Updated for 2019.
The Old Age Security (OAS) pension is a taxable monthly payment from the Government of Canada to eligible seniors who are 65 years of age or older. Read more on eligibility requirements here.
In addition to the OAS, low-income seniors may also be eligible for additional benefits including Guaranteed Income Supplement, Allowance and Allowance for the Survivor.
The current maximum monthly basic OAS payment is $613.53 for the October to December 2019 quarter. When your net income exceeds the income threshold set by the government, the OAS paid to you becomes subject to a clawback (or Recovery Tax as it’s officially referred to). The income threshold amount is updated every year.
For 2019, OAS clawback is triggered when net income is $77,580 or higher ($75,910 for 2018).
OAS clawback results in a reduction of OAS benefits by 15 cents for every $1 above the threshold amount and is essentially an additional 15% tax.
Clawback Example: Assume Clark, age 65, is recently retired. His net individual income (including the OAS pension) is $95,000 for 2017. Since his net income exceeds the threshold amount of $75,910, he would have to pay back some of his OAS pension.
Net income: $95,000
Minus threshold amount: $75,910
Excess income: $19,090
Clawback (15% on excess income): $2,863.50 or approx. $239 per month.
Unlike other benefits available to low-income seniors, income from OAS is taxable. For 2019, if your income exceeds $126,058, your OAS benefit is reduced to $0 ($123,302 for 2018).
Strategies To Minimize The OAS Clawback
1. Income Splitting
Splitting of pension and other income such as Registered Retirement Income Funds (RRIF), annuity payments, and CPP between spouses can lower individual income for either spouse and help them limit or avoid OAS clawbacks.
2. Evaluate Your Income Sources
Income derived from non-registered investments is treated differently when it comes to taxation. For example, only 50% of capital gains are included in taxable income; interest from GICs and savings are fully taxable and dividends are grossed up to 138% before they are taxed. When a greater portion of your investment income is taxable, your overall income may be pushed over the income threshold.
3. Prioritize TFSA
Income from investment or savings in Tax-Free Savings Accounts (TFSA) are tax-free, making TFSA’s an excellent tool for minimizing your taxable income and OAS clawback. You can also use your TFSA to hold most types of investment assets.
4. Early RRSP Withdrawal
Consider withdrawing from your Registered Retirement Savings Plan (RRSP) funds before age 65 if you have periods with low taxable income prior to retirement. RRSPs are only tax-deferred and taxes are due at withdrawal. Depending on your circumstances, the reduction in RRSP funds available later on may maximize the OAS benefit you qualify for.
Funds withdrawn from your RRSP can be re-invested in a tax-efficient account like the TFSA.
5. Contribute To Your RRSP
Even in retirement, you can continue to contribute to your RRSP (until you turn 71) if you have contribution room or have any employment income. RRSP contributions lower your net income for OAS calculations.
6. Spousal RRSP Contributions
If you are over age 71 and your spouse is younger, you can make spousal RRSP contributions to their RRSP if you have unused contribution room. This contribution will lower your taxable income.
7. Defer OAS/CPP
Seniors can defer OAS pension for up to 5 years from when they are eligible. With a deferral, you become eligible for a higher monthly pension later with an increase of up to 36% at age 70. This strategy works if your income level between ages 65-70 pushes you into the income threshold for OAS clawback. CPP can also be deferred.
8. Use Younger Spouse Age For RRIF
Use the age of the younger spouse to calculate your minimum RRIF payments. This will lower the mandatory minimum annual withdrawal requirement and lower your overall net income for OAS calculations.
9. Realize Capital Gains Early
Consider selling off real estate like your rental property, cottage, land, stocks, etc., before age 65 or prior to collecting OAS in order to avoid triggering OAS clawbacks.
10. Leverage Your Investing
If you borrow to invest, the interest paid for the loan may be deductible and lower your overall taxable investment income. Note that leveraging always comes with its own risks!
- RRIF’s Explained
- Understanding RRSP Transfers
- CPP and OAS Benefits for Surviving Spouse and Children
- LIRA, LIF, LRIF, PRIF and Their Uses in Retirement
- TFSA Withdrawal Rules