Many employees participate in wage-loss insurance plans that are often paid periodically by employers throughout the year. At the end of your employment, you may instead receive a lump-sum payment from this plan. In certain cases, these payments are taxable and must be reported in your income tax return.
Wage-Loss Insurance Plans
A large variety of insurance plans exist for issues such as sickness, accident, disability or income maintenance. Generally, these plans are called wage-loss replacement plans and are available to employees.
The Canada Revenue Agency considers that any arrangement between an employer and employees that involves benefits payable on a periodic basis if an employee suffers a loss of employment income as a consequence of sickness, maternity or accident is considered a wage-loss replacement plan.
Amounts that are received on a periodic basis from such a plan effectively replace income and are taxable as such Lump-sum payments — that are occasionally received by employees instead of periodic payments — are also considered as taxable income.
In some cases, these wage-loss replacement plans may also state that employees will receive a lump-sum payment on retirement, resignation or death based on the value of unused sick leave credits that were accumulated under this plan. The CRA also considers these payments to be taxable income from employment.
Reporting Lump-Sum Payments
If you received a payment, your employer will include it in Box 107 of your T4A slip. This amount must be reported on line 104 of your income tax return.
However, you may not have to report the full amount on your return. Instead, report the amount you received, minus contributions you made to the plan after 1967. Make these calculations unless you have already deducted these amounts on the return for a previous year.
If you received a lump-sum payment from a wage-loss replacement plan — parts of which were for years after 1977 — report the total amount in the year you receive the payment. If part of the lump-sum payment has been funded by your employee contributions, and you did not deduct them in a previous year, then your accumulated employee contributions are considered to be a return of capital. Accordingly, you do not need to include these as part of the taxable lump-sum payment that you are reporting.
If you paid the entire premiums for the plan and your employer did not participate in it, then you do not need to report the amounts received. In this case, these amounts are not considered income from employment.