The Federal Government is Considering Taxing Employer Contributions

Group health benefit plans provide employees with tax efficient compensation, however the Federal Government is considering taxing employer contributions made to such plans.

While the Government has not yet confirmed its intentions to proceed with the measure, and full details have yet to emerge. If the new tax is introduced in the upcoming 2017 Federal Budget, the premiums paid by employers would cease to be exempt from federal taxation costing Canadians billions of dollars.

This measure would harm millions of working, middle-class and lower income Canadians and their families who rely on these plans to sustain their health. Private benefit plans cover nearly $30 billion annually in healthcare costs for up to 22 million Canadians and their families (accounting for nearly a third of health-related spending nationally).

The following changes could have direct and indirect costs for:

  • Administrative practices -– since contributions towards group health benefits plans would become taxable income to employees, it may result in plan changes to reduce the impact that higher taxable income could have on out-of-pocket expenses.
  • Added pressure and costs to HR resources -– this new tax could force many plan sponsors with the difficult decision of possibly reducing their plan coverage or opting out entirely, causing employees to seek internal guidance from their employers. Plan designs may need to be changed (e.g. Health Spending Accounts may no longer be relevant as they would be taxable).
  • Attracting and retaining new talent -– since attractive and tax-beneficial group health benefits plans can be viewed as an important element of an employee’s total compensation package, this new tax could make it more difficult to attract and retain new talent. This would also diminish the perceived value of the programs employers offer to their employees, if they’re suddenly required to include employer contributions as a taxable benefit, when currently they are tax free.
  • Income tax break provided to middle-class families –- we estimate that the tax burden could increase by approximately $1,300 per annum for working class families, thereby mostly or completely offsetting up to $680 in income tax relief for middle income earners. This change is completely misaligned with the stated objectives of the new Government’s goals to help middle and working class families.

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