{"id":2006,"date":"2026-04-26T21:44:53","date_gmt":"2026-04-27T04:44:53","guid":{"rendered":"https:\/\/immixgroup.ca\/blog\/?p=2006"},"modified":"2026-04-27T22:24:47","modified_gmt":"2026-04-28T05:24:47","slug":"taxation-of-benefits","status":"publish","type":"post","link":"https:\/\/immixgroup.ca\/blog\/2026\/04\/26\/taxation-of-benefits\/","title":{"rendered":"Taxation of Benefits"},"content":{"rendered":"\t\t
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Immix Group Benefits Insight<\/p>\n\n

Taxation of Benefits<\/h1>\n\n \n

\n By\n \n Lindsay Byrka\n <\/a>\n B.A., B.Ed, CFP | Vice President<\/span>\n <\/p>\n <\/div>\n<\/header>\n\n\n

When an Employer \u201cdoing the right thing\u201d backfires<\/h2>\n\n

In our initial discovery meeting with a new client, we learned of a situation that had them re-examining their entire benefits offering, seeking a second opinion. This employer with a long standing benefits plan decided a few years ago to ease the cost of living burden by fully covering the cost of benefits, including Long Term Disability premiums.<\/p>\n\n

What they did not realise was that the LTD contract had been explicitly set up as an employee paid, non taxable plan, providing 66.67% of earnings to a $5,000 monthly maximum, intended to be received tax free on claim.<\/p>\n\n

Recently, an employee earning $80,000 became permanently disabled and successfully claimed LTD benefits. During the claim review process, records clearly showed the employer had been paying the premiums for many years.<\/p>\n\n

The CRA treated the LTD income as taxable, despite the insurance contract saying otherwise. Unfortunately, payroll reporting over many years overrode the initial intent.<\/p>\n\n

The financial impact was notable and very upsetting to the impacted employee. On top of dealing with a serious, degenerative medical condition, the disabled employee found herself receiving just $3,500 a month after taxes, instead of the $5,000 she believed she was insured for, which represented close to her pre-disability take home pay.<\/p>\n\n

The result: a $1,500 per month reduction, or $18,000 per year, at the exact moment the employee needed stability the most. The employer thought they were being generous when in fact their crucial oversight irreversibly transferred long term risk to the employee.<\/p>\n\n

Could this have been avoided? Yes, understanding tax implications and diligently examining the ongoing management of a plan are crucial to prevent these situations.<\/p>\n\n

At the Immix Group as part of our ongoing management and oversight of benefit programs, we routinely review contract wording and ask a simple but essential question: \u201cWho is paying the premium for the disability benefits?\u201d<\/p>\n<\/aside>\n\n \n

Tax Season Is a Good Time to Review How Your Benefits Plan Is Taxed<\/h2>\n\n

Tax time puts payroll and reporting under the microscope. It\u2019s also a practical moment to revisit a topic that\u2019s often misunderstood inside otherwise well-run organizations: how employee benefits are taxed.<\/p>\n\n

In Canada, the Canada Revenue Agency (CRA) expects employers to determine whether a benefit is taxable and, if it is, whether CPP, EI, and income tax withholding apply. Getting this right affects more than year-end slips: it changes payroll deductions, employee take-home pay, and how clearly employees understand the value of their plan.<\/p>\n\n

At the Immix Group, we work with employers to design, implement and manage employee benefit programs; our focus in this article is on common employee benefit plan items (extended health\/dental insurance, life, critical illness and disability insurance, and health and wellness spending accounts). Employers also need to address the large list of taxable items (cell phones, parking, credit card rewards) as indicated by the CRA.<\/p>\n\n

Our goal is simple: to help employers, HR teams, payroll staff, finance leaders, and plan administrators revisit the benefit-related tax questions that are easiest to overlook and most important to understand.<\/p>\n <\/section>\n\n \n

Are all employee benefits non-taxable?<\/h2>\n\n

No. Not all benefits are taxed the same way: some are generally non-taxable, some create a taxable benefit, and for some benefits, taxation depends on who pays the premium. Those distinctions matter for payroll treatment, T4 reporting, and employee communication. (link to handout resource).<\/p>\n\n

Insurance premiums are a common source of confusion. Basic health and dental coverage, life insurance, disability insurance, and health and wellness flexible spending accounts do not all follow the same tax rules. That is why it is risky to lump everything together under the label of \u201cbenefits.\u201d<\/p>\n <\/section>\n\n \n

Taxation of Employee Benefits in Canada<\/h2>\n\n

The table below summarises how common benefits are taxed, based on who pays the premium and how benefits are paid out<\/p>\n\n

\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n
Benefit Type<\/th>\n Employer-Paid Premium: Taxable to Employee?<\/th>\n Employee-Paid Premium: Taxable to Employee?<\/th>\n Benefit Paid Out: Taxable as Income?<\/th>\n <\/tr>\n <\/thead>\n
Life Insurance<\/th>\n Yes \u2013 taxable benefit<\/td>\n No<\/td>\n No \u2013 benefit paid is tax-free<\/td>\n <\/tr>\n
Accidental Death & Dismemberment (AD&D)<\/th>\n Yes \u2013 taxable benefit<\/td>\n No<\/td>\n No \u2013 benefit paid is tax-free<\/td>\n <\/tr>\n
Dependent Life Insurance<\/th>\n Yes \u2013 taxable benefit<\/td>\n No<\/td>\n No \u2013 benefit paid is tax-free<\/td>\n <\/tr>\n
Critical Illness Insurance<\/th>\n Yes \u2013 taxable benefit<\/td>\n No<\/td>\n No \u2013 benefit paid is tax-free<\/td>\n <\/tr>\n
Short Term Disability (STD)<\/th>\n No<\/td>\n No<\/td>\n Yes, if employer pays premium \/ No, if employee pays premium<\/td>\n <\/tr>\n
Long Term Disability (LTD)<\/th>\n No<\/td>\n No<\/td>\n Yes, if employer pays premium \/ No, if employee pays premium<\/td>\n <\/tr>\n
Extended Health Care (EHC)<\/th>\n No<\/td>\n No<\/td>\n No \u2013 benefit is not taxable<\/td>\n <\/tr>\n
Dental Care<\/th>\n No<\/td>\n No<\/td>\n No \u2013 benefit is not taxable<\/td>\n <\/tr>\n
Health Spending Account (HSA)<\/th>\n No (if properly structured as a PHSP)<\/td>\n N\/A (employer-funded)<\/td>\n No \u2013 reimbursements are tax-free for CRA Eligible Medical Expenses<\/td>\n <\/tr>\n
Wellness Spending Account (WSA)<\/th>\n Yes \u2013 taxable benefit<\/td>\n N\/A (employer-funded)<\/td>\n Yes \u2013 treated as taxable income<\/td>\n <\/tr>\n <\/tbody>\n <\/table>\n <\/div>\n <\/section>\n\n \n

Key Takeaways<\/h2>\n\n

The key tax planning rule: For disability benefits (STD\/LTD), have the employee pay the premium so that any benefit received during a claim are tax-free. For Life, AD&D, Dependent Life, and Critical Illness, the benefit payout is always tax-free \u2014 but employer-paid premiums create a taxable benefit on the employee's T4. Health and Dental are never taxable, regardless of who pays.<\/p>\n <\/section>\n\n\n\n