Employee benefits taxation

Taxable benefit or not?

How are employee benefit premiums taxed? What benefits are taxable benefits and which are non-taxable? How should cost-sharing be set up for employee benefits?

When it comes to employee benefit premiums and taxation, it’s important to remember that taxation depends on whether the premium is employer-paid or employee-paid, typically via payroll deduction.

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Taxation of Employee Benefits

A cleaner way to think about benefits taxation.

If the goal is to avoid taxable benefits for employees, the best way to set up benefits cost-sharing is to ensure the employee is paying the premium for certain benefits. If they do not pay these premiums, this creates a taxable benefit for the premium amount, or in the case of disability insurance, a taxable payout in the event of a claim.

At Immix, we want to ensure that you are set up in the most optimal way! If you’re unsure whether you have properly established your payroll deductions, please reach out to us.

Important

This page is for employer education and benefits planning discussion. Tax treatment can depend on plan wording, funding, province, payroll setup, and current CRA guidance.

Benefit treatment map

Start with the type of benefit, then look at who pays.

Use the categories below as a practical starting point for reviewing how different benefits are commonly treated, and why the funding arrangement matters.

Employer-paid premiums

Employer-paid premiums are a taxable benefit

Taxable premium treatment These benefits require special attention when the employer pays the premium because the premium amount may need to be treated as a taxable benefit to the employee.

Life Insurance

Any premium paid by the Employer must be treated as a taxable benefit to the Employee
Any benefit paid upon death is non-taxable, regardless of who pays the premium

AD&D Insurance

Any premium paid by the Employer must be treated as a taxable benefit to the Employee
Any benefit paid upon death is not taxable, regardless of who pays the premium

Dependent Life Insurance

Any premium paid by the Employer must be treated as a taxable benefit to the Employee
Any benefit paid upon death is non-taxable, regardless of who pays the premium

Critical Illness Insurance

Any premium paid by the Employer must be treated as a taxable benefit to the Employee
Any benefit paid is not taxable, regardless of who pays the premium

Who pays the premium

Taxation depends upon who pays the premium

Payout treatment depends on funding Disability coverage needs to be structured carefully because premium payment can affect whether a future claim payment is taxable as income to the employee.

Short-Term Disability

Any premium paid by the Employer is not a taxable benefit to the Employee
If the Employer pays any portion of the premium, the benefit in the event of a claim is taxable as income to the employee

Long-Term Disability

Any premium paid by the Employer is not a taxable benefit to the Employee
If the Employer pays any portion of the premium, the benefit in the event of a claim is taxable as income to the employee

Tax-neutral benefits

Generally tax-neutral Some core health and dental benefits are commonly structured so that employer-paid premiums and claim payments are not taxable to employees.

Extended Health Benefits

Any premium paid by the Employer is not a taxable benefit to the Employee
Any benefit paid is not taxable, regardless of who pays the premium

Dental Care Benefits

Any premium paid by the Employer is not a taxable benefit to the Employee
Any benefit paid is not taxable, regardless of who pays the premium

Account type

Taxation varies depending on account type

Account-specific treatment Health Spending Accounts and Wellness Spending Accounts can look similar to employees, but the tax treatment is different.

Health Spending Accounts

Amounts paid for CRA-eligible medical expenses are tax-deductible to the Employer
Amounts reimbursed for CRA-eligible medical expenses are not a taxable benefit for Employees

Wellness Spending Accounts

Amounts paid for wellness expenses are tax-deductible to the Employer
Amounts reimbursed for wellness expenses are a taxable benefit for Employees

Employer review point

The issue is rarely the benefit alone. It is how the benefit is funded.

Benefits taxation can become confusing because employers may look only at the coverage name. In practice, the payroll setup, employee deduction, employer contribution, and claim payout rules all need to line up.

Immix can help you review whether your benefits cost-sharing and payroll deductions are set up in a way that matches your goals for employee experience, plan administration, and tax treatment.

Review these before renewal or implementation

Who pays the premium?
Is the premium deducted through payroll?
Is the benefit treated consistently in payroll reporting?
What happens if an employee submits a disability claim?
Are HSA and WSA reimbursements handled differently?

Tax guidance reminder

Use this page as a planning guide.

Tax treatment can depend on the benefit, plan wording, funding structure, payroll setup, province, and current CRA guidance. Use this page for general education, then confirm current tax treatment with your benefits advisor, payroll provider, accountant, or tax professional.

Canada Revenue Agency Premiums and contributions to insurance plans Canada Revenue Agency Medical expenses and Private Health Services Plans Canada Revenue Agency Determine if a benefit is taxable

Common questions

Questions employers often ask when reviewing benefit taxation.

How are employee benefit premiums taxed?

When it comes to employee benefit premiums and taxation, it’s important to remember that taxation depends on whether the premium is employer-paid or employee-paid, typically via payroll deduction.

How can a plan be structured to help avoid taxable benefits for employees?

If the goal is to avoid taxable benefits for employees, the best way to set up benefits cost-sharing is to ensure the employee is paying the premium for certain benefits.

Why should employers review payroll deductions?

If employees do not pay certain premiums, this can create a taxable benefit for the premium amount, or in the case of disability insurance, a taxable payout in the event of a claim.

Plan review support

Unsure whether your payroll deductions are properly established?

Immix can help you review your benefits structure, clarify cost-sharing decisions, and identify areas that may need a closer look before renewal, implementation, or payroll setup changes.

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