Are LTD and CPP Disability Benefits Taxable?

When it comes to taxes, things are rarely simple and straightforward–and that’s certainly the case with the taxation of disability benefits. Here are some general guidelines. As always, your individual circumstances may vary; it’s important to consult with a lawyer and/or tax professional.

Are LTD Benefits taxable?

That depends on who pays the premiums.

If you pay for your own insurance coverage and subsequently wind up receiving benefits, they will be tax-free.

On the other hand, if your employer pays for your premiums, the benefits are considered income and will be subject to taxation.

In a third scenario, your employer pays for part of the premiums and you pay the rest. In that case, the proportionate amounts are taxable or non-taxable. For example, if you and your employer split the cost of your premiums 50/50, then 50% of the benefits will be taxable as income, and 50% will be non-taxable.

That’s the general rule, but things can become more complicated than that, because if you pay a portion of your premiums, there’s also the question of whether they’re paid with pre- or post-tax dollars.

On the plus side, if your benefits are indeed taxable, you probably won’t wind up with a big tax bill; usually the insurer will withhold a portion of your benefits payments to cover the taxes.

Are CPP Disability Benefits Taxable?

The answer to this is straightforward: yes, CPP Disability benefits are taxable.

Whether you receive monthly payments or a retroactive lump-sum payment, both are considered income and are subject to federal income tax.

By default, income tax deductions are not automatically applied to your monthly payments, but you can ask Service Canada to do so. You can request that they deduct a set amount or a certain percentage of your payments. This may help to prevent a large tax bill down the road. If you receive a lump sum retroactive payment, you can also spread out the tax owed over the number of years the benefits were for.