Understanding Group Benefits Taxation
What Employers and Employees Need to Know
Group benefits are one of the most appreciated ways businesses support their teams. But when reviewing a pay stub or preparing year-end tax documents, many people—both employers and employees—find themselves asking: Which benefits are taxable? Which ones aren’t?
This depends on the type of benefit and who pays the premium. The infographic below offers a high-level summary, and the sections that follow provide helpful explanations of each group benefit type and how it’s taxed.
Taxable Premiums: What Happens When Employers Cover the Cost
When an employer pays the premiums for certain types of group insurance, those premiums are considered a taxable benefit to the employee. While the cost is deductible for the business, the employee will see it reported on their T4 as additional income.
However, even though the premium is taxable, the benefit payout itself is usually not. That’s an important distinction.
Life Insurance: Premiums paid by the employer are taxable to the employee, but death benefits are non-taxable when paid to the beneficiary.
Dependent Life Insurance: Similar to life insurance, employer-paid premiums are taxable, while the payout is non-taxable.
Accidental Death & Dismemberment (AD&D): Premiums are taxable, but benefits received are generally not taxable.
Critical Illness: Premiums paid by the employer are taxable, but the lump-sum benefit paid to the employee upon diagnosis is non-taxable.
✅ Premiums show up as taxable income on the employee’s pay stub or T4.
✅ Benefit payouts (e.g., life insurance death benefit) are generally non-taxable.
Taxation Depends: Employer vs. Employee-Paid Premiums
For disability coverage, the tax treatment of the benefit payment depends on who pays the premium.
Short-Term Disability and Long-Term Disability:
If the employer pays any part of the premium: the benefit is taxable income to the employee.
If the employee pays the full premium: the benefit is non-taxable.
Note: Employer-paid premiums themselves are not taxable to the employee—but they result in a taxable benefit if a claim is paid out.
⚠️ To ensure non-taxable disability benefits, employees must pay 100% of the premium.
⚠️ Employers should clearly document premium responsibility in payroll systems.
Taxation Clarity: Which Benefits Are Non-Taxable for Employees
Some benefits—typically related to health and well-being—are non-taxable to employees, regardless of who pays the premium. These benefits are deductible for the employer and non-taxable for the employee, providing great value on both sides.
Extended Health Coverage: Covers a broad range of medically necessary services not covered by provincial healthcare, such as prescriptions, paramedical services (e.g., massage, physio), vision care, and travel insurance. Employer-paid premiums are non-taxable to employees, except in Quebec.
Dental Care: Includes preventive and restorative treatments like cleanings, fillings, and crowns. These benefits are non-taxable regardless of who pays the premium.
Employee Assistance Program: Provides confidential support services such as mental health counseling, financial guidance, and legal consultations. Premiums paid by the employer are not considered a taxable benefit.
✅ These are great additions to your benefits package—valued by employees and tax-efficient for all.
Taxation: How Account Type Affects Your Bottom Line
Spending accounts offer flexibility, but the tax treatment depends on the account type and what expenses are reimbursed.
Health Spending Account: Reimburses employees for CRA-eligible medical expenses. Amounts paid are deductible for the employer and non-taxable to the employee.
Lifestyle/Wellness Spending Account: Covers non-medical wellness expenses such as gym memberships or fitness trackers. Amounts paid by the employer for setup and reimbursements are deductible, but both are considered taxable benefits to the employee.
✅ HSA reimbursements are non-taxable when used for CRA-approved health expenses.
❌ LSA reimbursements (and even the setup amount) are taxable to employees.
Why This Breakdown Matters Understanding how group benefits are taxed allows employers to design smarter, more efficient plans—and helps employees avoid surprises during tax season. Knowing which benefits are taxable and how to structure premiums can make a big difference in take-home value and overall satisfaction.
Want this personalized for your business? Let’s talk.
Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or tax advice. Always consult a qualified professional regarding your specific situation. We are not responsible for any actions taken based on this content.
Source: Canada Revenue Agency – Benefits and Allowances Chart, https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/benefits-allowances-chart.html
