Stand-alone disability insurance is considered to be classified as accident or sickness insurance under provincial insurance legislation. 

The attached Tax Topic discusses the taxation of disability insurance both in a corporate and individual context. 

The tax treatment of the premiums and benefits under a disability insurance policy depends upon the purpose of the insurance and whether the policy is individually or corporately owned. 

DI and Income Loss Replacement Plans

The information in this Tax Topic is relevant for concepts like Income Loss Replacement Plans (ILRP), which enables business owners to offer income protection to their employees. 

An ILRP provides corporate owned individual disability insurance contracts to groups with as few as 2 employees. This concept is attractive where a company's group long term disability (LTD) plan does not adequately cover income replacement requirements for key employees or executives.

It may also be ideal for small businesses that find it difficult to qualify for group LTD. The corporation can deduct the premiums and the premiums are not a taxable benefit to the employee.

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Taxation of Disability Insurance