Income Tax on Employee Benefits
Health benefits (drug, dental, vision, medical) continue to receive favourable tax status as a non-taxable benefit.
Tax Deductible Business Expense
The employer’s cost of providing benefits (claims, fees and taxes) is a tax deductible business expense. Corporations need to monitor the reasonableness of benefits provided to employees who are also shareholders.
Deductions for unincorporated businesses are limited based on reasonableness as outlined in the private health services plan (PHSP) premiums section of the Business and Professional Income Guide. The following provides some highlights of the extensive criteria detailed in the guide:
- Scenario A
If you don’t have any permanent full-time arm’s length employees:
- The deduction for yourself is limited to $1,500, plus $1,500, if you have a spouse plus $1,500 for each adult child, plus $750 for each minor child.
- Scenario B
If at least half of your plan members are permanent full-time arm’s length employees:
- The deduction for you is limited to the lowest deduction for any permanent full-time arm’s length employee.
- Scenario C
If less than half of your plan members are permanent full-time arm’s length employees:
- The deduction for you is limited to the lower of Scenario A and Scenario B.
Employee Income Tax on Benefits
Health Benefits (drug, dental, vision, medical)
- Health benefit claim payments are non-taxable.
- The employer contribution toward the cost of eligible health benefits are not subject to federal income tax.
- The employer contribution toward the cost of eligible health benefits are not subject to provincial income tax except for residence of Quebec.
Disability Insurance Claim Payments (short-term or long-term)
- Disability claim payments are non-taxable if all employees covered by the insurance policy have always paid the full cost of their premiums and related taxes through payroll deductions.
- Disability claim payments are non-taxable if all employees covered by the insurance policy have always had the full cost of their premiums and related taxes added to their regular pay as a taxable benefit.
- If the employer ever paid any part of the disability insurance cost then disability claim payments are taxable and employees are eligible for an offsetting deduction equivalent the total of their contribution toward the cost of the insurance.
Note: Most disability policy offset non-taxable benefits with taxable payment from sources such as CPP.
Retirement Benefits (Pension, DPSP, RRSP)
Retirement income benefits are taxable when received by employees.
Relevant Canada Revenue Agency Interpretation Bulletins
- IT339R2 Private Health Services Plan
- IT470 Employee Fringe Benefits - Health Care, Counselling, Subsidized Meals, Uniforms, Education, Recreational Facilities, Transportation, Vehicle, Housing, Travel, Trips, Awards, Tuition, Frequent Flyer
- IT-529 Flexible Employee Benefit Programs
- IT-519R2 Eligibility of Medical Expenses
- IT502ST Employee Benefit Plans and Trusts - Deferred Compensation
- IT334R2 Employment Income - Sick Leave Credits, Gifts, Inducements, Strike Pay
- IT-85R2 Health and Welfare Trusts
- IT-428 Wage Loss Replacement Plans
- IT421R Low Interest Loans
- IC77-1R4 Deferred Profit Sharing Plans - Rules
- IT-363R2 Deferred Profit Sharing Plans - Deductibility