Short-term disability benefits are generally tax-free in Canada if you paid the entire cost of the disability insurance premiums yourself. If your employer paid all or part of the premiums, the benefits are generally taxable.
However, the full answer can be more complicated when both you and your employer contributed to the plan.
In a taxable wage-loss replacement plan, your own eligible contributions may reduce the amount that ultimately has to be reported as taxable income, provided those contributions were not previously used for that purpose.
| Who Paid The Premiums? | General Tax Treatment |
|---|---|
| You paid 100% of the premiums | Benefits are generally tax-free |
| Your employer paid 100% of the premiums | Benefits are generally taxable |
| You and your employer both paid premiums | Benefits are generally taxable, but your eligible contributions may reduce the amount reported as income |
The most important thing is to find out exactly how your short-term disability plan was funded before assuming that your benefits are taxable or tax-free.
On This Page:
- 1. Is Short-Term Disability Taxable?
- 2. Why Does Who Paid The Premiums Matter?
- 3. How Do You Find Out Who Paid?
- 4. Is Tax Deducted From STD Payments?
- 5. Do You Get A T4 Or T4A For STD?
- 6. Can Your Premium Contributions Reduce Taxable Income?
- 7. Gross Benefit vs. Take-Home Pay
- 8. Do You Pay CPP Or EI On STD Benefits?
- 9. How Do Other Disability Benefits Compare?
- 10. What If The Tax Treatment Looks Wrong?
- 11. Frequently Asked Questions
Is Short-Term Disability Taxable?
Short-term disability can be taxable or tax-free in Canada.
The general rule depends on who paid for the disability insurance coverage.
- You paid the entire premium yourself: Benefits are generally tax-free.
- Your employer paid all or part of the premium: Benefits are generally taxable.
The Canada Revenue Agency refers to many employer-based disability income arrangements as wage-loss replacement plans.
These are plans that provide income when an illness, injury or disability prevents an employee from working.
Short-term disability is one common type of income-replacement benefit.
For general information about how STD coverage works, visit our guide to short-term disability in Canada.
Does Short-Term Disability Count As Income?
Taxable STD benefits generally count as income for tax purposes.
Tax-free benefits from an employee-pay-all disability plan generally do not have to be reported as taxable income.
The distinction can have a significant effect on your actual take-home income.
Why Does Who Paid The Disability Premiums Matter?
The way the disability plan is funded generally determines how benefits are taxed.
The basic tax principle is:
Pay the full cost of the coverage yourself and the benefits are generally tax-free. Receive employer-funded coverage and the benefits are generally taxable.
This is why two employees receiving the same gross STD benefit can end up with very different take-home amounts.
For example:
- Employee A receives $800 per week from an employee-pay-all plan.
- Employee B receives $800 per week from a plan partly funded by the employer.
Employee A’s benefits may generally be tax-free, while Employee B’s benefits may generally be taxable.
The gross benefit is the same. The amount available after tax may not be.
Does It Matter Who Pays The Benefits?
The organization sending the payment does not by itself determine whether the benefits are taxable.
Payments could come from:
- an insurance company
- your employer
- a benefits administrator
- another organization responsible for the plan
The more important questions are:
- who funded the plan
- whether the employer contributed
- whether you made employee contributions
- how the plan is structured
What If You Paid All Of The Short-Term Disability Premiums?
If you paid the entire cost of the disability insurance plan yourself, the benefits are generally tax-free.
This type of arrangement is sometimes called an employee-pay-all plan.
What Is An Employee-Pay-All Disability Plan?
An employee-pay-all plan is one where employees are responsible for the full cost of the disability coverage.
For example:
- the disability premium is deducted from your pay
- you fund 100% of that premium
- your employer does not contribute to the cost of the disability plan
If the plan genuinely operates this way, disability benefits are generally tax-free.
Does The Premium Have To Come Off Your Paycheque?
Not necessarily.
What matters is whether you actually paid the full cost of the coverage.
Your proof may include:
- payroll records
- benefits statements
- insurance documents
- information from your employer
- records from the insurer or plan administrator
Do You Report Tax-Free STD Benefits As Income?
If you paid the entire cost of the plan and the benefits are not taxable, they are generally not reported as taxable wage-loss replacement income.
Keep records showing how the plan was funded in case questions arise later.
What If Your Employer Paid The Short-Term Disability Premiums?
If your employer paid all or part of the disability insurance premiums, your STD benefits are generally taxable.
