This is a messy situation, but you should NOT be taxed twice for the same money. The fix for his is on the CRA side, not the LTD side. LTD has to keep deducting taxes on your ongoing benefits. There is no way to change that because these ongoing LTD benefits are NEW payments that are taxable.
The key here is the taxes you already paid on the $20k. You owed that tax at the time you paid it because you hadn’t been double taxed at that point. Because you hadn’t refunded the money to LTD.
Now that you are paying back to overpayment to LTD bit by bit, you need to have your past taxes reassessed as you pay off the overpayment to LTD.
I don’t know how this will be done on a practical level. You would need to start by having the LTD insurer confirm the total “repayments” you made for the tax year in question, and what past LTD benefits those refunds are being applied to. This is the key, you need to show how these current deductions from LTD are linked to past LTD payments they made to you. You can present this information to Revenue Canada and they can calculate what tax credit should be applied.
You are going to get the run-around from everyone because this is not an easy situation to navigate for all involved.
Here is an old thread where a member describes how she resolved a similar overpayment situation with CPP, LTD and Rev Canada: CPP-D - pleased but worried re: taxes
David Brannen
Disability Lawyer with Resolute Legal
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