Critical illness insurance is an insurance product in which the insurer is contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of the specific illnesses on a predetermined list. Most insurance companies in Canada attach additional features to the basic insurance. The most common features are:
- ROP – Return of premium. If you do not claim a critical illness you can request a return of premium as long as you have fulfilled the minimum time period specified within the policy.
- ROPD – Return of premium on Death. Your premiums are returned to your estate.
Companies might provide this insurance as a benefit to the employees or shareholders. Alternatively, they might designate themselves as beneficiaries in case a key employee is diagnosed with one of the illnesses in the policy.
An insurance policy is owned by employee/shareholder but the premiums are paid by the employer
Prior to 2013, employer-paid premiums to a critical illness insurance plan were not taxable benefits to employees (they were taxable benefits to shareholders). The 2012 federal budget changed the treatment of certain employment benefits including critical illness insurance. The CRA makes the following statement:
“Effective January 2013, premiums or contributions you pay to a group sickness or accident insurance plan are a taxable benefit to your employee, unless it is in respect of a wage-loss replacement benefit payable on a periodic basis (not lump-sum). Examples of plans to where the premium is a taxable benefit include, but are not limited to, accidental death and dismemberment and critical illness insurance.”
Essentially, the premiums paid by the employer are taxable benefits to employee/shareholder and benefits are received tax free.
It is important to distinguish between employee and shareholder when any benefits are provided. An employee benefit is a deduction to the employer but a shareholder benefit is not. If a shareholder-employee receives a benefit because of being a shareholder, the benefit will be taxable as a shareholder benefit. It is important to verify this by a straight forward test – would you have received the benefit in question had you not been a significant shareholder (or a relative)? In assessing this test, the CRA will compare you to other employees in your company and employees in similar positions in other companies who are not shareholders.
The employer owns and is the beneficiary of an insurance policy on a key person employee
There will be no tax consequences for the employee. The employer will not be able to deduct the premiums. Benefits will be received by the employer as taxable.