Wage-loss replacement plans

You may have a wage-loss replacement plan in place that indemnifies employees against a loss of employment income as a result of sickness, accidents or maternity. The deductions and how the benefits are reported will depend on many factors.

Definitions and types of wage-loss replacement plans

A wage-loss replacement plan (WLRP) is an arrangement between an employer and employees, or an employer and a group or association of employees. A WLRP may provide short-term disability (STD), long-term disability (LTD) or weekly indemnity (WI) benefits. The benefits may be paid by the employer, or by an insurance company, trustee, board of trustees or other independent organization.

A plan is a wage-loss replacement plan when all of the following conditions are met:

  • it is a group plan, in that it covers more than one employee
  • the plan is funded, in whole, or in part, by the employer
  • the purpose of the plan is to indemnify employees against a loss of employment income as a result of sickness, accident or maternity
  • benefits are paid on a periodic basis, not as a lump-sum
  • it follows insurance principles that funds are accumulated, normally in the hands of a trustee or in a trust account, and are calculated to be sufficient to meet anticipated claims

If the plan is not a group plan (that is it is for a single employee), or if the plan is funded entirely by employee contributions (an employee-pay-all plan), it is not a WLRP. Any premiums you pay may be a taxable benefit. For more information, see the following publications:

Deductions from wage-loss replacement plan payments

CPP contributions and EI premiums

Deduct Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums from wage-loss replacement plan benefit payments when one of the following applies:

  • the employer pays benefits directly to an employee from a wage-loss replacement plan where the employer funds any part of the plan
  • a trustee, board of trustees or insurance company pays benefits on behalf of the employer to an employee through a wage-loss replacement plan, when the employer does all of the following:
    • funds any part of the plan
    • exercises a degree of control over the plan
    • directly or indirectly determines the eligibility for benefits

Do not deduct CPP contributions and EI premiums from wage-loss replacement plan benefit payments when the employer does one of the following:

  • does not exercise a degree of control over the plan
  • does not directly or indirectly determine the eligibility for benefits

Note

For more information, including an explanation of what is meant by "funds any part of the plan," "exercises a degree of control over the plan" and "directly or indirectly determines the eligibility for benefits," go to Wage-loss replacement plans.

Income tax and reporting

You have to withhold income tax from all wage-loss replacement plan benefits. If you also have to deduct CPP and EI, report the income and deductions on a T4 slip. If you do not have to deduct CPP and EI, report the income and deductions on a T4A slip.

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