The short answer is it depends. First, what are long term disability (LTD) settlement benefits? LTD benefits are a form of income replacement benefit that pays for a portion of your lost income because you are too injured or sick to work. Most LTD policies will cover you no matter what injury or illness you have that prevents you from working. In other words, ‘causation’ is not usually a relevant issue when it comes to approving long term disability benefits. Again, this is very circumstantial and it is important that you check with your specific policy.
Is there a time condition to receive long term disability benefits?
In order to be able to apply for long term disability benefits you need to be off work for a certain period of time. This can often be somewhere around 3-6 months. This is called the “elimination” period or the “qualifying” period. During this time you can be on short term disability benefits or EI sickness benefits.
Once you have passed the elimination period you can apply for long term disability benefits. Typical long term disability payments will be 50-80% of your pre-disability salary and can last up to the age of 65.
Are LTD benefits taxable?
A common question we receive is whether long term disability payments are taxable by the Canada Revenue Agency. As previously mentioned, it depends on who pays the premiums. If your employer pays your premiums you will not be taxed on the amount of premiums paid by your employer to cover you under a group long-term disability insurance policy. Although it may be the case that you do not pay taxes on the premiums that your employer pays, you will generally still have to pay taxes on any benefits you receive under that policy if you become disabled. This includes taxes you have to pay if your long term disability claim settles.
On the flip side, if you are the one who is paying the premiums for your long term disability benefits that means you are paying them with “after tax” dollars from your pay cheque. This means that you will not be taxed on any payments you receive from your long term disability carrier, including any settlement.
Most of the time your insurance carrier will notify you from the beginning whether your benefits are taxable or not. You can also ask them if you are curious about this.
Who pays disability benefits?
There are certain occasions where your disability benefits are paid partly by the employer and partly by yourself. In these circumstances you will need to get the details of how much each side paid and calculations can be made to determine how much is taxable. You can also consult with a personal injury lawyer to determine how much should be taxed before you agree to receive any benefits. Of course, if the insurance company is offering you a settlement and you are unsure if it’s fair then you may also consult with a lawyer for advice.