As tax season looms upon us yet again, I encourage you to verify with your accountant that your insurance premiums are being paid tax efficiently while optimizing the benefits you would receive if you made a claim. Most importantly, you want to ensure your method of paying premiums is onside with Canada Revenue Agency (CRA).
If you are not incorporated, your insurance premiums are paid using your after-tax dollars. The benefits you receive are generally non-taxable and the premiums are not tax deductible, except for office overhead insurance, where premiums can be deducted on your personal T1 and benefits are taxable when received.
If you’re incorporated, insurance premium accounting becomes more complex. Incorporated physicians often use their company to pay for the majority of their expenses, including insurance premiums. Your company’s ability to pay for and deduct premiums from BCMA group and individual insurance plans depend on the type of product.
Taxation of benefits
Negotiated benefit payments (CME, CMPA, CPRSP, PLP and REAP) are considered taxable benefits and as such a T4A is issued for any amounts paid in the calendar year. Note that you are able to deduct the corresponding costs as an expense on your income tax return.
For example, for CPRSP your financial institution will forward the appropriate income tax contribution receipts directly to you and therefore the net effect of this benefit will be nil for tax purposes. For CME and CMPA, your cost to attend a course on liability insurance will usually exceed the amount of your benefit.
A T4A will not be issued if:
• CME, CMPA, REAP—the benefit is paid to your corporation.
• CPRSP—the contribution is deposited to a corporation for IPP holdings.
You can pay life premiums through the corporation if the beneficiary is the same corporation. If your beneficiary is not your corporation (perhaps it’s your spouse or child), your corporation should issue a taxable benefit to you personally for the premium or the death benefit may become taxable at time of claim.
Although the premiums can be paid by your corporation, the premiums are usually not a tax-deductible expense; premiums are added back to the net income of the company. Corporate-paid life premiums are tax deductible only if the insurance is assigned to a loan at the request of the lender.
Your corporation can pay for disability insurance premiums and deduct them as an expense, but the benefit you receive would be taxable. If disability insurance premiums are employer paid, you can purchase a higher level of coverage to take into account the taxes payable when the benefits are received.
More commonly, you would receive a taxable shareholder or employee benefit for the disability premiums so that when you make a claim the benefit amount is non-taxable to you. An employee taxable benefit is a tax-deductible expense to the company, whereas a shareholder taxable benefit is not. Your accountant can differentiate if a taxable shareholder or employee benefit is appropriate for you.
Similar to disability insurance, if you do not receive a taxable benefit for critical illness premiums paid by the corporation, the benefit can be fully taxable as income when it is received. Since a critical illness benefit is paid as a lump sum, you definitely want to avoid giving almost half your benefit away to CRA.
Professional office overhead insurance
This type of insurance reimburses eligible office expenses like rent, employee salaries, and equipment leases. The premiums are paid by the corporation and are a tax-deductible expense. Although the benefits received are considered taxable income, the office expenses that the benefits reimbursed would be deductible, placing you in a neutral tax position.
Health and dental insurance
These premiums are a tax-deductible expense to your corporation, and the benefits you receive are tax free. If you belong to the BCMA Health Benefits Trust Fund (HBTF) Core-Plus Plan, your corporation can pay for the actual medical expense, which is then tax deductible. This ability to pay for and deduct health care expenses directly through the HBTF Core-Plus Plan can be more cost effective than partial reimbursements from traditional health and dental plans that may have high premiums.
You can see that it’s beneficial to take a closer look at how you pay premiums—the tax savings or loss can be substantial. If you find you’ve been paying premiums inefficiently, there are usually ways to correct past mistakes and implement optimal bookkeeping procedures going forward. The information we’ve provided is general guidance for you to assess if you’re on the right track. For your personal tax situation, please consult your accountant.
—Julie Kwan, BBA, CFP, CLU, GBA
BCMA Insurance Advisor