Changes to Tax Treatment of Payments in lieu of Benefits upon Cancellation of Benefit Coverage
The Canada Revenue Agency has changed the way that it treats lump sum payments to retirees and employees in lieu of benefit coverage upon the cancellation of private health services plans. The Canada Revenue Agency had previously treated these lump sum payments as “advance reimbursements of medical expenses” and therefore, employers were not required to withhold income tax from the payments.
In the commentary accompanying the federal budget, the Canada Revenue Agency indicated that it had changed its position and that commencing January 1, 2012, employers would be required to withhold income tax from these amounts and report them on employees or retirees’ T4A Information Return. The Canada Revenue Agency recognizes a narrow exemption to this rule for payments received after the January 1st deadline from employers who became insolvent prior to that date.
The Canada Revenue Agency has provided detailed information regarding these new reporting and withholding requirements on its website.