When I tell my students that taxable benefits are attached to group insurance premiums, they often wonder why we are speaking of "benefits" when it actually costs something to insured members? If you are asking yourself the same question, and if, like most people, you know as much about taxable benefits in group insurance as you do about Egyptian hieroglyphs, you should read this!
A "taxable benefit" is a good or service provided by an employer to employees as part of their job. For instance, a car, paid parking, a dwelling in a remote location, etc. The employee does not pay for this good or service, the value of which must nevertheless be added to the taxable salary so that the employee will pay income tax on this amount.
The rationale is that the benefit granted by the employer is considered by government as another form of salary and must therefore be taxed as such. Hence the term taxable benefit!
So, what do a company car and a group insurance plan have in common? If the employer pays part of the cost of a group insurance plan, this is considered a taxable benefit in group insurance just like the cost of the car provided to the employee.
However, determining what is taxable is slightly more complex in the case of group insurance than for a company car, since the premiums for some insurance coverage are not considered taxable by the government, as summarized in the table below:
FEDERAL OR OTHER PROVINCES
Remember that only the portion of the premium paid by the employer is a taxable benefit group insurance. If coverage is 100% paid by employees, the taxable benefit is nil.
In the case of self-insured health and dental care coverage, things get even more complicated, as the Quebec Ministry of Revenue requires that the taxable benefit be calculated on the claims actually paid out during the year. The per-pay deductions and taxable benefits are based on theoretical rates, but this figure must be compared with the actual amounts at the end of the year. This will lead to positive or negative adjustments, depending on the situation. The smaller the group, the more significant the fluctuations can be.
Things are different when it comes to the benefits received under the various types of coverage. The only payments that may be taxable are the disability insurance benefits (short- and long-term), if part of the cost of this coverage was paid by the employer. In other words, for short- and long-term disability insurance benefits to be non-taxable, premiums must have been 100% paid by employees. And this means ALL employees to whom this coverage is offered, not only those who receive disability benefits! And it is the employer’s responsibility to follow this rule, since the insurer has no way of checking.
Should the employer fail to follow this rule (e.g., the employer decides to provide managers with long-term disability coverage free of charge on a non-taxable basis) and the Quebec Ministry of Revenue find out, the government could require that all non-taxable benefits already paid out be taxed retroactively AND the cost of disability insurance coverage be charged to all managers retroactively.
Some tax optimization is advisable in order to minimize the income tax payable by individuals. This consists in calculating the portion of the costs paid by the employee based on the agreed cost-sharing formula, and then reallocating it in priority to the cost of coverage taxed by both levels of government. The total deduction paid by the employee remains the same, but the income tax payable will be lower. The table below illustrates the per-pay allocation of a $102 premium shared 50%-50% with and without optimization:
Employer
Cost
Employee Cost
Employer
Cost
Employee Cost
