The Old Age Security pension is a monthly payment from the Government of Canada available to most Canadians who are 65 years of age and older. Many Canadians have a retirement plan that includes savings, investments and OAS. However, depending on how much income you make, the government could claw back the amounts that are paid to you. The amount of the pension is adjusted each year to keep up with inflation.
OAS starts when you turn 65 years old. You can qualify regardless of your employment history, as it is not a determining factor. If you are living in Canada at the time of your OAS application and have resided in the country for at least 10 years after turning 18, you should qualify. If you live outside of Canada, but were a legal resident before leaving and lived in the country for at least 20 years after turning 18, you should also qualify. There are other scenarios that allow you to qualify as well, as Canada has certain social security agreements with other countries.
While the Canada Revenue Agency uses the term “OAS recovery tax,” it is commonly known as “OAS clawback.” If your world income exceeds a certain amount for the year, you are required to repay some or all of the OAS pension you have received. For each dollar of income above the threshold, your OAS pension is reduced by 15 cents. To look at it another way, each dollar you earn above the threshold is actually incurring an additional 15 percent tax on top of your current rates. For 2015, the income threshold is $72,809. If your income in 2015 was $80,000, for example, the $7,191 of income over the threshold would require a repayment of $1,078.65. This amount would be recovered via a reduction of your OAS monthly payments. For the period of July 2016 – June 2017, your monthly OAS benefit would be reduced by $89.89/month.
Limiting OAS Clawback
There are a few strategies you can implement to reduce clawback amounts:
- Split your pension with your spouse. If your spouse has a lower income, you can transfer up to 50 percent to your spouse, which should reduce your overall income. This could also include a Registered Retirement Income Fund and annuity income.
- Dip into your Registered Retirement Savings Plan before you turn 65. An RRSP is only a tax deferral, meaning that at some point, you’ll have to pay those taxes. Consider taking funds out before reaching the age of 65 so you do not lose the OAS.
- Use your tax-free savings accounts to generate investment income, which is non-taxable and would not count towards your net income.
- Interest on funds borrowed to earn investment income can be deducted and could reduce your net income.
- Watch for capital gains. If you are planning a sale of an asset that could trigger large capital gains, consider selling it before you turn 65.
The OAS is reviewed each year. If you earn too much in one year, you might be able to get it the following year depending on your income. If you were to have your OAS clawed back, there are hardship provisions under the CRA. You can ask the CRA to review your specific situation for relief.
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