If you’re receiving Canada Pension Plan (CPP) benefits or are planning to start receiving them soon, you might be concerned about the Old Age Security (OAS) clawback. The OAS clawback, also known as the OAS Recovery Tax, reduces your OAS payments if your income exceeds a certain threshold set by the government. For the most recent tax year, the clawback applies to any income above $90,977, with a reduction of $0.15 for every dollar over that limit.
In simple terms, for every $1,000 you earn above the threshold, you lose $150 in OAS benefits. If your income hits $149,000 or more, you could lose your entire OAS benefit, which can be up to $7,040 per year. The clawback is assessed based on your annual income as reported in your tax return, and any reduction in OAS is applied starting in July of the following year.
To make the most of your retirement income, it’s essential to understand how the OAS clawback works and how CPP payments factor into your total income. In this guide, we’ll walk through practical strategies to help you minimize or avoid the OAS clawback entirely.
What is the OAS Clawback?
The OAS clawback is a tax mechanism that reduces the amount of Old Age Security (OAS) payments you receive based on your net income. If your income surpasses a government-established threshold, your OAS payments will be reduced accordingly, eventually reaching a full reduction if your income exceeds a certain level.
One key factor in calculating your net income is the Canada Pension Plan (CPP) benefits. This means that any CPP payments you receive are included when determining whether you’re at risk for an OAS clawback. For example, if you have $80,000 in income from other sources and $20,000 from CPP, your total income of $100,000 exceeds the clawback threshold and will result in a partial reduction of your OAS benefits.
Strategies to Minimize or Avoid the OAS Clawback
While the OAS clawback can be a concern for many retirees, there are several strategies you can employ to reduce or even avoid it entirely. Here are some effective ways to manage your income and keep your OAS benefits intact:
1. Delay Taking CPP Benefits
One of the most effective ways to reduce your net income and avoid the OAS clawback is to delay taking your CPP benefits. While OAS payments typically begin at age 65, you have the option to delay CPP until age 70. By postponing your CPP, you can keep your income lower in the earlier years of retirement, which could prevent or minimize the clawback.
Additionally, delaying your CPP increases the monthly benefits you will eventually receive. The amount of your CPP benefit increases by 8.4% each year you delay taking it after age 65, which means you’ll receive higher payments when you decide to start your CPP.
2. Reduce Employment or Pension Income
If you’re still working during your retirement or receiving other pension income, you might consider reducing your hours or taking a smaller pension payout to lower your overall income. Staying below the clawback threshold allows you to keep your full OAS payments.
For example, if you can scale back your employment or take a smaller pension income, it could help you maintain a net income that keeps you below the $90,977 threshold, allowing you to avoid the OAS clawback.
3. Maximize Tax Deductions
Another effective way to reduce your net income is to make the most of available tax deductions. Common deductions include medical expenses, charitable donations, and other eligible expenses. By claiming these deductions, you can reduce your taxable income, which may lower your total income below the clawback threshold.
For instance, if you incur medical expenses that exceed 3% of your net income or make donations to registered charities, you can use these expenses to reduce your income. Properly documenting these expenses and ensuring you claim all eligible deductions can make a significant difference when it comes time to calculate your OAS.
4. Contribute to an RRSP
Contributing to a Registered Retirement Savings Plan (RRSP) is another effective way to lower your taxable income and reduce your exposure to the OAS clawback. RRSP contributions are tax-deductible, which means that the more you contribute, the lower your taxable income will be for the year.
By making RRSP contributions, you could bring your income below the clawback threshold. Additionally, RRSPs offer the benefit of tax deferral, which allows your savings to grow without being taxed until you withdraw the funds in retirement.
Example of OAS Clawback at Different Income Levels
Here’s a look at how the OAS clawback works at various income levels:
| Income Level (CAD) | Clawback Rate | Approx. OAS Clawback |
|---|---|---|
| $90,977 – $100,000 | 15% | $1,350 |
| $100,001 – $110,000 | 15% | $2,850 |
| $130,000 – $140,000 | 15% | $7,350 |
| $149,000+ | Full Clawback | Full OAS Reduction |
As shown in the table, income exceeding $90,977 results in a 15% clawback, with the clawback amount increasing as income rises. Once your income reaches $149,000 or more, you lose the entire OAS benefit.
Additional Tips to Reduce the OAS Clawback
1. Spousal Income Splitting
If you’re married or in a common-law relationship, income splitting between spouses can help reduce your household’s total taxable income. By allocating some of your retirement income to a spouse who has a lower income, you can reduce your taxable income and potentially keep your combined income below the OAS clawback threshold.
2. Tax-Free Savings Account (TFSA) Withdrawals
Unlike RRSP withdrawals, which are taxable, withdrawals from a Tax-Free Savings Account (TFSA) do not count as taxable income. Therefore, if you need extra income in retirement, withdrawing funds from your TFSA can help you avoid increasing your taxable income and triggering the OAS clawback. Having a well-funded TFSA can give you more flexibility in managing your income without impacting your OAS payments.
Conclusion
The OAS clawback can significantly reduce your retirement income, but with careful planning and proactive strategies, you can minimize or even avoid it. By delaying CPP benefits, reducing employment or pension income, maximizing tax deductions, contributing to an RRSP, and using income-splitting strategies, you can help keep more of your OAS benefit.
To ensure that you’re making the best decisions for your financial situation, it’s wise to consult with a financial advisor. Retirement planning is highly individualized, and a tailored approach will help you make the most of your OAS and other retirement benefits. By taking proactive steps now, you can better manage your income and enjoy a more financially secure retirement.
