The Old Age Security (OAS) clawback, also known as the OAS Recovery Tax, can significantly impact retirees with higher incomes. If your annual income exceeds a specific government-set threshold, your OAS payments may be reduced. For the most recent tax year, incomes over $90,977 are subject to a reduction of $0.15 for every dollar above this limit.
Retirees with total incomes of $149,000 or more may lose their entire annual OAS payment, which can amount to as much as $7,040. Understanding how the clawback works and the role of Canada Pension Plan (CPP) payments in your overall income is essential for effective retirement planning and maximizing your benefits.
What Is the OAS Clawback?
The OAS clawback is a mechanism that reduces OAS benefits for retirees whose net income exceeds the threshold. It is assessed annually based on the net income reported on your tax return, with the clawback amount deducted from OAS payments starting the following July.
CPP benefits are included in your net income, which means they can contribute to triggering the clawback. For instance, if you earn $80,000 from various sources and receive $20,000 in CPP benefits, your total income of $100,000 exceeds the clawback threshold, leading to a partial reduction in your OAS payments.
Strategies to Minimize or Avoid the OAS Clawback
Delay CPP Benefits
Postponing the start of your CPP benefits can help reduce your net income during retirement, potentially avoiding the clawback. While OAS benefits typically begin at age 65, you can delay CPP until age 70. Delaying CPP also increases your monthly benefits by 8.4% per year, providing larger payouts later.
Reduce Employment or Pension Income
If you continue to work or receive pension income in your 60s, scaling back work hours or opting for lower income distributions can help keep your net income below the clawback threshold. This strategy preserves more of your OAS benefits by minimizing taxable income.
Maximize Tax Deductions
Taking advantage of available tax deductions is another effective way to lower your net income. Common deductions include charitable donations, medical expenses exceeding 3% of net income, and other eligible expenses. Properly documenting and claiming these deductions can help mitigate the OAS clawback.
Contribute to an RRSP
Contributions to a Registered Retirement Savings Plan (RRSP) are tax-deductible, allowing you to reduce your net income for the year. By contributing within your allowable limit, you can lower your taxable income below the clawback threshold while deferring taxes on the contributions until withdrawal.
Practical Examples of OAS Clawback Impact
| Income Level (CAD) | Clawback Rate (15%) | Estimated OAS Clawback Amount |
|---|---|---|
| $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 | Complete OAS Reduction |
Additional Tools to Manage Income
Use Spousal Income Splitting
If you are married or in a common-law partnership, spousal income splitting can reduce your taxable income. Allocating a portion of your retirement income to your spouse can help you stay below the clawback threshold, especially if your spouse has a lower income.
Withdraw from a TFSA
Funds withdrawn from a Tax-Free Savings Account (TFSA) are not considered taxable income. Using your TFSA for retirement withdrawals instead of taxable accounts can prevent your income from surpassing the clawback threshold, preserving your OAS benefits.
Why Planning Matters
The OAS clawback can reduce your retirement income significantly, but strategic planning can help minimize its impact. Combining strategies such as delaying CPP benefits, reducing employment income, maximizing deductions, contributing to an RRSP, and employing income-splitting techniques allows retirees to manage their net income effectively.
Consulting a financial advisor to customize these approaches based on your unique financial circumstances can ensure a more secure retirement while keeping as much of your OAS benefit as possible.
