Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.
Old age security, or OAS, is a taxable government pension you may receive in retirement. Benefits start between ages 65 and 70 and continue until death. Like many other government benefits, such as the child benefit, it is dependent upon your income. Generally, the more you make the less you receive. And if you make more than a certain amount, you stop getting the benefit altogether. That’s because benefits like these are meant only for those who truly need them.
OAS provides a maximum of $613.53 monthly, or $7362.36 annually in 2019. Low-income seniors may also be eligible for additional funds through the Guaranteed Income Supplement. In contrast, high-income seniors may see less OAS, or may not receive OAS at all.Finances can be complicated, we make them simple. And offer low fees and friendly financial advice along the way. Use our state of the art technology to get started investing investing or saving.
What is OAS clawback
The government starts reducing your OAS amount once you make over $75,910 in taxable income 2019—note that this figure changes annually according to inflation. This reduction is commonly referred to as a “clawback,” but is formally known as a “recovery tax.”
Your current global, taxable income determines if you will pay the recovery tax. If so, it will be deducted in the following year from your monthly OAS cheques.
Determining if you need to pay the recovery tax
For every taxable dollar you make over $75,910 your pension will be reduced by 15%. If you make over $123,386 you are not entitled to this pension at all.
The keyword here is “taxable” income—most gifts, inheritances, life insurance policy payouts, and TFSA withdrawals do not get added to your taxable income and will not affect your OAS. On the other hand, salaries, dividends, capital gains and RRSP withdrawals are taxable and could trigger a clawback.
Only about 5 percent of seniors receive reduced OAS pensions, and only 2 percent are deprived of it entirely.
Who is eligible for OAS
Unlike the Canada Pension Plan, neither you nor your employer pays into it, and it’s unrelated to your work history. Rather, taxpayers fund it. In order to be entitled to collect OAS, you must be a Canadian citizen or legal resident who has lived in Canada for at least 20 years after turning 18.
You don’t have to currently live in Canada to collect, as long as you meet the minimum residence requirements. You may also be eligible to collect if the country in which you live has a social security agreement with Canada. The other major eligibility factor for OAS is making under $123,386.
History of OAS
The government began concerning itself with supporting the elderly in 1927. The provinces paid British subjects over 70 years of age up to $20 a month. Seniors initially found it humiliating, invasive, and stigmatizing to get assistance.
After many decades of tinkering with the formula, we ended up with the OAS system we now enjoy. But the strain on the pension scheme is serious. The elderly are now living longer than ever before: up to 80 years old from 60 in the 1920s.
The huge cohort of baby boomers have started to retire and the number of Canadians over 65 is set to double by 2036. In response, former Prime Minister Stephen Harper raised the age you can start to collect OAS to 67 from 65, starting in 2023. But this decision was reversed by the subsequent government.
Considering the strain on taxpayers, questions have also been raised about whether today’s seniors even need so much financial support. Whereas in the 1970s, nearly 40 percent of the elderly lived in poverty, today it’s just 5 percent. From 1976 to 2014, senior families saw their median after-tax income rise steadily, up 66.7 percent to $54,500 from $32,700, in real dollars.
Seniors are now, well, rich. Canadians over 75 years old control $1 trillion worth of stocks, bonds, mutual funds and cash, or more than a third of all financial assets in the country. The average senior is now nine times wealthier than his millennial grandchild. Whereas seniors used to depend on public dollars to retire, they are increasingly depending on private income.
How OAS clawback is calculated
The calculation is fairly simple.
The government will deduct $0.15 of every dollar of worldwide taxable net income exceeding $75,910 for 2019. So simply subtract the clawback threshold from your total worldwide taxable income. Then multiply the sum by 0.15 and divide by 12.
The limit is $75,910
You make $80,000
$4090 * 0.15= $613
Therefore your annual OAS would be reduced by $613 annually, or $51.08 per month.
The government will do the math for you and send a letter detailing any clawbacks.
How to reduce your clawback
Since the government is using last year’s income to determine this year’s OAS payments, you may find yourself in a bit of a cash flow pickle if your income has drastically dropped from last year.
If you feel it’s unfair, you can request a reduction in your clawback by filing Form T1213.
There are a few other strategies available to reduce your clawback:
1. Defer OAS
You can choose to defer your OAS payments for up to five years, which will increase your pension amount when you do decide to take it. For example, you may decide you want to start getting OAS at 70 rather than 65. For every month OAS is deferred, your monthly payment will increase by 0.6 percent up to a maximum of 36% at age 70.
Plus, don’t forget that because of inflation, your OAS clawback threshold will rise over five years and thus will require more income to exceed it.
You may cease employment between 65 and 69, or take that time to sell large capital gains and withdraw RRSP funds so that you are under the clawback threshold when your turn 70.
2. Sell stocks the year before you collect
Since capital gains (outside of registered accounts) count as taxable income it may be prudent to realize some of them the year before you choose to collect OAS. Consult a qualified fee-only financial planner for advice on this strategy.
3. Give money to your spouse
Using your spouse to reduce your tax bill has a long and cherished history and hearkens back to the institution’s most fundamental motivation: an economic partnership.
4. Play around with your RRSP
Until now you’ve been deferring taxes by contributing diligently to your RRSP. But the time has now come to pay: Any withdrawals will be added to your income and be taxed at your marginal rate. If you take out enough money it may impact income-tested benefits like the OAS. Therefore, you need to plan withdrawals carefully.
Don’t take out more than the clawback threshold if you can live on less. You could even consider delaying OAS for five years while living off RRSP withdrawals.
And if you’re still contributing to your RRSP then consider saving up the deductions so that you can use them during the years you collect OAS to reduce your taxable income to avoid triggering a clawback.
If you’re in a low tax bracket now, consider switching RRSP contributions for TFSA contributions. Your money will still grow tax-free but the withdrawals are not added to your taxable income (because you’ve already been taxed on contributions).
5. Maximize deductions against your income
There are multiple ways to lower your taxable income while still building wealth, although the options narrow in retirement. One option we’ve already discussed is to contribute to RRSPs. Another is to write off interest on loans used to invest—this includes mortgage loans on investment properties and lines of credit used to buy stocks. Speak to a qualified professional accountant and fee only financial advisor for more information this strategy.
6. Use your holding company
This is one of the more complex maneuvers, and will probably be unhelpful to anyone who’s not a high earner. But since that’s the exact population that get hits with clawbacks, it’s important to bring up.
This tactic works best for those who have ceased employment and are now living off investment income like dividends, capital gains, and rental income.
You may, with the help of a very qualified tax professional and lawyer, want to move your investments into a corporation. This way, any taxable income will be attached to the corporation, and not to you personally.
If you need the income to live on, you can do the following:
Transfer assets into the corporation in exchange for an interest-free promissory note, which will also defer any capital gains. Basically you are offering to finance the company and it promises to pay you back at some point in the future.
The corporation now owes you money, which it can repay tax-free by giving you its investment income.