This can include situations where:
- the employer paid 100% of the premium
- the employer and employee shared the premium cost
- the employer contributed to the disability portion of a broader benefits plan
Why Are Employer-Funded Disability Benefits Taxable?
The tax treatment reflects how the income-replacement coverage was funded.
When the employer contributes to a qualifying wage-loss replacement plan, the benefits paid under that plan are generally included in taxable income.
Does This Mean The Entire Benefit Is Always Taxable?
Not necessarily.
If you also made contributions to the plan, eligible employee contributions that have not already been used may reduce the amount that has to be reported as taxable income.
This is one reason employees should keep records of their own disability premium contributions.
What If You And Your Employer Both Paid The Premiums?
A shared-cost disability plan is one of the most misunderstood situations.
The general result is:
- the benefits are generally taxable because the employer contributed to the plan
- your own eligible contributions may reduce the taxable amount
For example, imagine that:
- your employer pays part of the STD premium
- you pay the rest through payroll deductions
- you later receive taxable disability benefits
You may be able to account for eligible employee contributions that have not already been used to reduce wage-loss replacement income.
The exact tax reporting depends on the plan, your contribution history and the tax documents provided.
Why Should You Keep A Record Of Your Contributions?
Your own contributions can matter when calculating the amount of taxable wage-loss replacement income.
Keep:
- pay stubs showing disability deductions
- annual benefits statements
- letters confirming premium contributions
- tax slips
- records from the insurer or employer
How Do You Find Out Who Paid Your STD Premiums?
Do not guess.
Start by checking:
- your pay stubs
- your benefits booklet
- your employee benefits portal
- annual benefits statements
- your employment contract
- information from HR or payroll
- information from the insurer
What Should You Ask Your Employer?
Ask for written confirmation of:
- the total STD premium
- the amount you paid
- the amount the employer paid
- the dates those contribution arrangements applied
- whether the contribution structure changed over time
Does A Payroll Deduction Prove That Benefits Are Tax-Free?
No.
A payroll deduction shows that you paid something toward the plan.
It does not prove that:
- you paid the entire premium
- the employer did not also contribute
- the deduction applied specifically to STD rather than another benefit
Get the full funding information.
What If The Employer Cannot Explain The Premium Split?
Ask the insurer or benefits administrator for available records.
The tax treatment should be based on the actual plan arrangement, not an assumption.
Is Tax Deducted From Short-Term Disability Payments?
Income tax is generally withheld from taxable wage-loss replacement benefits.
The organization paying the benefit may deduct tax before sending you the payment.
This means:
- your gross STD benefit may be higher than the amount deposited
- the tax withheld may appear on your tax slip
- the amount withheld is not necessarily your final tax liability for the year
Can You Still Owe Tax At The End Of The Year?
Yes.
Tax withheld from a benefit payment is an estimate based on payroll and tax rules.
Your final tax result can depend on:
- your total annual income
- income earned before going on disability
- other benefits or income
- tax credits and deductions
- your province or territory of residence
- the amount of tax already withheld
You could owe additional tax or receive a refund when you file.
Can Too Much Tax Be Deducted?
It is possible for the amount withheld during the year to be higher than your final tax liability.
That difference is generally resolved when you file your income tax return.
For information about the gross amount of your benefit before tax, read how much short-term disability pays in Canada.
Do You Get A T4 Or T4A For Short-Term Disability?
Taxable wage-loss replacement benefits may be reported on a T4 or T4A slip, depending on how the benefits are paid and which payroll deductions apply.
Short-Term Disability Reported On A T4
Some taxable wage-loss replacement benefits may be included in employment income on a T4 slip.
The Canada Revenue Agency has specific rules for employee contributions to wage-loss replacement plans where benefit amounts are shown on a T4.
Short-Term Disability Reported On A T4A
Some wage-loss replacement payments are reported in box 107 of a T4A slip.
The CRA generally directs taxpayers to report T4A box 107 wage-loss replacement income on line 10400 of the tax return.
For current CRA guidance, see:
What If You Do Not Receive A Tax Slip?
Contact the organization that paid the benefit.
Ask:
- whether the benefits were taxable
- which tax slip should be issued
- when it was sent
- whether a copy is available online
Can Your Own STD Premium Contributions Reduce Taxable Income?
They may.
If you received taxable payments from a wage-loss replacement plan and also made your own contributions to that plan, CRA rules may allow you to reduce the amount reported by eligible contributions that were not previously used.
