How to Avoid The Old Age Security (OAS) Clawback?

Old Age Security (OAS) is a monthly payment you are eligible to receive if you are 65 years of age or older. Unlike the Canada Pension Plan, you and your employer do not need to pay into the OAS credit, as it’s funded completely by Canadian taxpayers. Once you reach the age of 65, you will most likely be enrolled into the benefit by the Canada Revenue Agency, and they will notify you of your enrollment. In some cases, however, you might have to apply on your own. Your statement of Old Age Security is found on tax form T4a. 

To collect OAS, you need to be a Canadian citizen or a legal resident that has lived in Canada for a minimum of 20 years as an adult (over 18 years old).  As long as you meet that minimum requirement, you can still collect OAS if you are living abroad in your retirement. 

The amount of money you receive per month with this credit depends on your income. If you make more than a certain threshold, you will have to pay all or part of your OAS back, also known as the OAS clawback. 

What Is The OAS Clawback?

The OAS Clawback is also known as the Old Age Security Pension Recovery Tax. The clawback is in place to ensure government tax assistance truly goes to the people who need it. So, if you make over a certain income, it’s assumed that you might not be the most suitable recipient for OAS, and should have to pay it back. With the threshold changing every year, you will need to pay back 15 cents for every dollar of your income over the limit income that year. In addition, each dollar above the threshold incurs an additional 15% of tax on top of your regular tax rate, excluding inheritance, gifts, life insurance payouts, and tax-free savings account withdrawals. 

In 2020, the maximum amount was an annual, world income (income earned anywhere in the world) of $79,054. Seniors make more money than they did in the 1970s, which encouraged the government to consider the OAS Clawback. 

Check out the difference between a TFSA and a RRSP.

How Do You Calculate The OAS Clawback?

To calculate your repayment of OAS, you need to subtract the maximum threshold from your total world income. Then, you need to calculate 15% of that difference for repayment. For example:

So, with the above scenario, you would need to repay an annual 2,113.5 or monthly $176.125 that year. 

Check out these tax credits and deductions for seniors.

Do You Have To Repay The OAS Recovery Amount Right Away?

In general, the amount you have to pay back is assessed every year during tax season. As such, the amount you owe is paid back during the year after the income year. For example, if your income in 2021 exceeds the current threshold amount of $79,054, you’ll have to repay the amount starting July 2022 to June 2023.

How To Avoid The OAS Clawback?

Although the OAS Clawback was introduced to avoid excess credit for citizens who might not need it, the CRA isn’t able to assess everyone’s financial situation precisely. Even if the clawback has good intentions, it can cause financial strain on some senior citizens. Luckily, there are a few strategies to avoid the OAS clawback:

Split Your Income

One of the benefits of marriage is saving on taxes. If your spouse makes a lower income than yourself, you can transfer up to 50% of your pension to your spouse, which would dramatically decrease your overall income and put you under the threshold for the OAS Clawback. Check out the CRA’s website for more information on splitting your pension income with your spouse.

Here are some tax tips on filing your income tax return as a couple. 

Defer Your OAS

If you decrease your OAS payments, your pension amount will increase when you decide to start collecting it. So, if you wait an extra 3 years before collecting OAS (68 instead of 65), your monthly OAS payment will increase by 0.6% for every month you haven’t collected. It’s also important to note that with inflation rising every year, so will the limit threshold for the OAS clawback.

Are you living with a disability? Check out the disability tax credit.

Maximize Deductions on Your Taxes

Although the amount of money you can deduct from your income for taxes generally decreases in retirement, there are still opportunities to write off expenses. Discuss your finances with a professional to explore opportunities to deduct, and in turn, reduce your overall income. 

Here are some tax tips for low income earners. 

Withdraw From Your RRSP Earlier

Taking out money from your RRSP results in more income. Once you withdraw, you will need to pay tax on that money, and that income can take you over the limit for the OAS clawback. If you’re strategic with when you start to withdraw funds from your RRSP, you can avoid the OAS Clawback by not adding more income once you reach the age of 65. 

Use Your TFSA

Remember, income generated from interest on your tax-free savings account is not taxable. As you near the age for OAS eligibility, you might consider using funds from your TFSA to avoid increasing your income. 

Watch Your Capital Gains

Capital gains refer to the profit made from selling a property or investment. If you sell your house and make a profit when you’re 65, you will have to add the profit, or capital gains, to your income. This can take you over the OAS threshold, resulting in the clawback. Try to realize your capital gains before you turn 65 so that the income is not added during the time you’re eligible for OAS. 

Additional Reading

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Final Thoughts

Old Age Security payments can make a big difference when you aren’t generating any more income, or if your income dramatically decreases, after the age of 65. By closely examining your financial situation, you can make a few smart choices to lessen your chances of experiencing the OAS clawback.