Taxation of Disability Insurance Plans

Taxation of Disability Insurance Plans

Who owns the policy - the insured or the employer?

Who is the premium payor- the insured or the employer?

Who will receive the disability claim benefits - the insured or the employer?

Is the plan set up on a "grouped" basis (e.g. Salary Continuation Plan)?

Does the plan provide reimbursement of office overhead expenses during disabi!ity?

Individually- Owned Contracts (Where an individual owns and pays for disability income policy )	The premium paid is considered "personal and living expenses" which is not deductible for tax purposes. An individual's premium for disability income insurance is not an expenditure incurred for the purpose of gaining or producing income. The benefits are received tax-free
Employer - Paid Plans Where an individual owns a disability income policy and the employer pays the premium)	The premium paid by the employer must be included in the taxable earnings of the employee. In the above case, the value of the premium would be a tax deductible "salary" expense for the employer. The benefits are received tax-free.
Salary Continuation Plan (SCPs) (Disability income policies are "grouped")	The employer contributions (premium) for the disability policies are tax-deductible. The employer contributions will not be considered taxable income to the Employee provided disability benefits from the plan are paid directlly to ; the employee. Any disability benefits received by the employee, however, will be included as taxable income as received
Office Overhead Insurance (Disability insurance policy covering office overhead expenses)	The premium for office overhead coverage is deductible as a business expense regardless of whether the business is incorporated or not. The benefits payable in the event of a claim are taxable. In turn, the proceeds are being used to pay expenses which are deductible as a business expense so the overall tax cost on the receipt is nil
Interpretation provided courtesy gwl nov 2001