This can be particularly important when:
- you and your employer both funded the plan
- you contributed for many years before making a claim
- your contribution records are not obvious from the tax slip
Can You Simply Deduct STD Premiums Every Year?
Generally, paying disability insurance premiums does not mean you simply claim those premiums as an annual personal tax deduction.
Instead, eligible contributions can matter when determining the taxable amount of wage-loss replacement benefits.
What Records Should You Keep?
Keep records showing:
- how much you contributed
- the years in which contributions were made
- whether contributions were previously used to reduce taxable benefits
- which disability plan the contributions applied to
Short-Term Disability Tax Examples
Example 1: Employee Pays The Full Premium
An employee earns $1,200 per week before becoming disabled.
The STD plan pays a gross benefit of $720 per week.
The employee paid 100% of the disability insurance premiums.
The $720 weekly benefit is generally tax-free.
Example 2: Employer Pays The Full Premium
Another employee receives the same gross STD benefit of $720 per week.
The employer paid the entire cost of the disability plan.
The $720 weekly benefit is generally taxable.
Income tax may be withheld before the employee receives the payment.
Example 3: Employee And Employer Share The Premium
An employee and employer both contributed to the disability plan.
The benefits are generally taxable because the employer contributed.
However, the employee’s own eligible contributions may reduce the taxable wage-loss replacement income under CRA rules.
This does not mean the benefit is simply split into a taxable half and a tax-free half.
Example 4: Same Gross Benefit, Different Take-Home Pay
| Employee | Gross Weekly STD | General Tax Treatment |
|---|---|---|
| Employee A paid 100% of premiums | $800 | Generally tax-free |
| Employer paid the premiums for Employee B | $800 | Generally taxable |
The two employees receive the same gross benefit but may have different amounts available after tax.
Gross STD Benefit vs. Take-Home Pay
When budgeting for a disability leave, distinguish between the gross benefit and the amount you will actually receive.
| Amount | Meaning |
|---|---|
| Gross benefit | The benefit calculated under the STD plan before applicable taxes, deductions or adjustments |
| Net benefit | The amount you actually receive after applicable taxes, deductions and adjustments |
Your net payment can depend on:
- whether the benefit is taxable
- the amount of tax withheld
- other required deductions
- offsets for other income
- whether the payment covers a full or partial benefit period
For the full calculation process, visit How Much Does Short-Term Disability Pay In Canada?
Do You Pay CPP Or EI Premiums On Short-Term Disability Benefits?
Taxable does not automatically mean that every STD payment is also subject to Canada Pension Plan contributions and Employment Insurance premiums.
Whether CPP and EI deductions apply can depend on:
- who pays the benefit
- who controls or administers the plan
- the relationship between the employer and insurer
- the CRA payroll rules that apply to the arrangement
This is why one employee may receive taxable benefits reported on a T4 while another receives taxable wage-loss replacement benefits reported on a T4A.
Review the deductions shown on your payment statements and tax slips rather than assuming that taxable benefits automatically produce the same CPP and EI deductions as your normal salary.
How Do Taxes On STD Compare With EI And Long-Term Disability?
Short-Term Disability
STD may be taxable or tax-free depending primarily on how the disability plan was funded.
EI Sickness Benefits
EI sickness benefits are taxable income.
They are a federal government benefit rather than a private disability insurance payment.
Long-Term Disability
LTD benefits generally follow the same broad funding principle as disability insurance:
- employee-pay-all coverage generally produces tax-free benefits
- employer-funded or partly employer-funded coverage generally produces taxable benefits
The funding of an STD plan and an LTD plan may not be identical, even when both benefits are part of the same workplace package.
Check each benefit separately.
For a full comparison, read Short-Term Disability vs. EI Sickness Benefits vs. Long-Term Disability.
Does Short-Term Disability Tax Treatment Vary By Province Or Insurance Company?
The central tax question is generally how the disability plan was funded, not which province you live in.
However, your overall tax result can still be affected by:
- your province or territory of residence
- your total annual taxable income
- provincial and federal tax rates
- available credits and deductions
For province-specific information about short-term disability coverage and employment rights, visit:
- Short-Term Disability Ontario
- Short-Term Disability Alberta
- Short-Term Disability BC
- Short-Term Disability Manitoba
- Short-Term Disability Saskatchewan
- Short-Term Disability Nova Scotia
Does The Insurance Company Determine Whether Benefits Are Taxable?
Not by itself.
