Why Taxability of Benefits Matters for Your Business
Offering employee benefits is one of the best ways to attract and retain top talent, but not all benefits are created equal when it comes to taxes.
If you’re a business owner, HR leader, or CFO designing a group benefits plan, understanding the tax treatment of premiums is critical. It affects your payroll reporting, your employees’ take-home pay, and even how much support they get when they need it most.
At Healthwise Benefits, we help companies like yours design smarter benefit plans that go beyond the basics and minimize tax burdens while maximizing value.
Are You Cost-Sharing the Right Way?
Many employers set up cost-sharing with the best intentions, but unknowingly create tax headaches for their team.
One of the most common mistakes we see is businesses doing a straight 50/50 split across all benefits no matter what type of coverage it is.
We recently reviewed a plan for a company with 200 employees where the employer was splitting every single benefit, including life insurance, accidental death and dismemberment, dependent life, health, and dental, right down the middle. On paper, it seemed fair. But in practice, it created avoidable taxable benefits and unnecessary T4 admin work.
The smarter approach: Structure cost-sharing based on the tax treatment of each benefit, not just budget fairness. For example:
- Let employees pay for taxable benefits (like Life, AD&D, Dep Life)
- Employers can cover more of the non-taxable benefits (like Health and Dental) without triggering any extra income tax for them when they are doing their taxes.
This simple shift can lighten your admin work for T4 season, and save your Employees a taxable benefit which inflates their T4. They may not be changing tax brackets with this change, but its smart benefits. Why create more work?
When an Employer-Pays for Benefits and they Become Taxable
Let’s back up and dive into how employer-paid premiums are treated as taxable income for employees.
If your business pays for:
- Life Insurance
- Accidental Death & Dismemberment (AD&D)
- Dependent Life Insurance
…the premiums become a taxable benefit. That means the dollar amount paid is added to your employee’s T4 income. An important note, is that the actual life insurance payout remains tax-free if a claim is made, regardless of who pays the premium.
To avoid this taxable benefit, many employers have their employees pay the premiums for taxable benefits, so their T4s stay clean and no additional taxable reporting is needed.
Disability and Critical Illness: Special Tax Considerations
Disability insurance (short or long-term) and critical illness insurance are often misunderstood when it comes to taxes, because they are different than above listed benefits, and the consequences can be significant.
Disability Insurance
- If you (the employer) pay the premium, any disability benefit the employee receives is considered taxable income. So, if an employee receives $4,000/month in long-term disability, they’ll owe income tax on it.
- If the employee pays the premium, the benefit is tax-free. They keep the full $4,000/month when they are on claim and need it.
That’s why many plans are intentionally structured so that employees pay disability premiums, even when employers cover other benefits like health and dental. This strategy is clean and easy to prove if ever audited. However, some employers choose an alternate strategy which is offsetting T4s…
What Does It Mean to Offset an Employee’s T4 with the LTD Premium?
Some employers choose to “offset” the LTD premium on the employee’s T4. This means:
The amount the employer paid for the LTD premium is reported as a taxable benefit on the employee’s T4 slip for that year.
Important Notes:
- The LTD premium paid by the employer should be clearly itemized as a taxable benefit on the employee’s paystub each pay period.
- This ensures transparency and provides a clear audit trail showing that the employee was taxed on the premium throughout the year, not just retroactively at tax time, in case of a mid year audit.
Why CRA Allows This Strategy
The Canada Revenue Agency (CRA) permits this offset approach because:
- The employee is being taxed on the premium amount up front (via the T4),
- Which meets the CRA’s condition that tax must be paid on the premium in order for the benefit to be tax-free at claim time.
In short, CRA wants to see that the employee has been taxed somewhere in the process, either when the premium is paid, or when the benefit is received.
By reporting the premium as taxable income now, employers give employees the advantage of receiving 100% of their LTD benefit tax-free in the future, without requiring the employee to pay the premium out of pocket.
We’re here to guide you on how benefits are treated from a tax perspective under CRA rule, but your payroll provider or accountant should always verify the details for your business..
Critical Illness Insurance
This benefit pays a one-time lump sum. Taxability depends on who pays the premium:
- If the employer pays, the payout is taxable.
- If the employee pays, the payout is tax-free.
Example: A $50,000 critical illness payout would be taxed if employer-paid, but paid in full if employee-paid.
Let’s Rethink Your Benefits Strategy
Thoughtful plan design isn’t just about what you pay today, it’s about how well your plan supports your people during their toughest moments. At Healthwise Benefits, we don’t just help you pick a plan. We help you build a strategy.
Whether you’re evaluating your current offering or designing a new one, we help you:
- Align your benefits with long term business goals
- Reduce employee tax burdens
- Increase transparency and retention
- Stay compliant with CRA reporting
✅ TL;DR: Want Our Cheat Sheet?
Understanding benefit taxability helps you:
- Avoid surprise T4 complications
- Design smarter plans
- Maximize employee value at claim time
📥 Want the quick-reference guide? Download our Taxability Cheat Sheet here
This article is intended to provide general information about how employee benefits are treated for tax purposes in Canada. It is not a substitute for professional tax advice, and should not be relied upon for making specific tax or payroll decisions. For guidance tailored to your organization or situation, consult a qualified tax professional or accountant.
