Group benefits are a tax-efficient way to compensate your employees. Not only are they paid to employee outside of payroll taxes but in many cases, benefits are provided to the employee free of income tax and remain a deduction for the employer.
Payroll Taxes
Payroll taxes in Canada include premiums to Employment Insurance (EI) and contribution to the Canada Pension Plan (CPP). Below is how the tax is calculated.
Contributions to the Canada Pension Plan are made by both the employee and the employer. The contributions are 5.7% of the employee’s annual salary up to $61,400 (in 2022). The maximum salary is set every year by the Canada Revenue Agency (CRA) and is referred to as the maximum contributory earnings (YMCE). Any salary earned after $61.400 is free of this tax. The total tax is 11.4% but share by both the employee and the employer.
Premiums to Employment Insurance are made by the employer. Premiums are 1.58% of the employee’s annual salary up to $60,300 (in 2022). The maximum salary is set every year by the Canada Employment Insurance Commission (CEIC). Any salary earned after $60,300 is free of this tax.
Because employee benefits are often a non-taxable form of compensation (which bypasses payroll taxes), there is a 12.98% of tax savings earned on the first $60,300 annually paid to an employee. Further income tax relief is also available for both the employee and the employer. Employee benefits are tax efficient. See below to find out exactly how each benefit class is treated by the tax-collector.
Income Taxes Implications
Accidental Death & Dismemberment: Yes
Group Life Insurance: Yes
Short-Term Disability: Yes
Long-Term Disability: Yes
Extended Health Care Benefits: Yes
Dental Plan: Yes
Employee Assistance Program: Yes
Registered Pension Plan: Yes
Group RRSP: Yes
Deferred Profit-Sharing Plan: Yes
Retirement Compensation Agreement: Yes
WSIB Benefits: Yes
Accidental Death & Dismemberment: Yes
Group Life Insurance: Yes
Short-Term Disability: No
Long-Term Disability: No
Extended Health Care Benefits: Only in Quebec
Dental Plan: Only in Quebec
Employee Assistance Program: No
Registered Pension Plan: No
Group RRSP: No
Deferred Profit-Sharing Plan: No
Retirement Compensation Agreement: No
WSIB Benefits: No
Accidental Death & Dismemberment: No
Group Life Insurance: No
Short-Term Disability: No
Long-Term Disability: No
Extended Health Care Benefits: Yes
Dental Plan: Yes
Employee Assistance Program: No
Registered Pension Plan: Yes
Group RRSP: Yes
Deferred Profit-Sharing Plan: N/A
Retirement Compensation Agreement: Yes
WSIB Benefits: N/A
Accidental Death & Dismemberment: No
Group Life Insurance: No
Short-Term Disability: Yes if paid by the employer, No if paid by the employee
Long-Term Disability: Yes if paid by the employer, No if paid by the employee
Extended Health Care Benefits: No
Dental Plan: No
Employee Assistance Program: No
Registered Pension Plan: Yes
Group RRSP: Yes
Deferred Profit-Sharing Plan: Yes
Retirement Compensation Agreement: Yes
WSIB Benefits: No
Optimize for Maximum Tax-Efficiency
Some tax optimization is possible in order to reduce the income tax payable by employees. This can be done by calculating the portion plan costs paid by the employee based on the agreed-upon cost-sharing formula and then reallocating it in priority to the cost of coverage taxed by both levels of government. The total deduction paid by the employee remains the same, but the income tax payable will be lower. The table below illustrates the per-pay allocation of a $1,020 premium shared 50%-50% with and without optimization:
Without Optimization
Employer Cost
Accidental Death & Dismemberment - $10
Disability Insurance - $70
Extended Health Benefits - $250
Dental Benefits - $150
Total - $510
Employee Cost
Accidental Death & Dismemberment - $10
Disability Insurance - $70
Extended Health Benefits - $250
Dental Benefits - $150
Total - $510
With Optimization
Employer Cost
Accidental Death & Dismemberment - $0
Disability Insurance - $140
Extended Health Benefits - $70
Dental Benefits - $300
Total - $510
Employee Cost
Accidental Death & Dismemberment - $20
Disability Insurance - $0
Extended Health Benefits - $430
Dental Benefits - $0
Total - $510
By moving the life insurance premiums in the hand of the employee, the benefit becomes non-taxable. Premiums toward extended health and dental benefits are eligible for the medical expenses tax credit in the hands of the employee, so premiums best allocated to them.
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Disclosure
All quotes are provided by Red Helm Insurance Ltd. FSRA license #37440M, an independent brokerage specializing in health benefits. While all effort is made to ensure accuracy, quotes, rates, and plan details may be subject to review or change without prior notice. Plan eligibility is not guaranteed and may be subject to a medical questionnaire or other eligibility criteria. By submitting your information in our quote request form, you are accepting the terms and conditions of our website and are accepting that we communicate with you electronically for the purpose of solicitation.
