Last updated: June 25 2013
In our Disability Awareness series we have discussed income sources such as CPP Disability Pension, and EI. We continue that discussion with the tax consequences of other income sources that are available to those who have suffered a disability.
If you receive Workers’ Compensation benefits, they are taxable and you will receive a T5007 slip at tax time. When you enter the slip, your software will include the amount on an income line – Line 144 of your return. That’s important because this is the line that triggers an offsetting deduction which your software will automatically enter at Line 250. The result of including this amount in income and then deducting it at Line 250 is that the payments are included in your net income but not your taxable income. Therefore the payments may then reduce your refundable tax credits and may also reduce any non-refundable tax credits that may be claimed for you.
Wage Loss Replacement Benefits.
If you were eligible to participate in a WLRP and you paid all of the premiums, then benefits you receive from the plan are not taxable. However, if your employer paid some or all of the premiums, the benefits you will receive will be taxable. You can deduct the premiums you paid from that income before you report the net amount on Line 104. All of the premiums you have paid to date can be deducted.
For example, Connor was injured at work and received benefits from a wage loss replacement plan that was jointly funded by employee and employer premiums. Because Connor’s employer paid a portion of the premiums, the benefits are taxable, but Connor can claim a deduction for all of the premiums he paid into the plan that he has not deducted previously. In this case, Connor has paid $100 a year for the last 10 years since he started his employment. The deduction, therefore is $1000.
If you’re leaving your employment due to a disability, you may receive a severance package or job termination payment. RRSP planning is important to reduce taxes on receipt of severance. Professional tax assistance is highly recommended. Your tax and wealth advisory pros can help you maximize your RRSP contribution room, plan a tax-efficient withdrawal schedule to maximize refundable tax credits and minimize tax, and also take any redundant amounts (cash you are not needing immediately) and invest them in a TFSA for yourself or other adults in the family.
NEXT TIME: Non-Refundable Tax Credits
LAST TIME: EI Benefits for Disabled People
Excerpted from Jacks on Tax, by Evelyn Jacks. © All rights reserved.