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
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:
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.
- 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.
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
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.