Taxation

Direct Tax on Employee Benefits

The federal government charges 5% GST/HST on benefit administration fees and provincial governments add their share of the HST, as well as retail sales tax (RST) and provincial premium tax (PPT).

Provincial Premium Tax (PPT)

Provinces and territories charge a premium tax on employee benefit insurance premiums and related fees. Ontario, Quebec and Newfoundland also charge the tax on uninsured arrangements whether they are professionally administered as Administrative Services Only (ASO) as well as self-administered benefits.

Provincial Retail Sales Tax on Benefit Costs
Rate Jurisdiction Insured Plans Uninsured Plans
4% Newfoundland Yes Yes
3.5% Prince Edward Island Yes No
3% Alberta,
Saskatchewan,
Nova Scotia,
North West Territories,
Nunavut		 Yes No
3.48% Quebec Yes Yes
2% Ontario Yes Yes
2% All other jurisdictions Yes No

 

Provincial Retail Sales Tax (PST/RST)

Some provinces continue to charge retail sales tax on employee benefits even after introducing Harmonized Sales Tax.

Provincial Retail Sales Tax on Benefit Costs
Rate Jurisdiction Tax Base
8% Ontario group life and health benefits, including Provincial Premium Tax (PPT)
if the PPT forms part of the premium billed by an insurer.
9% Quebec group life and health benefits
8% Manitoba group life & disability insurance benefits

 

Federal Goods and Services Tax (GST) / Harmonized Sales Tax (HST)

The federal government charges 5% GST or HST on the administration charges for benefits based on the primary location of the employer and the provinces with HST add their portion.

GST / HST on Benefit Administration Fees
Rate Tax Jurisdiction
15% HST Nova Scotia
14% HST Prince Edward Island
13% HST Ontario, New Brunswick, Newfoundland and Labrador
14.975% HST Quebec
5% GST All other jurisdictions

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