The Old Age Security (OAS) 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, private pension plans, Canada Pension Plan (CPP) and Old Age Security (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.
If your income exceeds a certain threshold, you may have to repay some of your OAS pension. This is called the Old Age Security Pension Recovery Tax (or OAS Clawback). The threshold amount changes each year and if your net world income exceeds the threshold amount ($79,054 for 2020), you will have to repay part or all of your OAS pension.
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. This amount would be recovered via a reduction of your OAS monthly payments. For more information on the threshold amounts for current and previous years and how to calculate your repayment, follow this link.
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 (RRSP) 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 Account (TFSA) 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.
Also, if your income exceeds the threshold but you anticipate having a significantly lower income next year, you may be able to skip your repayment obligation. To request a waiver, complete Form T1213(OAS) and send it to the CRA.