Employer Benefits & Savings plans stand out as a crucial tool for businesses to attract and retain top talent while providing valuable perks to employees. However, behind the allure of these plans lies tax implications that demand careful consideration and understanding. In this post, we delve into the intricate world of the taxation of Benefits & Savings plans and offering insights to help both employers and employees navigate this often murky terrain with confidence.
1. Group Life and Health Insurance Premiums:
Group life insurance, dependent life insurance, accidental death insurance, and critical illness insurance premiums paid by the employer are generally taxable and added to an employee’s income for the year, subject to income tax.
Employer-paid health & dental insurance premiums are not taxable outside Quebec, but they are taxable in Quebec and added to your income for the year, subject to income tax.
2. Medical Expenses Tax Refund:
You may be eligible for a tax refund for medical expenses on the portion of the bill you paid yourself or a portion of your health premiums, depending on various factors and regulations.
3. Group Disability Premiums:
Employer-paid short or long-term disability premiums are not taxable, but benefits received in the future are taxable.
Employee-paid premiums result in tax-free benefits. Similarly, if you personally cover premiums for an individual policy, the benefits may be non-taxable.
4. Non-Group Insurance Plans (plan for an individual employee):
Contributions from an employer to individual insurance plans are taxable benefits.
5. Retail Sales Tax
Premiums paid for group insurance, Life, Dependent Life, Accidental Death & Dismemberment, Critical Illness, Disability, Health and Dental are all possibly subject to sales tax, depending on your province of residence and taxed at the rate of your province of residence or employment, depending on who is paying the premiums.
6. Pension Plans and Group RRSPs:
Group RRSPs- Employer Contribution
Employers have the option to make contributions to Group RRSPs on behalf of their employees. These contributions are not treated as taxable income for employees when they're made. Additionally, employer contributions to Group RRSPs usually qualify for tax deductions, providing a tax advantage to the employer. Taxation only arises when employees withdraw funds from the RRSPs during their retirement years.
Group RRSPs- Employee Contribution
Employee contributions to RRSPs provide a tax deferral benefit. When employees contribute to their RRSP, they can deduct the contributions from their taxable income for the year, reducing their tax liability.
However, withdrawals from RRSPs are subject to taxation. Taxation occurs when individuals withdraw funds from their RRSP, usually during retirement, and the withdrawn amount is taxed at their applicable tax rate.
Deferred Profit-Sharing Plan (DPSP)
Employer contributions to a DPSP are not taxed immediately. An Employee is only subject to taxation on the funds from a DPSP when you withdraw them, typically during retirement. At that point, the withdrawn amount is treated as income and taxed accordingly.
Understanding the tax implications of various employee benefits is essential for managing your finances effectively and ensuring compliance with tax laws. It's advisable to consult with a tax professional for personalized advice regarding your specific situation.