Ways to Minimize the OAS Clawback

The Old Age Security (OAS) pension is a taxable monthly payment from the Canadian Government to eligible seniors over the age of 65.

Eligibility for OAS include the following:

• You must be at least 65 years of age.
• If living in Canada: You must be a Canadian citizen or legal resident and must have lived in Canada for at least 10 years since you turned 18.
• If living outside Canada: You must have been a Canadian citizen or legal resident before you left Canada and must have resided in Canada for at least 20 years since you turned 18.

The current maximum monthly basic OAS payment as of the October to December 2021 quarter is $635.26. 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 its officially referred to). The income threshold amount is updated every year. 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.

Ways to Minimize the OAS Clawback

• Prioritize Your TFSAs
  • Income from savings and/or investment in a Tax-Free Savings Account (TFSA) is tax free. Ensuring you maximize your TFSA accounts will allow you to draw income as required without impacting the OAS clawback
• Analyze Your Sources of Income
  • Income derived from non-registered accounts are treated differently for tax purposes. For example, interest income is fully taxable, while 50% of capital gains are taxable. If your investment income is taxable, then this could push you over the income threshold for OAS
• Early RRSP Withdrawal
  • If you know that you will have lower periods of income before age 65, consider withdrawing funds before you start your OAS payments. Funds withdrawn from your RRSP can be re-invested in a non-registered account or a TFSA
• Defer OAS/CPP
  • OAS payments can be deferred until age 70, which increases the monthly benefit amount by 36%. If you are planning to have higher income between the ages of 65 and 70, this will defer any clawbacks
• Leverage Your Investing
  • If you borrow to invest, the interest paid may be deductible and lower your overall taxable investment income
• Realize Capital Gains Early
  • If you are planning on making any large sales of property, consider doing this before age 65 ot 70
• For Your RRIF, Utilize the Younger Spouse’s Age
  • This strategy will lower your annual withdrawal requirements and lower your overall net income for OAS calculations
• RRSP Contributions
  • You can lower your taxable income by making contributions to your RRSP or your spouse’s RRSP if you are over 71, but they are younger. This will lower your taxable income
• Income Splitting
  • Splitting of pension and other income such as Registered Retirement Income Funds (RRIF), annuity payments, and CPP pension sharing between spouses can lower individual income for either spouse and help them limit or avoid OAS clawbacks.