Disability Insurance Benefits and Non-Residents

The recent decision by the FCA in Price (2012 FCA 332) substantially clarifies the tax treatment of benefits earned in Canada under a private disability insurance plan and paid to a non-resident.

In Blauer (2007 TCC 706), the court was faced with the question whether such benefits were taxable under part I of the ITA through the application of subsection 2(3), paragraph 6(1)(f), and subsection 115(1). The TCC held that the disability benefits were not so taxable. The judge added in obiter that such benefits might be taxable as pension benefits under section 212 of part XIII; however, because that issue was not raised by either party, the implication (at least for that particular taxpayer) was that such payments were not subject to any Canadian tax.

In Price, the section 212 argument was not raised. The court explicitly reversed Blauer and found that part I applied. The case concerned an Air Canada pilot who earned income both inside and outside Canada. The determination of the portion of the disability benefits relating to income earned in Canada (and thus taxable under part I) was not at issue.

Price has implications for taxability, withholding, and reporting on tax slips. The implication of taxability under section 115 is that non-residents who receive disability benefits must file a tax return. (The tax in part I, unlike the tax in part XIII, is not a final tax directly withheld by the payer.) Payers must also withhold under section 153 because the disability benefits are employment income and therefore fall within the definition of "salary or wages" in subsection 248(1). The calculation of the withholding is set out in regulation 102(1), which applies because the disability benefits are remuneration (as defined in regulation 100(1)) and the employee is deemed to report for work at the establishment of the employer from which the remuneration is paid (regulation 100(4)). Payments to the CRA are reported on a T4A slip, which is the same form that residents use.

For Quebec provincial income tax purposes, disability insurance benefits paid to a non-resident are taxable under section 26 of the Taxation Act (TA) if the recipient was working in Quebec when the employer paid the insurance premiums. In such cases, payers must withhold tax under section 1015 of the TA. There does not appear to be any exemption or deduction available to reduce the disabled employee's tax under either the TA or the ITA. Finally, such disability benefits are not subject to source deductions for payroll taxes such as the QPP, the Quebec parental insurance plan, and employment insurance. Payments to Revenu Québec are reported on relevé 1, which (as is the case for federal purposes) is the same form that residents use.

Jean-Philippe Thériault
SSQ Financial Group, Quebec City

Canadian Tax Focus
Volume 3, Number 3, August 2013
©2013, Canadian Tax Foundation