As an individual, when you pay life insurance premiums, they are not deductible on your income tax return. However, if you are a business owner and you pay life insurance premiums on behalf your employees, your expenses may be deductible.
Here’s a look at what the Canada Revenue Agency (CRA) requires.
Deductible Employer-Paid Life Insurance Premiums
If you pay premiums for your employee’s group life insurance, you can deduct the cost as a business expense on your statement of business income and expenses.
However, you cannot deduct costs for group term insurance or optional dependant life insurance. Group term life insurance is a group policy where the benefits consist of policy dividends, experience rating refunds, or amounts payable on the death of an employee, former employee, or one of their covered dependents.
Optional dependent life insurance covers eligible dependents of employees. Employees are not obligated to receive this benefit.
Calculating Your Deduction
If you pay premiums on a regular basis and the premium rate does not vary based on age or gender, you can deduct the entire cost of the premiums as a business expenses. In addition, you may also deduct all sales and excise tax related to the coverage.
If you do not pay the premiums regularly or if they vary based on age or gender, you cannot write off the entire cost. Instead, you must contact the CRA directly for instructions regarding what portion of the expense you may deduct.
In most cases, life insurance premiums are considered a taxable benefit. Accordingly, you must include their value when calculating payroll and income tax for your employees.
For example, if you pay one of your employees $1,000 and also pay $200 for life insurance premiums on his behalf, you must withdraw income tax and remit payroll tax as if you paid your employee $1,200 for that pay period.
Additionally, you must also deduct Canada Pension Plan contributions. However, because the benefit is a non-cash benefit, you do not have to deduct Employment Insurance premiums.
Reporting the Benefit
At the end of each year, you must create a T4 slip for each of your employees, detailing the total amount you have paid them, benefits they have received, taxes you have remitted and other essential details.
Include the amount you have paid for life insurance premiums under code 40 at the bottom of each T4 slip. Ensure that you also send a copy of this slip to the CRA.
If you paid life insurance premiums for a retired employee, report these benefits on his T4A slip. Use code 119 and report the value in the Other Information section of the slip.
In many cases, there is a $500 reporting threshold for information included on a T4 slip. Note that this threshold does not apply for life insurance premiums, in which case you must report all amounts over $25.