The Canada Revenue Agency  – CRA changed the Group Disability Insurance Withholding Tax Rule that applies to group disability plans.

The new rule takes effect January 1, 2015 .  It applies to those disability claims where the employer pays the premium for the group disability portion (we call them taxable group disability plans). A taxable plan is one where the claim cheque is considered taxable income to the employee and must be included in the recipient employee’s income for the year.

Previously, CRA did not require insurers to actually withhold taxes off the actual taxable disability claim cheques. CRA simply required the insurer to send a T-slip and the employee was to include it in their annual tax return as income. So, insurance companies did not withhold any income tax on these claim cheques.

However, CRA has amended the rule effective January 1, 2015.

CRA will now require insurers to withhold the appropriate income tax and deduct it from the taxable disability claim cheques sent to employees of taxable plans.

This means that disability claimants net cheques may appear less than before, because of the taxes deducted on the cheque.  Though in fact the employee/claimants will end up with the same amount of income during the course of their claim.

Note – this new tax rule does not affect those employers or employees with group plans whereby the employee pays the premium for the disability benefit (non taxable group disability plans).

There are no other changes and this does not affect how you,  the employer, completes any of your records –  that remains the same.

I thought is was important for you, as an employer, to know about this, even though it does not affect your paperwork.  You may have employees on claim who will notice that the claim cheques now have taxes deducted (January 2015), and they will question why.  Also, for any future claimants.

For a reminder of the taxation of group benefits, if you haven’t already, you can visit my group taxation page here and download the tax chart that I created for you.