What is the Old Age Security (OAS) Clawback?
Officially known as the OAS recovery tax, the clawback is a measure designed to target benefits towards Canadians with lower and middle incomes. Unlike the Canada Pension Plan (CPP), which is based on your contributions, OAS is funded through general tax revenues and is an income-tested benefit. The recovery tax is triggered when a senior's net world income exceeds a government-specified threshold. For every dollar of net income above this threshold, a portion of the OAS pension must be repaid.
The 2025 Income Thresholds for Full OAS Clawback
The thresholds for the OAS recovery tax change annually to account for inflation. The clawback amount for the payment period of July 2025 to June 2026 is based on a recipient's net income from the 2024 tax year. The full pension is clawed back once a person's income reaches a specific maximum threshold, which differs depending on the recipient's age.
For the July 2025 to June 2026 payment period, the thresholds are:
- For ages 65 to 74: A person's full OAS pension is recovered if their 2024 net income was approximately $151,668 or higher.
- For ages 75 and over: Due to a 10% increase in benefits introduced in 2022, the full pension is recovered at a higher income level. For this group, the full clawback occurs if their 2024 net income was approximately $157,490 or higher.
It's important to note that the clawback begins at a much lower income level. For the 2025 payment period (based on 2024 income), the recovery tax starts when net income exceeds $93,454.
How the OAS Recovery Tax is Calculated
The calculation for the recovery tax is relatively straightforward. It is based on your net world income, specifically Line 23400 of your tax return.
Here is a step-by-step example for a 68-year-old in the 2025 payment period:
- Determine the excess income: Find the difference between your 2024 net income and the minimum clawback threshold ($93,454).
- Calculate the recovery tax: Multiply the excess income by the clawback rate of 15%.
- Repay the amount: This calculated amount is the total annual repayment. It will be deducted from your OAS payments over the following 12 months (July 2025 to June 2026).
For example, if a 68-year-old had a 2024 net income of $100,000, their excess income would be $6,546 ($100,000 - $93,454). The annual clawback would be 15% of $6,546, or $981.90. This means their annual OAS payment for the July 2025 to June 2026 period would be reduced by that amount.
Deferral and the Clawback
One strategy for managing the clawback is to delay receiving your OAS payments. While you can begin at age 65, you can defer up to 60 months (until age 70). This increases your monthly benefit by 0.6% for each month you delay, up to a maximum of 36%. A higher starting benefit also means you can earn more income before your entire OAS is recovered.
OAS Deferral vs. The Clawback
| Scenario | Age 65 (Maximum OAS) | Age 70 (Maximum OAS, Deferred) |
|---|---|---|
| Maximum Annual OAS Benefit (approx.) | ~$8,820 (ages 65-74) | ~$11,995 (36% higher than max age 65) |
| Full Clawback Income Threshold (approx.) | $151,668 | ~$173,000 (estimation based on higher benefit) |
Note: The specific income threshold for a deferred pension will be higher, as it takes more excess income to fully claw back a larger benefit. Calculations can be complex and should be confirmed with an advisor or Service Canada.
Strategies to Minimize the Impact of the OAS Clawback
For high-income retirees, careful financial planning can help preserve your OAS benefits. Since the clawback is based on your taxable net income, strategies that reduce your net income are most effective.
- Optimize RRSP/RRIF Withdrawals: Plan your withdrawals from Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) strategically. Large, lump-sum withdrawals can push you over the clawback threshold. Consider delaying withdrawals or spreading them over several years to manage your net income.
- Maximize TFSA Contributions: Withdrawals from a Tax-Free Savings Account (TFSA) are not considered taxable income and therefore do not affect your OAS benefits. Maximize contributions to a TFSA to shelter investment growth from triggering the clawback.
- Consider Pension Splitting: If you are part of a couple, you may be able to split eligible pension income with your spouse or common-law partner. This can lower the net income of the higher-earning partner, potentially reducing the OAS recovery tax.
- Use Capital Gains Strategically: Realizing capital gains can increase your net income. Consider the timing of selling investments to avoid triggering the clawback. You can also use capital losses to offset capital gains and lower your net income.
- File Form T1213 (OAS): If you expect your income to be significantly lower in the current year than the previous year, you can request a reduction in the recovery tax withheld from your OAS payments. This can be useful for those whose income has dropped significantly after retirement.
Conclusion
The OAS clawback, or recovery tax, is an important consideration for many Canadian retirees with higher incomes. The income level at which OAS is fully clawed back for 2025 is approximately $151,668 for those aged 65–74 and $157,490 for those 75 and older, based on 2024 net income. Proactive planning, such as optimizing withdrawals from registered accounts and leveraging TFSAs, can help mitigate its impact. For detailed information on the recovery tax, always consult the official Government of Canada website. By understanding the thresholds and implementing sound financial strategies, you can ensure your retirement income plan remains secure.
