Where an individual policy is purchased by the insured, benefits under the individual policy are not generally subject to tax. When paid by the individual, disability income premiums are not tax deductible. Furthermore, in a group policy where the employer collects premiums out of the employee's wages and remits them to the insurer, benefits are not considered income and are not subject to tax since the entire cost is borne by the employee...
Amounts received as disability income by an employee under a typical long-term disability plan to which the employer contributed are taxable as income, provided two criteria are met.
Firstly, where the taxpayer's employer has paid all or part of the premiums, the full amount of any benefit is taxable. Since the premiums are split between the employer and the employee, the employee is entitled to get a deduction on the monies received up to the total amount of premiums that he or she may have paid.
Payments made by an employer pursuant to a collective agreement might be regarded as having been, in fact, paid by the employee if the latter had foregone higher wages or other benefits. There must be evidence that there were trade-offs in the collective bargaining process and that higher wages or other benefits were forgone in favour of the disability benefits so that the payments would not fall within the provisions of paragraph 6(1)(f) of the ITA.
Secondly, in order for the disability insurance benefits to be treated as taxable the amount must be payable on a periodic basis as compensation for loss of employment income and it must be paid pursuant to a "plan" toward which an employer has made contributions. So long as the contract or agreement calls for payments to be made on a periodic basis, the periodic character of the payments is not changed by the fact that the payment were not paid on time. Where disability benefits are to be paid monthly but in fact are paid on irregular intervals and for varying amounts, the amount will be treated as "on a periodic basis" as required by paragraph 6(1)(f) of the ITA. The court will treat
the question not when or how the disability benefits were paid but rather when or how they were payable. It is the year in which the claimant receives the amount and not in the year that the amounts became payable that such amount must be included in the calculation of income.
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