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One of the reasons behind the phenomenal growth of group insurance has been certain tax advantages which it enjoys. The proceeds of a group insurance policy, that is group life insurance or group accident and sickness insurance generally are not taxed in the hands of the payee. This is in accordance with the normal practice in regard to benefit payments under insurance policies.

On the other hand, employee contributions, which are made toward a group insurance plan, are not deductible in computing taxable income, as you would expect. However, employer contributions to a group term insurance plan are deductible by the employer as a necessary business expense.

Until 1993 such employer contributions were not taxed in the hands of the employee if they pertained to Health insurance and, if they pertained to Life insurance, only contributions for insurance in excess of $25,000 constituted taxable income. This fact is a most important reason for the great historical growth of group insurance.

This preferential tax treatment was challenged in May of 1993 when the government of Quebec decided to include employer contributions toward Medical and Dental coverages in the employee’s income. Quebec also ruled that in the future all employer contributions toward Life insurance would be included in the employee’s taxable income, not just contributions for life coverage in excess of $25,000.

A few months later, in February 1994, to be precise, the federal government adopted the same approach toward Life insurance requiring that all employer contributions toward Life insurance be included in the employee’s taxable income.

In summary, therefore, the following rules apply to employer contributions under private group plans:
  • Life insurance (including Dependent Life) - all employer premium contributions are taxed in the hands of the employees.
  • Accident and Sickness plans - employer premium contributions are not taxed in the hands of the employees, except in Quebec where net employer contributions with respect to Medical and Dental plans are taxed.
With respect to public medical care plans; employer contributions are taxed in the hands of active employees but not in the hands of retired employees.

Finally, benefit payments under a group disability income insurance plan (or, as the law refers to it, under a “wage loss replacement plan”), to which the employer contributes, are taxed in the hands of the employee. However, if the employee contributes 100% of the premiums for a wage loss replacement plan, and then income benefit payments would be received tax-free.

It should be noted that under the provisions of the Income Tax Act employees may claim a tax credit for medical expenses (not including those reimbursed by either private or government plans), which exceed the lesser of a certain flat amount and 3% of their net income in any calendar year. The flat amount varies from time to time and was $1,614 in 1993.

Any contributions or premiums paid by a taxpayer to a private health services plan for the benefit of the taxpayer are treated as medical expenses for tax purposes.

In Quebec and Ontario there is also a sales tax added to the premiums for all group insurance of persons employed or resident in these provinces. Unlike the premium tax, the sales tax is payable by the consumer. The role of the insurer is to collect the sales tax and remit it to the government. The current rate of tax is 9% in Quebec and 8% in Ontario.

If a client has operations in several provinces, the sales tax is only due on the Quebec and/or Ontario content of the plan.

©2003 Group Lockhart Inc. - 519.672.3890 or 1.800.265.1224