The Canada Pension Plan or CPP long-term disability benefits program is Canada’s biggest long-term disability insurance program. It’s intended to provide financial assistance to those who have contributed to the CPP fund during their working lives but are now unable to work due to severe and prolonged disabilities. One side effect of the CPP program is that things can sometimes get murky when a CPP recipient is also receiving long-term disability (LTD) benefits from an insurance company. In this post, we’ll try and clarify how these two different programs, CPP Disability Benefits and Long Term Disability Benefits can overlap and influence each other.

CPP Disability Benefits and Long Term Disability Benefits

Confusion often abounds if you’re receiving long-term disability benefits from an insurance company and, after a year of receiving said benefits, you’re informed you must apply for CPP disability benefits as well. Things get really confusing when you realize that, should you win CPP benefits, your insurance company will keep the CPP money, your monthly LTD payment will be reduced and you’ll be stuck with a tax bill for the money your insurance company is keeping.

Knowing this, why would you go ahead and apply for CPP benefits? Let’s explain what’s happening first.

• Your insurance company keeps your CPP payments -It’s not unusual for an employer to purchase a bare-bones LTD policy that has lots of no-win (for you) clauses; like the clause that says that after a year you’ll need to apply for CPP benefits and the money goes to the insurer.
• Your monthly payment has been reduced – Sometimes you get to keep the CPP check but then find your insurance payment is reduced by the exact amount of the CPP payment. Again this is a function of a less than stellar LTD policy. You can buy one where your monthly payment won’t be deducted from your CPP benefits but – surprise – it will cost a lot more.
• You’re left with a tax bill where before there was none – A lot of long-term disability insurance program payouts are tax exempt. CPP payments are not. So if you were receiving $1,000 per month from the insurance company and then won a $500 payment from CPP your monthly disability payments will likely still total $1,000 but you’ll have to pay taxes on the $500 from CPP.
• You’re left with a tax bill, Part II – Once you’re approved for CPP long-term disability benefits you receive a one-time retroactive lump payment. These retroactive payments can be quite large and they’re taxable. So you may receive a $10,000 lump sum retroactive payment, have to turn it over to the insurance company, and be liable for the tax levied on that lump sum.

By now you’re thinking that, unless they were bound by law to do it, a person would have to be a bit of a masochist to apply for CPP long-term disability benefits if they were already receiving LTD benefits from an insurance policy. And, frankly, most people would agree with you.

why you should go ahead and apply for CPP benefits anyway.

• CPP Benefits are a Solid Backup – It’s not unusual for insurance companies to cancel long-term disability payments within only 2 or 3 years of their commencing. With a rock-solid long-term disability diagnosis from CPP backing you up it will be much harder for them to do so.
• The CPP Safety Net – Even if you have an ironclad diagnosis of long-term disability from CPP the insurance company may cancel your payments anyway. In which case the CPP long-term disability benefits become an invaluable backup.
• If you don’t apply the insurance company will act as you did anyway – Most long-term disability insurance policies contain clauses that state you need to apply for CPP benefits. If you don’t the insurance company is allowed to estimate how much you would have made from CPP and deduct that amount from your monthly payment. Better to apply for CPP benefits.
• Receiving CPP benefits can increase your retirement benefits – If you’re receiving money from a non-taxable LTD policy your CPP contribution will be zero. But since CPP benefits are taxable you’ll continue to make CPP fund contributions and you could end up getting a higher retirement pension amount once you turn 65.
• Finally, you can apply for the Disability Tax Credit – If you apply for and are granted the Disability Tax Credit any tax you may owe on a lump sum disbursement can be virtual, if not completely, eliminated.

So you can see that if you’re receiving long-term disability benefits from an insurance company, applying for CPP benefits can actually be a smart move. Ask the benefits specialists at Disability Credit Canada for more information regarding the often strange interactions between private insurance policies, CPP Disability Benefits, and Long Term Disability Benefits.