Sarah, a 35-year-old marketing manager in Toronto, has a group disability insurance plan through her employer. Her employer pays 100% of the premiums. If Sarah becomes disabled and receives $3,000 per month in disability benefits, how will these benefits be taxed?

Question: Sarah, a 35-year-old marketing manager in Toronto, has a group disability insurance plan through her employer. Her employer pays 100% of the premiums. If Sarah becomes disabled and receives $3,000 per month in disability benefits, how will these benefits be taxed?

Answer options: ✅ The full $3,000 per month will be taxable income to Sarah.

• The first $1,000 per month will be tax-free, and the remaining $2,000 will be taxable.
• The entire $3,000 per month will be tax-free as it replaces lost income.
• The premiums paid by her employer are a taxable benefit to Sarah, but the disability benefits are tax-free.

Correct answer: The full $3,000 per month will be taxable income to Sarah.

Explanation: When an employer pays 100% of disability insurance premiums, the premiums are not a taxable benefit to the employee, but any disability benefits received are fully taxable. If the employee pays all premiums, benefits are tax-free. If both contribute, benefits are proportionally taxable.