickness benefits, confirm with Service Canada how they coordinate with your LTD payments
Tax filing when you have LTD income
If your LTD is taxable (employer-paid plan), you will receive a T4A slip (box 107, wage-loss replacement plan payments) or sometimes a T4 slip if CPP and EI are also deducted. The payer issues the slip, which is often the insurance carrier but can be the employer.
Steps at tax time:
- Report the LTD income on Line 10400 (other employment income) using box 107 of the T4A; if it came on a T4, it is part of the employment income reported on Line 10100
- The withheld tax (if any) appears on the slip and is entered on Line 43700 (total tax deducted)
- If no tax was withheld and you received significant LTD, you may owe tax at filing
If your net tax owing is more than $3,000 ($1,800 in Quebec) for the year and was also more than that in either of the two years before, you have to pay instalments; the tax instalments guide has the due dates and how the amounts are worked out. Voluntary instalments during the year are one way to avoid interest when LTD income has no tax withheld.
Related coverage and credits
A workplace plan’s other coverage, and what happens to it when you leave, is covered in the group benefit plan guide and the guide to continuing benefits after leaving a job. The disability tax credit is a separate credit with its own eligibility test. Employer-paid group life insurance follows the opposite rule from LTD: the premium is taxed as a benefit each year, while the death benefit is tax-free.