Providing an employee benefit plan for your Canadian workers is not only a valuable form of compensation for them but also an excellent way to give a raise without incurring any payroll taxes. An employer can pay for 100% of the benefit plan but it actually makes more sense to have the employee share in some of the cost. When setup correct, your employee benefit plan can have zero tax consequence to both the employee and the employer.
Revenue Canada says dependent life insurance is taxable as T4 income, if the employer pays any portion of the premium.
If the employer pays any portion of a disability premium that covers weekly income, short-term or long-term disability (as a result of a accident or sickness) it is also classified as taxable income.
Let’s say the employer is paying $30 a month for a disability insurance premium and that buys the employee $3000 a month in income in the event of accident or illness. If the employee makes a claim, that $3000 a month is now taxable income. It’s beneficial to have that portion of the premium be paid by the employee for this reason.
When we setup a plan, the employee pays all the taxable portions. For sake of example, let’s say the premium is $120 a month and the employee pays $60 with the employer paying the other half. That constitutes all the taxable benefits and anything leftover goes to extended health and dental.
Therefore, anything paid by the employer is a tax-deductible expense but not taxable to the employee. It’s a zero tax consequence to anybody.
If the employer pays the entire premium on behalf of the employee, it’s tax deductible for them but the employee has to pay tax on the insurance premium, the dependent life premium and has a taxable disability benefit if he/she makes a claim.
This misunderstanding can lead to employees getting a worse deal than they actually are. Unsuspecting unions might also favour 100% coverage of the employee benefit plan by the employer without realizing that the employer ends up getting taxed more in the end.