Withholding income tax at source for long- or short-term disability payments

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Earlier this year the Canada Revenue Agency (CRA) released the Employers’ Guide to Payroll Deductions and Remittances (T4001). The Employers’ Guide states that withholding income taxes at source from taxable long- and short-term disability (LTD and STD) benefit payments is required. 

What does this mean?

Historically, the Employers’ Guide indicated that withholding income tax at source was not required on taxable STD and LTD plans*. The withholding could be done on an optional basis.  However, the most recent version of the Employers' Guide, posted in January 2014 on the CRA website, no longer included the above administrative position.  The CRA has confirmed this change will apply on taxable STD and LTD payments issued, effective January 1, 2015.

*NOTE: For Quebec plan members, provincial income tax has always been deducted from the LTD or STD disability benefit payments before a payment was issued.

What is Sun Life doing to meet this requirement?

For all taxable LTD or STD plans:

  • Effective September 1, 2014: All new LTD and STD claims received after this date will have income tax deducted at source from any disability benefit payments made.
  • Effective January 1, 2015:  All plan members in receipt of taxable disability payments as of that date will have income tax deducted at source, where required.  Income tax deductions will be based on government approved income tax tables and the basic personal exemption amount.  Plan members may notice a change in their benefit payments.

Communicating these changes

There won’t be anything required for you to communicate to your plan members in receipt of disability benefit payments.  We will do this for you.  In September, Sun Life will contact the plan members who are affected to let them know about this change, via a direct mail campaign.

This communication explains that income tax withholding will begin effective with the first payment issued on or after January 1, 2015.  In addition, we refer plan members to the CRA website if they wish to estimate the potential impact this change may have on the disability benefit payments they receive.

The communication will only go to plan members who either:

  • do not currently have income tax deducted from their disability benefit payment, or
  • have previously provided specific direction on the amount of income tax to be deducted from their disability benefit payment (they may see a change to their benefit amount as the income tax deduction will now be based on government approved income tax tables).

In addition to the initial communication, a reminder notice will be sent in November, 2014.    

Questions?

Please contact your Client Service Administrator at 1-877-786-7227.