The Old Age Security (OAS) pension is a welcome gift from the government to many seniors. But with the clawback that reduces or eliminates payments, it also seemingly discriminates against those who have a healthy retirement income.
Do you really need OAS?
If you’re a pensioner who makes more than the allowed net income for the year, you will be required, under the clawback, to pay back part or all of this bonus.
OAS is intended to help seniors who need financial support. According to Statistics Canada, the average income for senior couples was $52,300 or $25,000 for unattached seniors. If you exceed the annual threshold, you are likely in a good financial place.
Still, it’s hard not to feel like you’re being punished for having a higher retirement income. However, you must remember that OAS is not funded by you through employment. OAS is completely funded by tax revenues, which means everyone who pays taxes has contributed.
The OAS clawback — or recovery tax — kicks in when your income reaches a threshold (around $72 000/year which increases annually) and is completely eliminated when your net income reaches about $118,000/year (which also increases annually). So if have healthy RRSPs, you might end up in a higher tax bracket, which will result in the OAS clawback (for the most up to date numbers, click here).
For each dollar over the threshold, you pay 15% of the difference. Recovery payments are deducted over a 12-month period, which will save you from having to return the entire amount at tax time. The clawback amounts are repaid through withholdings from your monthly OAS payments.
The OAS clawback applies to you if:
- your annual income for exceeds the annual threshold
- you live outside Canada and are paying a non-resident tax on Canadian pensions of more than 25%
Are there any clawback loopholes?
If your income is too high, you can defer OAS payments for up to five years. This will allow for higher monthly payments when you start to receive your pension. Using this deferral strategy benefits those who might be faced with the OAS clawback.
Additional ways of deferring OAS payments
- Income Splitting: You can elect to transfer up to 50% of eligible pension — a pension plan or annuity payments — to the spouse with the lower income. This can significantly decrease recovery payments or help you avoid them altogether. Income splitting also applies to the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP).
- Invest in a Tax-Free Savings Account (TFSA). Funds in a TFSAs are completely tax-free and a great strategy to reduce or eliminate OAS clawbacks.