When new companies are starting out and want to provide employees with health benefits as a perk, the question always comes up regarding who should pay for the benefits. This seems fairly obvious (the company should pay) but there are certain situations where it is actually better if the employee pays.
Payroll ‘best practices’ are to have the employee pay, after tax, the life, long term (LTD) and short term (STD) disability while the employer pays for everything else. By doing this, in Canada, the employee will not have to pay income taxes on the amount received if they actually do have to make a claim.
However, some companies do actually pay for the life, LTD and STD (removing the tax benefit as stated above), and then the best practice is to deduct taxes on these amounts at source because they are considered taxable benefits. The other way is to not deduct at source, include it on their T4 as a taxable benefit and then they true up with the government when they file their taxes. However for the latter, increasingly, employees are claiming that they are not savvy enough to understand the tax implications and great grief occurs when they see the surprise on their T4.
In case you want some light easy reading, here is the official CRA website for all taxable benefit types and their treatment:
http://www.cra-arc.gc.ca/E/pub/tg/t4130/t4130-08e.pdf
and here is the Income Tax Act guidance on not paying taxes when an employee pays the life, LTD and STD premiums:
3 comments ↓
The link you provided for the T4130-e is broken
I’ve updated the link now for the new version that came out in Feb 2009. Thanks!
of the health benefits such as life ins, accidental death ins, extended health and dental - which of these benefits are taxable
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