If my employer offers to put my separation package into a RRSP do I still tell my insurer
If I get taxes taken out by lump sum does the insurer look at lump sum or net
If I get paid out biwkly with taxes taken out does insurer take total or net?
Thanks
The answers to your questions will depend on two things: 1) The specific LTD Benefits offset provisions in your LTD policy and 2) the essential nature of the payments received from the employer.
The only thing I can say in general, is that insurers are normally concerned with gross payments, rather than net payments. But this depends on whether your LTD benefits are taxable as well. Again, this will turn on the wording (or lack thereof) in your LTD policy.
I always recommend caution when trying to “structure” any type of settlement or payment with view to avoiding taxes or LTD offsets. Make sure the payment is done within the legal bounds and the essential nature of the payment is not being misrepresented in any way, in order to defeat a LTD offset or tax consequences. Courts are always concerned with with essential nature of things, rather than how it appears on the surface.
Be very careful about accepting advice from people based on their experiences because their situation may be very different because of different LTD policies and nature of the payments from employer. You would need to get specific legal advice on how the specific settlement offered to you would affect you based on your LTD policy.
David Brannen
Disability Lawyer with Resolute Legal
The response posted above is based on the limited factual information made available and is not intended as a full and complete response to the question. The only reliable manner to obtain complete and adequate legal advice is to consult with a lawyer, fully explain your situation, and allow the lawyer enough time to research the applicable law and facts required to give an adequate opinion. The basic information provided above is intended as a public service only, a full one-on-one discussion with a lawyer should be done before taking any any action. The information posted on this forum is available to the viewing public and is not intended to create a lawyer client relationship with any person. If you want one-on-one advice, please click here to request a free consultation or call toll free 1-877-282-5188 to speak with a member with our disability claim support team.
LTd isn’t taxable but the separation pkg will be best taxable for me.
Im afraid Manulife will want full amount and I will have to pay taxes.
I don’t have that kind of money.
Marykate - You may be worried needlessly about suffering financially due to the severance offset from your LTD. Optimistically, you might end up ahead financially, depending on your personal situation. Of course, you will lose your employment benefits by losing your employment, which can actually be the most significant financial impact in the long run for many disabled employees.
Here’s one example of how severance offset and LTD may work. If your severance is indeed an offset as per your contract and you receive 12 months of severance, your future LTD payments will be suspended for the next 12 months. You are likely receiving “non-taxable” LTD based on a complicated calculation of your previous gross salary, less payroll taxes, less income tax, etc. to arrive at a net, non-taxable LTD amount. Completely ignoring CPPD or your other personal factors today, if you look at your “net income” from your employer before you went on LTD, you may find that you “netted” $25,000 on a gross income of $40,000. “All other things being equal” and assuming the 12 months of your severance is the calendar year Jan-Dec 2019, you’ll be in exactly the same situation for the 12 months of your severance period (plus you may end up being able to keep your CPPD on top!). You will receive $40,000 in severance from your employer and after all the payroll taxes and income tax is deducted you will end up with the same $25,000. You won’t receive your non-taxable LTD for these same 12 months. Your LTD monthly payments will recommence at the end of your 12 month severance period.
You could end up ahead financially in the situation where you receive the same 12 months of severance via salary continuance (bi-weekly payments) and you receive it across two calendar tax years. This could be a significant benefit to you depending on your personal tax situation since your taxes are calculated on a calendar year basis.
If you receive severance via a “lump sum” and decide to invest in an RRSP via a direct contribution from your severance, you may shelter/defer some of your personal income taxes this year, but you will less money to live on and it won’t reduce your severance offset with your LTD insurer. Your LTD insurer will still suspend your LTD payments for the next 12 months regardless of the form of your severance. Receiving a lump sum will also mean your employee benefits will cease after the legal notice period (e.g. often 8 weeks in some provinces). With salary continuance, however, in some situations employer group benefits like health, dental and pension can continue right through to the end of the salary continuance period (i.e. the end of the bi-weekly payments) because you remain an employee and eligible to remain a member of the employer’s group benefits contract.
The description above is only an example of how severance offset and LTD might work in some situations. As David said, every situation and contract is entirely different.
My standard opening or closing line is you can’t rely on advice from any poster on the internet … I may have no knowledge about LTD or contracts or tax. How would you know? I don’t know anything about you or your contract. There’s a lot at stake here for you. It’s critical that you consult with legal and tax professionals to achieve the best possible outcome for you. The severance offer your employer puts on the table is simply that - an offer… you don’t need to accept it.
Hi Joanne
Thank you
Yes my LTD is non taxable.
The separation package is for 38 weeks.
The health and dental ends at the end of 2019!the same as the money.
Not sure if the LTD insurer will go by the number of weeks or the total before taxes
Well, it can get complicated as your LTD month can start any day in the month - say March 10 - April 9, so the first month and last month will look funny from an offset perspective. CPPD is always a calendar month - from the 1st of the month to the last day of the month.
38 weeks = 8.78 months which takes us from now until the end of 2019.
If I were a betting person, and you will NEVER know, my guess is your LTD will stop once you commence your bi-weekly severance and it will start up again when severance ends. Again, the first month and last month will look funny but your insurer will give you a full accounting.
Run that package by legal and tax professionals!!!
They are not saying the word severance in lieu of retirement.
I didn’t think CPPD was affected by this?
Do you think LTD will go by the number of weeks as oppose to the total amount?
Thank you Joanne
My employer is saying in lieu of retirement package
Starts April 1st and ends Dec 31, 2019
This is an example:
Usually LTD is paid in months. So if your LTD “month” goes from the 10th to the 9th, the LTD insurer will convert everything to their LTD month for the purpose of offsets.
I only cited CPPD as an example because the LTD “month” and the CPPD “month” are seldom the exact same “month”, so when the LTD insurer calculates a CPPD offset for a backdated lumpsum, the first “month” and last “month” will probably not be exactly the same “month” (i.e. dates) unless your LTD happened to have started on exactly the 1st day of a calendar month. So, the same may happen to the offset of your severance unless, of course, your LTD happened to have started on the 1st of the month and the effective date of your severance also starts on the 1st of the month.
I think LTD is usually paid monthly in arrears. They will give you a precise calculation.
No, your CPPD disability should not be impacted because the criteria for CPPD is the ability to work. Receiving severance does not demonstrate your ability to work. However, when Service Canada (CPPD) sees your employment income for 2019, they will probably not know it is severance and think you have been “gainfully working” for most of 2019, so you should contact them this year to head off future questions. They will probably require some documented proof of the severance income. I think you just need to be proactive. This is not “working” - it’s severance and they are two different things.