Higher-income seniors are often disappointed when their Old Age Security (OAS) benefit gets clawed back.
What is OAS?
OAS is a taxable monthly social security payment program available to most seniors aged 65 and older. Since the benefit is not based on employment history, it may be available even if a person has never worked in Canada.
Am I eligible for OAS?
In order for a person to be eligible for OAS pension, he or she must:
- be at least 65 years old;
- be a Canadian citizen or legal resident at the time the OAS application is approved; and
- have resided in Canada for at least 10 years since age 18, continuously and immediately before approval of the OAS pension.
If someone leaves Canada, are they still eligible for OAS?
Yes, as long as they meet the first two criteria above. With respect to the third point, however, instead of residing in Canada for 10 years since the age of 18, they would have had to reside in Canada for at least 20 years (cumulatively).
If an individual doesn’t qualify based on the criteria above, they may still be eligible for OAS if they lived in a country with a social security agreement with Canada, or they’ve contributed to the social security system in a country with which Canada has a social security agreement. Examples include the U.S., Germany, France and Australia.
Can I work while receiving OAS?
It is possible to work and receive OAS simultaneously, but the income earned may create a partial OAS benefit instead. The government applies the OAS recovery tax or clawback once a person’s net income (including employment and investment income) exceeds $73,756 (2017). The clawback is at a rate of 15% until OAS has been eliminated completely, which occurs once net income reaches $119,615 (2017).
How do I minimize OAS clawback?
If you have income near or above the threshold, review your T1 personal tax return in order to decipher the types of income you are reporting.
Consider these common OAS clawback reduction strategies:
If you need to supplement income, you can consider making withdrawals from a TFSA. TFSA withdrawals are not taxable and are not included in the taxpayer’s income, making them exempt from clawback.
Look at the types of investment income you are currently receiving. Do you have non-registered investments that are paying dividends? If yes, you may want to limit your exposure to dividend-producing investments or hold these investments in a registered account. OAS clawback is based on net income, which includes dividends received from Canadian corporations on a grossed-up basis. That gross-up increases net income and could expose you to OAS clawback.
If you are working and have income between $73,756 and $119,615, you may want to delay receiving your OAS until income is lower. This is a new option that allows seniors to delay OAS until sometime between age 65 and age 70. If you decide to delay OAS, you are able to increase your future monthly payments by 0.6% per month for every month you delay receiving OAS — to a maximum of 36% at age 70. If you are approaching 65 and are still earning income, consider your options.
Consider using corporate-class mutual funds within a non-registered account instead of mutual fund trusts, dividend-paying stocks or bonds. Corporate-class funds generally have lower distributions than their mutual fund trust equivalents. Making this change can help seniors who have sizeable non-registered investment portfolios invested in mutual fund trusts or other higher-taxed investments.
Consider basing RRIF withdrawals on the younger spouse’s age to reduce the amount that is required to be withdrawn on an annual basis.
Check if you are eligible to income split your RRIF, CPP or pension income with your spouse or common-law partner. If you are, doing so will help reduce net income and hopefully avoid or reduce clawback.
OAS is a hot topic for many seniors, and you may be impacted by the clawback. Take the opportunity to review your investments to determine if your current income mix is optimal. For a free review of your retirement income planning please get in touch.
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