The Old Age Security (OAS) pension is one of the main sources of retirement income in Canada.
Unlike the Canada Pension Plan (CPP), which is a plan you contribute to during your working years, the OAS is a direct payment from general government coffers to seniors who meet the eligibility requirements.
Readers of my retirement planning blog often ask me whether the OAS is a taxable benefit, how much taxes they can expect to pay, and the ins and outs of the OAS clawback (i.e. OAS recovery tax).
Is OAS Taxable?
OAS payments are included in your taxable income for the year and taxed based on your income tax bracket.
At the end of the tax year, you will receive a T4A (OAS) tax slip from Service Canada that shows how much OAS pension you received and how much taxes were deducted.
You can typically expect your OAS Statement at the end of February.
The taxable pension amount paid to you is indicated in box 18, and this amount should go into line 113 of your tax return.
If the OAS recovery tax was deducted from your pension, it is also recorded in box 20 of your T4A (OAS) slip. More on this later.
You can request that federal income taxes be withheld each month so you don’t have to pay quarterly or wait until the end of the year to pay a lump sum in taxes.
To make this request, you must complete Form ISP 3520.
OAS pensioners who live abroad pay a monthly 25% withholding tax rate on their benefits when deemed non-residents of Canada.
They may be able to lower this tax rate if their country of residence has a social security agreement with Canada. Here’s a list of countries that have a tax treaty with Canada.
Unless you meet the 20-year residency requirement, your OAS payments stop after you have been outside Canada for longer than 6 months. Payments are restarted after you return to Canada.
OAS Clawback (Recovery Tax)
When your annual income exceeds a certain threshold ($81,761 for the 2022 tax year and July 2023 to June 2024 recovery tax period), you must repay some of your OAS pension.
When your income exceeds $134,626, you are no longer eligible to receive the OAS pension. The threshold increases to $142,428 for the July 2024 to June 2025 recovery tax period.
The default OAS recovery tax (clawback) applied to your OAS pension depends on when you start collecting.
For example, if you start receiving the OAS pension in January 2023, your 2021 income tax return is used to determine how much OAS is clawed back.
However, if you start receiving an OAS pension in July 2023, your 2022 income tax return amount comes into play to determine the impact of the threshold levels for OAS clawback purposes.
The reason for this is that the OAS payment calendar runs from July to June of each year.
The OAS recovery tax is 15 cents (15%) for every dollar exceeding the minimum threshold amount until OAS is totally eliminated.
Let’s dig into the numbers.
OAS Clawback Scenario
- Recovery tax period: July 2023 to June 2024
- Minimum income recovery threshold for 2023: $81,761
- Maximum income recovery threshold for 2023: $134,626 (age 65 to 74)
- Applicable income tax year: based on your 2022 tax return
If your total income in 2022 is $95,000, your repayment amount is calculated as:
- ($95,000 – $81,761) = $13,239
- $13,239 x 0.15% = $1,985.85 in OAS clawback
You will be repaying $1,985.85 for the July 2023 to June 2024 payment period.
This means that roughly $165 (i.e. $1,985.85/12 months) will be subtracted from your monthly OAS payments starting in July 2023. This recovery tax paid is reflected in box 20 of your T4A-OAS.
When your annual income is lower, it may result in excess OAS clawback. In this case, you will receive the excess amount back after filing your taxes.
If you can pre-empt that your income will be lower for next year, you can stop CRA from applying the higher rate OAS recovery tax by completing Form T1213 (OAS).
How To Minimize OAS Clawback
Your total worldwide income is considered when determining OAS clawback (including dividends, capital gains, and interest income).
Some of the strategies to reduce or eliminate the OAS Clawback are:
- Use up your TFSA first. Withdrawals from a TFSA are not taxable.
- Trigger capital gains before age 65 when you start collecting your OAS.
- Maximize all the tax deductions at your disposal, including using up your RRSP contribution room. If you are over age 71 and have contribution room, you can still contribute to a spousal RRSP account if your partner is under 71.
- Delay collecting CPP till later years when your income level is lower.
- Split pension income with a spouse to lower net income for both individuals.
Read more on how to minimize the OAS clawback.
Old Age Security Overview
The OAS is a retirement benefit available to Canadian citizens and residents who are at least 65 years of age and who have lived in Canada for at least 10 years after they turned 18.
Canadians who retire abroad must have lived in Canada for at least 20 years since age 18 to continue receiving the OAS pension.
Seniors can choose to delay taking their OAS until age 70 to increase the benefits they receive. The maximum monthly increase possible is 36% at age 70.
For a bit of historical background on the OAS, the program was initially introduced in 1927 (under the Old Age Pension Act) and was available to retirees aged 70 and older with annual incomes less than $365.
It was expanded in 1952 to provide retirement income of up to $480 per year.
In 1967, the Guaranteed Income Supplement became a part of the OAS pension.
Is GIS Taxable?
The Guaranteed Income Supplement is an additional OAS benefit paid to low-income seniors receiving the OAS.
Unlike the OAS pension, GIS payments are not taxable. The income threshold to qualify for GIS varies depending on whether:
- You are a single, widowed, or divorced pensioner.
- Your spouse receives (or does not receive) the full OAS pension.
- Your spouse receives the allowance.
Below are the GIS amounts for individuals receiving a full OAS pension in the third quarter of 2023 (between July and September).
|Scenarios||Maximum monthly payment||Maximum annual income threshold|
|If you are a single, widowed, or divorced pensioner||$1,043.45||$21,168 (individual income)|
|If your spouse/common-law partner receives the full OAS pension||$628.09||$27,984 (combined income)|
|If your spouse/common-law partner does not receive an OAS pension||$1,043.45||$50,736 (combined income)|
|If your spouse/common-law partner receives the Allowance||$628.09||$39,168 (combined income)|
Service Canada reviews your eligibility for the GIS program every year, and when your income exceeds the threshold (based on your income tax and benefit return), your payments stop.
GIS payments also stop when you leave Canada for more than six months.
There is a buffer of $5,000 in employment income before there is a GIS clawback.
How To Apply for the OAS
Eligible seniors are automatically enrolled in the OAS and GIS programs. if you do not receive a letter stating you will be enrolled automatically, you can complete Form ISP-3550 and mail it to designated Service Canada offices for your province.
If you have questions regarding your OAS application, contact Service Canada at 1-800-277-9914 (Canada/US) or 1-613-957-1954 (outside Canada/US).
For questions about your taxes, contact the Canada Revenue Agency at 1-800-267-5177 (Canada/US) or 613-952-3741 (all other countries).