Two employers can use the same insurer but have different:
- premium arrangements
- employer contribution levels
- employee contribution levels
- benefit formulas
- plan designs
For insurer-specific claim information, visit:
- Manulife Short-Term Disability
- Sun Life Short-Term Disability
- Canada Life Short-Term Disability
- Blue Cross Short-Term Disability
- Desjardins Short-Term Disability
- RBC Short-Term Disability
What If The Tax Treatment Of Your STD Benefits Looks Wrong?
Start by collecting the documents that explain the plan.
Review:
- your pay stubs
- your benefits booklet
- premium statements
- the employer’s contribution information
- your STD approval letter
- payment statements
- your T4 or T4A slip
What If Tax Is Being Deducted But You Paid All Of The Premiums?
Ask the payer to explain:
- why the benefit is being treated as taxable
- what premium information it relied on
- whether the employer contributed at any point
- what tax slip will be issued
Keep records of the response.
What If Tax Is Not The Real Problem?
Sometimes an employee believes that tax caused a lower payment when the actual issue is:
- the wrong salary was used
- a maximum benefit was applied
- another income offset reduced the payment
- the benefit covered only part of the payment period
Read How Much Does Short-Term Disability Pay In Canada? to understand the full benefit calculation.
What If The Insurer Stops Paying Benefits Completely?
A benefit cut-off is not a tax issue.
If your insurer denies or stops STD payments while you remain unable to work, read our guide to short-term disability denials in Canada.
You should also consider how much time remains in the plan. Read How Long Does Short-Term Disability Last In Canada?
If STD is ending and you are still unable to work, visit What Happens When Short-Term Disability Ends?
Frequently Asked Questions
Is short-term disability taxable in Canada?
It depends on who paid the insurance premiums. If you paid the entire cost of the plan yourself, benefits are generally tax-free. If your employer paid all or part of the premiums, benefits are generally taxable.
Are short-term disability payments considered income?
Taxable STD benefits are generally reported as income. Benefits from an employee-pay-all plan are generally tax-free.
Do you pay income tax on short-term disability?
You generally pay income tax when your employer funded all or part of the disability insurance plan.
Is STD tax-free if I paid the premiums?
Benefits are generally tax-free if you paid 100% of the cost of the disability insurance coverage yourself.
What if my employer and I both paid the premiums?
The benefits are generally taxable because the employer contributed. However, your own eligible contributions may reduce the amount ultimately reported as taxable wage-loss replacement income.
Does a payroll deduction mean my STD benefits are tax-free?
No. A payroll deduction shows that you contributed to the plan, but your employer may also have contributed.
Is tax automatically taken off STD payments?
Income tax is generally withheld from taxable wage-loss replacement benefits. The amount withheld may not equal your final tax liability for the year.
Will I get a T4 for short-term disability?
Possibly. Taxable wage-loss replacement benefits may be reported on a T4 or T4A depending on how the payments and payroll deductions are handled.
What does box 107 on a T4A mean?
Box 107 is used for certain payments from a wage-loss replacement plan. CRA guidance generally directs taxpayers to report this amount on line 10400 of the tax return.
Can I deduct my short-term disability premiums?
STD premiums are not generally claimed as a simple annual personal tax deduction. However, eligible employee contributions may reduce taxable wage-loss replacement income when benefits are received.
Do I pay CPP and EI on taxable STD benefits?
Not necessarily. Whether CPP and EI deductions apply depends on how the plan and payments are administered.
Is EI sickness benefit income taxable?
Yes. EI sickness benefits are taxable income.
Are long-term disability benefits taxable?
The same broad funding principle generally applies. Employee-pay-all coverage generally produces tax-free benefits, while employer-funded or partly employer-funded coverage generally produces taxable benefits.
Does my medical condition affect whether STD is taxable?
Usually no. The tax treatment generally depends on how the plan was funded, not whether the claim involves an injury, physical illness, mental health condition, pregnancy complication or another disability.
Does my province affect whether STD is taxable?
The central question is generally who funded the disability plan. Your province or territory can still affect your overall tax rate and final tax result.
What should I do if my STD benefits are being taxed incorrectly?
Collect records showing who paid the premiums and ask the payer to explain the tax treatment in writing. Tax-specific questions may also require advice from a qualified tax professional.
Short-Term Disability Benefits Denied Or Cut Off?
Tax questions are different from insurance disputes.
If your insurer has denied your short-term disability claim, stopped benefits before you recovered or is pressuring you to return to work before you are medically ready, understand your options before deciding what to do next.
Contact Samfiru Tumarkin LLP for a free, confidential consultation with a disability lawyer.