Are your LTD benefits taxable or non-taxable?

When assessing a litigated claim for long-term disability benefits, one very important consideration a disability lawyer must always be aware of is whether the long-term disability benefits are taxable or non-taxable under the specific disability policy at issue in the claim.

Long-term disability benefits are typically taxable under a policy when an employer pays a portion (or all) of the insurance premiums on a disability policy.  Long-term disability benefits are typically non-taxable under a policy when an employee pays 100% of the insurance premiums on the disability policy.   It is very important however, that you review and discuss your long-term disability policy with an experienced disability lawyer in order to confirm whether the disability benefits under your particular policy are in fact taxable or non-taxable. 

In situations where the long-term disability benefits are taxable under the policy, there may be    potential tax advantages for a disabled individual in the event that a lump-sum settlement of the claim can be reached.   These should be carefully discussed and considered with an experienced disability lawyer, before entering into any settlement negotiations or agreements involving claims for taxable long-term disability benefits.  

For example, in a situation where taxable long-term disability benefits under a policy are paid on a monthly basis until age 65, an insurance company is required to report 100% of this income to Revenue Canada for tax purposes.

In a situation involving  a lump-sum settlement  however, an insurance company  will be required to issue a T4A for the  portion of  the lump-sum settlement that relates  to the payment of taxable long-term disability benefits for  any  period prior to the settlement of the disability claim (i.e. the “arrears” or “past benefits”).  An insurance company will not be required however  to issue a T4A for the  portion of  the lump-sum settlement relating to  the payment of   taxable long-term disability benefits for  any  period of time after the date of the  settlement  (i.e. the “future benefits”).   This will likely reduce the amount of income tax owed to Revenue Canada regarding your taxable long-term disability benefits.   (Note* a T4A is a tax document prepared and submitted to Revenue Canada to record, for tax purposes,   lump-sum taxable  disability income received).  

Prior  to the settlement of any taxable long-term disability benefit claims, the allocation of any lump-sum settlement payments relating to taxable disability benefits should  also be carefully discussed and considered with an experienced disability lawyer.  This includes the possibility of preparing a T1198 in order to spread any taxable lump-sum settlement portion over a number of years.  This will likely reduce the amount of income tax owed to Revenue Canada   for the specific year in which the lump-sum disability settlement payment is actually received.   (Note* a T1198 is a tax document prepared and submitted to Revenue Canada, for tax purposes, in order to  allocate or spread lump-sum taxable  disability income received over a period of more than one year)

A careful review of your particular disability policy and claim with an experienced disability lawyer, before settling your disability claim,   will help to ensure that you obtain the best outcome possible.  When dealing with taxable long-term disability benefits, it is recommended that you also talk to an accountant or tax expert.