Planning for Old Age Security Clawback
Marc André Castonguay, CFP, CIM
What is old age security clawback and does it affect me?
Many Canadian seniors depend on Old Age Security (OAS) during retirement. Unlike the CPP benefit, which is based on contributions made by you and your employer, OAS is funded out of the general revenues of the Government of Canada. The amount you will receive from OAS does not depend on the number of years you worked but rather on the number of years you lived in Canada after age 18. To be eligible for the maximum OAS pension, you must have lived in Canada for at least 40 years after turning 18. If you have lived in Canada for less time, you could still qualify for a partial benefit.
How much will I receive?
The current maximum OAS pension amount is $698.60 monthly (from July to September 2023) from age 65 to 74. It is adjusted quarterly to reflect increases in the cost of living. Since July 2022, OAS recipients age 75 or over receive 10% more. It is important to note that this benefit is fully taxable. You can start collecting OAS at age 65, but not earlier.
You have likely heard of the term “clawback” when the conversation about OAS comes up. Its official name is OAS pension recovery tax. If an OAS recipient’s total net annual income exceeds the threshold amount, a portion, or in some cases the entire amount, of the OAS benefit must be paid back. I know it sounds a bit terrifying, but here’s how it works. Individuals who have an annual net income that exceeds the “minimum income recovery threshold” will have part of their OAS pension clawed back at a rate of 15% of the excess income. In other words, for every extra dollar of income, 15 cents will have to be repaid. The minimum income recovery threshold in 2023 is $86,912.
Now, the way the income test is applied can be a bit tricky. The government will look at your net income as per your tax return from the preceding year and apply the clawback, if warranted, on your monthly OAS pension from July this year to June next year. So, for example, if an individual’s 2023 net annual income is $91,912, which is $5,000 higher than the 2023 income threshold, he would be clawed back for $750 over one year, or $62.50 per month on his OAS pension paid from July 2024 to June 2025.
If you are in a situation where you could lose some of your OAS due to clawback, here are a few ideas:
1. Look at splitting your pension income with your spouse. Since 2007, retirees can split up to 50% of their pension income, including RRIF withdrawals at age 65 or older, with their spouse or common law partner. This is an effective way to reduce your income. Keep in mind that your spouse’s income will increase following the split.
2. Include a TFSA as part of your retirement plan. Unlike RRSPs and RRIFs, withdrawals from TFSAs are not taxable. So, if you are near the clawback threshold and need additional income, withdrawing from a TFSA will not increase your net income. By having a variety of different savings vehicles, it will give you more options in planning your retirement income.
3. Elect to defer your OAS. If your income results in a high clawback, it may make sense to defer your OAS pension. Deferral will increase your OAS benefit by 0.6% for every month after your 65th birthday. This can make sense for people working past age 65 and earning a higher income than the threshold.
Other factors that could affect the OAS clawback by increasing your net income are:
1. Dividend income in non-registered accounts. While dividends received from Canadian companies are relatively tax efficient compared with interest income or foreign dividends, the process to getting a more favorable tax result includes applying a gross up to the dividend received. It is the grossed-up dividend amount that is included in an individual’s income.
2. If you sell an asset with a notable unrealized capital gain, the sale will trigger a capital gain, half of which will be included in your income.
While most Canadians are unaffected by the OAS clawback, if you are in a situation where clawback could apply, speak with your financial planner to see what can be done to optimize your financial situation. For some, the OAS clawback might be inevitable; sometimes, trying to avoid clawback at all costs is not the best solution. Any decision made should take into consideration your complete retirement picture.
More articles from Marc André:
This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.