For most Canadians, Old Age Security (OAS) will form a part of your retirement plan. This benefit is available to everyone aged 65 or older who has lived in Canada for at least 10 years since the age of 18.
If you’ve lived here for 40 years or more after turning 18, you’ll general qualify for the full pension amount (which, in 2023, is $687.56 monthly/$8,250.72 annually).
For every year you delay drawing OAS, the amount increases by 7.2%, until aged 70.
Unlike CPP, which you pay into throughout your working years and receive benefits based on your contributions, OAS is available to everyone who meets the above criteria.
This is “free” government money.
But if your taxable income reaches a certain level, the government will take back some of that free money. Officially, this is called the OAS recovery tax, but is often referred to as a “clawback”. In 2023, the threshold for this is $86,912. That means if your taxable income is higher than this amount, you will have to pay back some or all of your benefit.
This clawback amount is calculated at 15% of the amount of your total taxable income that is above the threshold. For example, if your taxable income was $90,000, which is $3,088 more than the threshold, you would lose $463.20 of your benefit.
What income is used to calculate the OAS clawback?
- Canada Pension Plan/Quebec Pension Plan
- OAS income
- RRSP or RRIF income
- Company pension
- Retirement annuity
- Any salary from employment
There is no reason you should have to give up some of this free government money you’re entitled to.
So, how can you reduce your OAS clawback and keep more money in your pocket?
- Delay receiving your OAS until age 70. This will increase the amount of OAS you will receive, at a time when your overall income will likely be less anyway. This is particularly helpful for those who plan to work until (or past) age 65.
- Utilize your TFSA. Income removed from your TFSA is not taxable, so it will not contribute to the amount used to calculate your taxable income for the clawback threshold. Use these funds to generate the income you need without reaching the threshold.
- Take advantage of pension splitting. You can “give” up to half of their pension income (for example, CPP) to your spouse, for tax purposes, which would reduce your taxable income. For example, if your joint income is $150,000; by splitting that into $75,000 per person, you would both come in under the threshold for OAS clawback.
- Reduce dividend income. Although dividends are taxed at a lower rate and therefore are often considered tax efficient, to receive that tax credit the “grossed up” income is applied. That larger amount can put you over the OAS clawback threshold if your income is already close.
- Avoid capital gains by selling assets before 65. Selling before 65 means any capital gain won’t count towards your taxable income while you are collecting OAS.
There are a lot of strategies around retirement income – which income to pull from and when – to maximize your government benefits and reduce the amount of tax you pay. All these strategies depend on where your retirement income will be coming from, and your individual retirement goals.
If you want a clear plan that maximizes your retirement income – book a call.