What is the Old Age Security (OAS) Clawback?
Officially called the OAS recovery tax, the clawback is a repayment mechanism for high-income seniors receiving Old Age Security. Once your net world income exceeds a government-set threshold for the tax year, a portion of your OAS benefit must be repaid at a rate of 15 cents for every dollar of income over the threshold. For example, for the 2024 tax year, the threshold was \$90,997.
Strategic income management to minimize the clawback
Managing your net income (Line 23400 on your tax return) is crucial to reduce the OAS clawback, requiring proactive planning.
Maximize your Tax-Free Savings Account (TFSA)
TFSA withdrawals are not taxable income and do not factor into the OAS clawback calculation, making them a powerful tool for generating tax-free retirement income.
Use pension income splitting
Pension splitting allows couples to transfer up to 50% of eligible pension income to the lower-income spouse, potentially lowering taxable income below the clawback threshold. This is effective for defined benefit pensions and RRIF withdrawals (at age 65+).
Optimize your investment income
Consider investments that generate capital gains over interest income in non-registered accounts, as only 50% of capital gains are taxable, offering better tax efficiency.
Delay your OAS pension
Delaying OAS payments until age 70 increases your monthly benefit by up to 36%. This allows you to potentially receive a larger pension at a time when your taxable income may be lower, reducing the impact of the clawback.
Manage Registered Retirement Income Fund (RRIF) withdrawals
RRIF withdrawals are taxable and can trigger the clawback. Strategies include delaying conversion from an RRSP, making strategic withdrawals in lower-income years, or basing minimum withdrawals on a younger spouse's age.
Consider the timing of significant income events
Plan major taxable events, like selling assets, for years when your overall taxable income is lower, ideally before age 65.
Comparison of income sources and the OAS clawback
| Income Source | Impact on Taxable Income (Approx.) | Effect on OAS Clawback |
|---|---|---|
| TFSA Withdrawals | 0% | No effect |
| Capital Gains | 50% | Lower impact |
| Eligible Dividends | 138% (Gross-up applied) | Moderate to high impact |
| Interest Income | 100% | High impact |
| RRIF Withdrawals | 100% | High impact |
| CPP/Private Pensions | 100% | High impact |
Conclusion
Avoiding the OAS clawback requires strategic financial planning and understanding how various income sources are taxed. By utilizing tax-efficient accounts, optimizing investments, and coordinating income with a spouse, retirees can effectively minimize or avoid the clawback and protect their benefits. Consulting a financial advisor is recommended. For more details on the OAS recovery tax, visit the official Canada.ca page.
Additional considerations for avoiding the clawback
- Charitable Donations: Donating appreciated securities can eliminate capital gains tax.
- Loss Carryforwards: Capital losses can offset capital gains, but do not directly reduce income for the clawback calculation.
- Form T1213: If your income decreases significantly, you can file this form with the CRA to request a reduction in the recovery tax withheld from your OAS payments.
