Are you wondering if you have to pay taxes on your CPP disability benefits? How can you avoid getting stuck owing a huge amount of money?
Have no fear — David is here! I’m not a tax accountant, but I will do my best to help answer these tricky tax questions. If you are still confused and need more information, please contact a local tax accountant. Or, if you are trying to figure out how much tax you may owe, you could try using one of the free consumer tax preparation software recommended by Revenue Canada.
This article is part of our Ultimate Guide to CPP Disability Benefits.
- 1. Do I Have to Pay Taxes on CPP Disability Benefits?
- 2. Can Service Canada Deduct Taxes From My Monthly Payments?
- 3. What Do I Do When I Get My T4A(P) Slip?
- 4. What Can I Do to Reduce the Amount of Taxes Owed?
- 5. How Is CPP Disability Tax Handled When You Also Get Long-Term Disability Insurance Payments?
- Next Step – Get Our Free Book
1. Do I Have to Pay Taxes on CPP Disability Benefits?
Yes, the CPP disability benefit is taxable income — the monthly payments and the retroactive benefits. This means you could owe money on your next tax return.
For years that you receive CPP disability, you will get a T4A(P) slip. It will list the total amount of disability benefit paid to you and possibly retroactive amounts as well.
On the T4A(P), box [xxx] will give you the total amount that you received. In fact, it even tells you to write it on line 11400. So, it’s as easy as that! Line 11400 is where you put the total of T4A(P) slips, which includes any income from CPP programs. (On old returns, prior to the 2019 tax year, it was on line 114.)
Your first T4A(P) slip will have a large amount because it will include some (or all) of what they owed you as a retroactive payment. This could include 2-3 years of back pay. This part of your CPP disability is also taxable income. So, you must report the full amount as stated on your T4A(P) slip.
Revenue Canada is supposed to automatically review that when it’s above a certain income threshold. That threshold is currently just under $17000. They review to see if some of that money should be attributed to previous years. They should automatically do this for you and consider your options. Are you better off leaving it all to be counted in this tax year? Or, it might be wiser for them to assign some of the money that you would have received into a prior year’s taxes and then reassess. They should run this calculation and figure out what makes the most sense. There’s nothing that you can really do other than to be aware of that issue and bring it up if you think they haven’t considered it.
Obviously, there is an advantage to spreading the payment out over other years — it lowers the amount that you’re reporting in any one year. Lowering your taxable income usually lowers your taxes.
To wrap this question up: Yes, CPP disability is taxable income. The total amount of the T4A(P) slip goes into line 11400 of your return. And, if you receive a retroactive payment, Revenue Canada should look at that for you, split it up accordingly, and reassess prior years to help lower your overall taxes.
If you think you have taxes to pay, you might want to consider putting some extra money away to cover that when it comes up. There are some things you can do to reduce taxes and prevent any big tax bills. Keep reading to find out!
2. Can Service Canada Deduct Taxes From My Monthly Payments?
Yes! You can ask Service Canada to deduct the federal income tax from your monthly payment by signing into your My Service Canada Account or by filling out the Request for Voluntary Federal Income Tax Deductions CPP/OAS (ISP-3520CPP) form and mailing it in or dropping it off at a Service Canada office.
3. What Do I Do When I Get My T4A(P) Slip?
You’re going to want to report the full amount of the CPP benefits. This includes the amount paid for previous years on line 114 of your tax return. When you include this number on line 114, the Canada Revenue Agency will automatically check to see if it’s beneficial for it to be spread out over the years.
4. What Can I Do to Reduce the Amount of Taxes Owed?
- If you are receiving a large retroactive payment, you can have the lump sum spread over two or more taxation years as mentioned above — this way, you pay less each year.
- You can apply for the Disability Tax Credit.
- You might owe less if you paid tax on long-term disability payments for the same months covered by the retroactive payment. See #5 below.
This is quite a common question we receive. The CPP retroactive payment is always taxable income — if you receive it or if it’s paid directly to your insurance company. Some people are not aware of how much they could owe in taxes if they don’t take steps to reduce it.
Let’s say you receive $18,000 for your retroactive payment and that this payment goes back three years. You would want to spread this payment out over three tax years instead of receiving it all in one. You can do this by asking Revenue Canada to spread the payments out over the years you would have received the money. Keep the letter from Service Canada that shows the years and amounts that this retroactive sum covers.
So, instead of receiving a lump sum of $18,000 in one tax year and being taxed on the entire amount, it would look like you had received $6,000 for three consecutive tax years. For the most part, this works as you’d expect. The CRA will then review your past years based on the new income. You may or may not owe taxes, but if you do, they will likely be less than having the full amount in one year.
Additionally, you can call Service Canada, CRA, and any low-income support programs you are a part of and explain the situation. Some programs that use tax info can cut you off automatically if you can’t address what your income will be for that year. It’s best to keep them informed of your situation so they don’t jump to conclusions.
5. How Is CPP Disability Tax Handled When You Also Get Long-Term Disability Insurance Payments?
This situation can get complicated and stressful. How you are taxed for your CPP disability benefit partially depends on the status of your LTD payments.
Tax issues can come up when some or all the CPP retroactive payment goes to an insurer as reimbursement for past disability insurance payments. This is known as a long-term disability overpayment. You can read more about
It usually plays out in one of two ways:
Situation 1: You paid tax on the LTD benefits
If your LTD benefits were taxable, then the CPP benefit paid to the insurer will not be taxed. When issuing your annual T4A for LTD benefits, your insurer will include the reimbursement as an offset — a deduction against income on your T4A. This reduces your taxable income by the same amount.
If your insurer doesn’t adjust the T4A to include the reimbursement, then you can still claim it as a deduction on line 232 of your individual tax return. You can’t claim a deduction twice. So be careful not to include it on line 232 if it appears on your T4A from the insurer.
Consult a tax accountant for more detailed information and expert advice on this.
Situation 2: You didn’t pay tax on the LTD benefits
This situation becomes a bit more complicated, and more issues may arise. Your insurance company won’t issue a T4A, and you can’t claim the retroactive pay as a deduction. Revenue Canada will tax the retroactive payment — but you can reduce the burden this may cause (see #4 above).
Next Step – Get Our Free Book
Start making better decisions today. Click on the image below to request a free download of our book.