Is disability insurance tax deductible? 2024 guide

Disability insurance is a great financial planning tool to ensure your financial stability. Sometimes it is offered by our employers and other times we may look to buy additional disability insurance cover to ensure that our financial needs are sufficiently covered if we are unable to work.

Unfortunately, depending on the type of disability insurance that we have, we face various tax concerns. For example, we might receive disability insurance benefits tax-free or the benefits may be taxable. Trying to figure out which situation applies to us is the last thing we want to do if we ever have to claim our disability insurance. 

This article helps you easily identify whether or not your disability insurance is tax deductible. You can then use our free comparator to explore the best disability insurance policies in Canada and get free quotes instantly.

What is Disability Insurance?

Disability insurance is an insurance policy designed to provide you with a monthly income in the event of you becoming disabled and being unable to work. By paying a monthly premium to an insurance provider like TD disability insurance or Blue Cross disability insurance, you transfer the risk to the provider who will subsequently pay you a monthly disability benefit upon a successful claim. 

Since disability insurance is your safety net between having an income and not, it is vital that you understand how much income your monthly benefit is worth and if it is sufficient for you to live off. A big aspect concerning this is disability insurance tax. 

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Is disability insurance taxed in Canada?

The short answer to whether or not disability insurance is taxed in Canada is ‘maybe'. To know if your disability insurance is taxed or not will require you to consider both parts of disability insurance that come with tax implications. Mainly, the disability insurance benefits and the disability insurance premiums. 

The benefits you receive from disability insurance can be either tax-free or taxable and the determining factor is usually the type of policy that you have. If you have an individual disability insurance policy or if you have paid for your policy yourself, then your disability insurance benefits will be paid to you tax-free.

On the other hand, if your disability insurance is provided by an employer, then the disability insurance benefits that you receive will be taxable.

Is disability insurance tax deductible in Canada?

Similarly, disability insurance premiums may be tax deductible in Canada depending on the type of insurance you have and the entity that pays for the premiums. Private disability insurance is not tax-deductible, whereas corporate disability insurance is tax-deductible. The table below provides a quick summary of the types of disability insurance that may be tax deductible.

Type of Disability Insurance	Tax-deductible?
Individual disability insurance policy	No
Self-employed disability insurance policy	No
Employer-paid group policy	Yes
Split-premium group policy	Partially
Wage Loss Replacement Plan (WLRPs)	Yes

Is individual disability insurance tax deductible?

Disability insurance that you purchase yourself is not tax deductible and you cannot claim any paid disability premiums on your taxes. This is because disability insurance premiums are a personal expense according to the Income Tax Act, and no personal expenses can be written off for tax purposes. 

However, since individually bought long-term disability insurance or short-term disability plans are not tax deductible it means that you will receive any benefits from the insurance tax-free. I.e. by having paid for the insurance with after-tax income, you do not have to pay tax on the insurance again. 

Is disability insurance tax deductible for self-employed?

Unfortunately, for those who are self-employed, disability insurance is not tax deductible and cannot be written off as a business expense. For the same reasons as disability insurance purchased by individuals, disability insurance purchased despite being self-employed is seen as a personal expense and is therefore not tax-deductible according to the Income Tax Act. 

Since disability insurance for self-employed is not tax-deductible, the benefits will also be paid tax-free in the event of a successful claim. 

Is group disability insurance tax deductible for corporations?

Yes, group disability insurance is tax deductible for companies that extend this form of coverage to their employees. This is because disability insurance is considered a business expense that the company uses to retain and reward employees and they can, therefore, get tax deductions on the premiums that they have paid. 

However, and unfortunately for the employees, since the company receives a tax break on the premiums paid, any disability insurance benefits that the employee subsequently receives will not be tax-free. 

Is split-premium group disability insurance tax deductible?

You may, however, find yourself in a situation where your company either splits the group disability insurance with you as an employee, or you pay for your part of the premium in full. In these instances, companies can only claim tax deductions on the actual premiums that they pay, which subsequently means that only part of any potential disability benefit received will be taxable. 

Furthermore, if you pay for the group disability insurance yourself, or money is taken from your paycheck to cover your premiums, then you will receive the disability benefit completely tax-free.

The following examples might further help you understand whether or not disability insurance is tax deductible.

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Are Wage Loss Replacement Plans (WLRPs) tax deductible in Canada?

Wage loss replacement plans (WLRPs) are similar to disability insurance policies, except they a more comprehensive and work by combining multiple disability insurance policies under one product. Often, WLRPs will also cover medical costs in addition to lost wages.

Since WLRPs are provided by companies to their employees, the premiums are tax-deductible similar to group disability insurance. The benefits that the employee receives will, therefore, also be taxable and must be included on their yearly income tax return. 

Tax implications of disability insurance

The tax implications of disability insurance like Canada Life disability insurance or Sun Life or another provider, can be a little complex, especially if your main focus is to apply for a tax deduction on the disability insurance’s premiums.

Since individual disability insurance is not tax-deductible, business owners should consider consulting with a tax professional to fully understand how the tax rules apply to them.