Published: May 16, 2025
Introduction: Taxation of Group Benefit Plans
Benefits are non-monetary compensation that employers provide to employees. Employers are generally able to deduct their payments for benefits as a business expense. For employees, benefits are included in office or employment income under various Tax Act sections depending on the type of plan. The Income Tax Act taxes benefits for employees because of their indirect economic value.
Group benefits are a form of benefit provided to a group of people, typically employees. The CRA has recognized a group as being more than one person. The types of group benefits are private health plans, group sickness or accident insurance plans, employment insurance, and group term life insurance policies. There are different tax treatments for employees depending on the specific type of group benefit.
Group Benefits for Employers
Employers can deduct payments made for group benefit plans. Payments for group benefit plans are business expenses for employers. Employers may deduct these payments in accordance with sections 18 and 67 of the Income Tax Act. An expert Canadian tax lawyer can help you maximize your business deductions for group benefits and help you avoid reassessments for group benefit deductions.
Group Benefits for Employees – Taxable Benefits
Group benefit plans are generally taxable for employees because of their employer’s contributions. Depending on the benefit, employees will have to pay taxes when the employer contributes to the plan or when the policy pays the employee.
Subparagraph 6(1)(a)(i) excludes employer contributions to group sickness or accident insurance plans and group term life insurance plans from an employee’s income. However, other provisions tax these benefits.
Under paragraph 6(1)(e.1), employees are taxed when the employer’s contributions are made to group sickness or accident insurance plans that pay a lump sum.
An employee must include in income in the year any contributions made by an employer to a group sickness or accident insurance plan that pays a lump sum. Employees do not need to include the lump sum payment in their income, as the benefit has already been taxed through
Paragraph 6(1)(e.1). However, the CRA has stated that periodic payments from group sickness or accident insurance plans fall under paragraph 6(1)(f) and not paragraph 6(1)(e.1).
Paragraph 6(1)(f) taxes employees when they receive the benefit payments from employment insurance plans paid by their employer.
Employment insurance benefits are periodic payments from sickness or accident insurance plans, disability insurance plans, or income maintenance insurance plans. Employees do not need to include their employer’s contributions in their income for employment insurance benefits.
Employees must include periodic payments received from the group employment insurance policy in their income. Knowing the frequency of payment for the benefit is crucial in ensuring tax compliance, as it changes taxation from when the premium is paid to when the policy pays.
Subsection 6(4) requires that employer contributions to group term life insurance policies are included in an employee’s income when the employer pays for the benefit.
A group term life insurance policy is a group policy that pays only on the death or disability of employees in the course of or because of their employment or former employment, and there are insurer repayments to employers when claims and costs are lower than expected. Employees must include in their income any payments made by employers for the policy. Employees are not taxed on the life insurance policy when it pays out.
Group Benefits for Employees – Non-Taxable Benefits
The CRA has taken the position that employees do not need to include private health services plan contributions by employers in their income. A private health services plan is a plan where 90% or more of the premiums paid by the insurer are towards expenses that are eligible for medical expense tax credits; and a qualifying plan involving one party agreeing, for payment, to cover another’s potential loss from an uncertain event.
Employee payments to private health services plans are also tax deductible for employees
Periodic payments from disability insurance plans are tax-free for employees if the employee pays for the premium. However, if an employer pays part of the premium, then there is tax on the periodic payments based on the employer’s contribution.
Pro Tax Tips – Strategically Planning Group Benefits
The immediate inclusion of employer contributions to certain benefits can lead to employees paying higher taxes on benefits they might not want. An experienced Canadian tax lawyer can help you compensate employees in a tax-efficient manner, ensuring that employees are not taxed on benefits they do not want.
FAQ
Should an employee opt in or out of a plan?
Taxable benefits are included in income based on their fair market value. If an employee were to purchase that benefit, the employee would need to earn more than just the value of the benefit to pay for it because of taxes that must be paid on the income. The employee will still have to pay taxes on the receipt of benefits from insurance plans. Employees will generally find it valuable to opt into group plans that they will use and need.
What if an employer contributes to an Employee-Pay-All plan?
Employee-pay-all plans are plans where employees are the payor of the plan and not their employer. These plans aim to avoid the inclusion of benefits in income and prevent taxes on insurance payments in some instances. Employees will have to include in their income any contributions made by employers to these plans, even if the employer is taking it out of their wages or paying the employee extra to contribute to the plan.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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