The Globe and Mail, Report on Business, PORTFOLIO Column
August 31, 1990
Text of a letter to the Editor sent following four other colums of debate on the pros and cons of taxable vs. non-taxable LTD benefit. The following expressed The Consulting House viewpoint on the subject:
An important point in the debate seems to have been totally overlooked. A taxable disability benefit is designed to provide a higher payment, so that a disabled person is able to pay the income tax and still be left with enough to sustain a decent standard of living – ideally one equivalent to what would have been provided under a non-taxable benefit.
Why would anybody want to pay the insurance industry a higher premium than is absolutely necessary to sustain the desired standard of living? And why pay the insurance industry a higher premium to support a higher insured percentage of salary, so that a disabled person can pay tax on any disability income?
I fail to understand why anyone would encourage such an arrangement knowing how much we as Canadians want to minimize the taxes that individuals and companies pay. In this age of free trade and world-scale economies, it is vital that we become as cost-efficient as possible by reducing, rather than increasing, the taxes payable.
Assuming a disability lasting 10 years and modest payments of $2,000 a month, we would be looking at $240,000 in benefits. There is no question that the taxability of this huge sum is a very serious matter. If the choice were mine, I would certainly choose to pay the very small tax on the premium, rather than tax on the $240,000.
The additional tax that employees pay is very small and I believe it is an investment well worth making in order to achieve tax-free status for the few individuals who actually collect. No one knows who will be disabled next. Therefore, everyone must pay a small price for the sake of tax-free benefits and peace of mind.
The ideal scenario would be to increase each employee’s pay by just enough to cover both the premium and the increased taxes on such a salary increase. The employee pays the entire cost of this benefit and therefore receives it on a tax-free basis. The company gets the tax write-off for the increased payroll. And more importantly, there is no need for insurance to cover the income taxes otherwise payable under a taxable benefit.
Simon R. Sabat,
Principal,
The Consulting House Inc.,
Employee Benefits Specialists
Toronto.