There are many income benefit programs available to Canadians in retirement. Many Canadians look forward to receiving benefits from the government when they retire. One such retirement income for Canadians is the Old Age Security (OAS) program.
If you are 65 years and above and have lived in Canada as a citizen or permanent resident for at least 40 years after 18, you can receive full OAS benefits up to $648.67 per month from the general government reserve.
However, depending on the amount of income you make, the Canadian Government can claw back some of your money. This is referred to as Recovery Tax or OAS clawback. So, the more you make, the less you will receive.
If your taxable income is more than $79,054, the government starts reducing your OAS amount by 15%. So, you are taxed 15% from your OAS benefits for every dollar that exceeds the threshold. If your income exceeds $133,141, you may stop receiving OAS benefits.
Annoying right? I am sure you hate the idea of having your OAS clawed back. In this article, I will show you how to minimize OAS clawback strategically.
Check out these ten strategies you can apply to minimize or avoid OAS clawbacks as a higher-income retiree.
Pension Income Splitting
When one partner earns significantly more or less, pension income splitting may be very beneficial. You can divide specific forms of income during retirement.
Because OAS is an individual benefit, sharing taxable income can help one partner lower their income and reduce OAS clawbacks.
For example, if you are a high net worth individual and you have about $100,000 in eligible retirement income, and your spouse earns about $42,000 in retirement income, then you would be subject to OAS clawback unless you do pension income splitting with your partner.
Pension income splitting will then provide you an opportunity to reduce the overall tax burden of your family simply by moving your eligible pension income from you to your spouse who is in a lower tax bracket.
To do this, you would “transfer” about $22,000 to him, so that your bracket will fall to $78,000, while his income will increase to $64,000 which brings both of you below the OAS clawback threshold, allowing you to receive full OAS benefits.
Even though we used the word transfer, you’re not transferring your investments perse. You are simply splitting your income through a joint election on each spouse/common-law partner’s tax returns each tax year.
You would continue to receive your benefits and pension, but during the tax season, both of you can use Form T1032 to jointly elect how much of the pension income you are splitting.
However, not all income can be split. The following are eligible incomes that can be split:
- Lifetime annuity payments from an RPP, RRSP, DPSP, and Retirement Compensation Arrangement (RCA)
- Taxable foreign pensions
- Payments from an RRIF, LIF, LRIF, PRIF
- Interest from a non-Registered Life Annuity
- Interest from a Guaranteed Interest Annuity (GIA)
The following are incomes that cannot be split:
- Any foreign source pension income that is tax-free in Canada because of a tax treaty that entitles you to claim a deduction
- Income from a US IRA
- Old age security (OAS), Guaranteed income supplement (GIS)
- Canada Pension Plan (CPP), Quebec Pension Plan (QPP)
Tax-Free Savings Accounts (TFSA) are an excellent way to grow your money without paying taxes. If you haven’t yet reached your contribution limit, increasing your TFSA investments will help you avoid OAS clawbacks.
TFSA investments will grow tax-free and tax-free when they are withdrawn. This means that OAS clawbacks will not be triggered now or in the future.
Each year, as a new contribution room becomes available, you can move investments into your TFSA. Though you may face a high OAS clawback now, but as you put money into your TFSA, you may reduce the clawback in the future.
Contribute to Your Spouse’s RRSP
If your spouse or common-law partner is younger than you, you can contribute to the RRSP when you do not have any contribution room available in your RRSP. This will also help to lower your taxable income.
You can reduce the risk of OAS clawback by deferring OAS until you reach the age of 70. This strategy is beneficial if your income level between the time you are 65 years and 70 years will push you into the income threshold of OAS clawback.
This strategy appears to be simple, but yet very efficient. In the immediate time, you will prevent OAS clawback, and in the future, you can even potentially earn more money in OAS benefits.
This is true because every month you delay your OAS benefits, you get a 0.6% increase. Therefore, delaying your OAS benefits for five years until age 70 will increase your monthly payout by 36%.
But again, this strategy will only make sense if you expect to have a lot of income between 65 years and 70 years.
Withdraw From Your RRSP Before 65
If you have periods with low taxable income before you turn 65 years and you think your retirement income will still be higher than the OAS threshold amount after retirement, then you may consider withdrawing some of your money from the RRSP accounts.
Registered Retirement Savings Plan (RRSP) only defers taxes. At some point, you will have to pay those taxes when you want to withdraw.
Taking your money from the RRSP account now could lower your income when you start collecting your OAS benefit and may help to maximize the OAS benefit you qualify for.
This strategy is very tricky, and should only be applied after professional advice. But if you are confident that this strategy is worth it for you, then you may withdraw part of your RRSP before starting OAS, and you can put the money into a TFSA to continue growing tax-free.
Leverage Your Investing
Borrowing your money out to investors so you can deduct the interest can be another strategy. It significantly reduces your net income, but leveraging comes with its own risk. Be careful.
Use Younger Spouse Age for RRIF
If you are 71 years of age and your spouse is way younger than you, you can use your spouse’s age to calculate your minimum RRIF payments. It lowers your net income and reduces your mandatory annual withdrawal requirements.
Contribute to Your RRSP After Retirement
Until you are 71 years of age, you can still contribute to your RRSP account if some contribution room is available. If your income is higher at 65 to 70 years, this strategy could benefit you. Contributing to your RRSP can lower your net income for OAS calculations.
Evaluate The Income in Your Non-registered Account
Interests from GICs and some other savings are fully taxable. Be mindful of investing in interest-only investments. A considerable percentage of the income will be included in your income calculation and could take you over the OAS threshold.
Plan Large Capital Sales (Cottage, Vacation Home, Stocks, etc.)
Selling your significant capital assets is another approach for avoiding OAS clawbacks. Capital assets may include a cottage, a vacation home, or stocks. If sold after OAS has begun, this may result in more OAS clawbacks that could have been avoided.
When a sale triggers capital gains, it will increase the taxable income by half of the capital gain (this 50% is called the inclusion rate).
If OAS payments have started and income is above the clawback threshold, this rise in taxable income will also trigger OAS clawbacks.
Final Thoughts on OAS Clawback
OAS benefit is free money from the Canadian government, so it would be great to receive it without worrying about OAS clawbacks.
If you are looking for ways to reduce your taxable income after the age of 65 to come under the OAS threshold, the strategies in this article are a good start for you.
However, no two situations are the same, and therefore these strategies are not meant to be a one-size-fits-all solution. In fact, it might even appear as if some strategies are conflicting, for example, points 5 and 8.
That is because different situations call for different approaches but in any case, don’t make any move without consulting a tax professional.
As a matter of fact, I believe the easiest to execute are the Pension Income Splitting Strategy and the TFSA strategy.
Pension Income Splitting will for sure help you minimize and avoid an OAS clawback, but in all, try to seek professional advice before you take any serious decisions.
FAQs on OAS Clawback
What is the threshold of OAS Clawback?
The current income threshold for OAS clawback is $79,054 for the 2021 income year.
Can you lose your OAS?
Yes. When your income exceeds $131,141, you may lose your OAS benefits.
Is the OAS clawback based on family income?
No, OAS clawbacks are based on individual earnings, not family earnings. If you earn more than $79,054 in 2022, you will pay a 15% tax on your OAS payments for every dollar you make beyond that amount.
When did OAS clawback start?
OAS clawback, or the repayment of OAS benefits, began in 1989.
What is the OAS clawback calculator?
Old Age Security (OAS) payment rates are reviewed in January, April, July, and October. This is done to ensure they reflect the cost of living increases, as measured by the Consumer Price Index (CPI).
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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