OAS clawback is something that many Canadians know about, but don’t know the details.
All you know is that the government can “claw back” the benefits you receive.
Does that mean they take it away forever?
Do they take all of it or just some of it?
How do I avoid it?
In this article, we explore everything related to OAS clawback.
What is OAS Clawback?
OAS clawback is when the money you receive from OAS is “clawed back” or more simply, the government takes it back.
This occurs when your income is too high.
The average OAS payment is $698 each month. But if your income was too high in the previous tax year the government can reduce this benefit to $600 per month. Or if you had a really high income, you could potentially receive nothing from OAS.
The amount of OAS clawback applied is dependent on a specific formula.
How Much Income Can I receive before my OAS is clawed back?
OAS clawback begins when your gross annual income is above $86,912.
You can get this information directly from the Canadian Government’s website
For each dollar of income above $86,912, your OAS benefits are reduced by 15%.
And if you are receiving more than $142,428 of income your entire OAS payment will be clawed back and you will receive no money from OAS.
Is OAS clawback calculated every year?
If your income was above the OAS clawback threshold in the previous year, then your OAS clawback amount will be applied to next year’s OAS payments.
You don’t have to pay the money back from your bank account.
Rather the amount of OAS clawback is deducted from your monthly payments for the following year.
Can I requalify for full OAS payments?
Yes, you can.
Just because you had OAS clawed back in one year, does not mean that it will be clawed back every year going forward.
Each year the government will do the OAS clawback calculation, so it is dependent on the most recent year’s income.
In 2023 you could trigger OAS clawback, meaning your 2024 payments will be reduced.
But in 2024 if your income was below the OAS clawback threshold you would begin receiving full OAS payments in 2025.
How to Avoid OAS Clawback?
To avoid OAS clawback the solutions all require you to reduce your taxable income.
There are several ways to do this, such as:
- Delaying your OAS Payments
- Delaying your CPP payments
- Spreading capital gains over multiple years
- Focusing on tax-efficient investments
- Avoid mutual fund purchases near the end of the year
- Income splitting
Delay your OAS payments
If you are still working at 65, or expect to have unusually high income years then it may be better to delay your OAS payments.
By delaying your OAS payments, the value of your OAS will increase by 0.6% each month (or 7.2% annually) if you delay receiving your OAS after age 65.
This is a win-win situation because the OAS you would be receiving at 65 will not be clawed back and when you stop working and have a lower income your OAS benefits will be higher.
Delay your CPP Payments
Similar to delaying your OAS payments you can also delay receipt of your CPP payments.
If you’re going to have a higher income year at 65, you can always delay receiving CPP until later which will reduce your income.
By doing this you are also increasing your future CPP benefits, another win-win scenario.
By delaying your CPP payments past age 65 the CPP payment will increase by 0.7% per month or 8.4% annually.
TFSA Contributions
If you have room in your TFSA to make contributions you should be utilizing it.
When you have investments in a non-registered account any dividends, interest, or capital gains are added to your income. This investment income can potentially raise your income too much resulting in OAS clawback.
By moving funds that are in non-registered accounts into a TFSA you’ll avoid reporting the investment income on your tax return.
This does two things
- It will help you avoid OAS clawback
- You won’t pay income tax on the investment income
Spread Capital Gains Over Multiple Years
If you have a large capital gain, say on a stock or mutual fund investment, it may be better to trigger the capital gain over two calendar years.
If you have a $50,000 gain on a stock you want to sell if you sell it all in one year you’ll have to report $25,000 of income on your tax return
- 50% of Capital Gains must be reported as income ($50,000 / 2 = $25,000)
If you sell the position over two calendar years you’ll still have to report the full $25,000 as income, but it will be split up as $12,500 in year 1 and $12,500 in year 2.
Splitting the capital gains up over multiple years will reduce the income you report and can avoid OAS clawback.
Focus on Tax-Efficient Investments
If you cannot invest all your money in TFSAs and RRSPs you will have to invest your money using non-registered accounts. These are investment accounts that are not sheltered from tax, so you want to focus on investments that are most favourable from a tax perspective.
From most tax efficient to least tax efficient
- Capital Gains
- Capital gains refers to growth in an investment. If you buy a stock at $10 and you sell at $15, you just produced a $5 capital gain.
- Only half of the capital gain you received is added to your income, in our above example you would have to report $2.50 of income, even though you made $5.
- Dividends
- Dividends are in the middle, between capital gains and interested. Dividends are paid from companies that have excess profits and want to distrubute those profits to shareholders.
- Interest
- Interest is the least tax efficient investment income you can receive. Interest is usually paid on any type of loan, such as GICs, Mortgages and Bonds.
- While there is nothing wrong with these types of investments you want to ensure that you’re owning as much of these investments in accounts where tax is sheltered, like your TFSA and RRSP.
There’s quite a bit of detail above – but the takeaway is that you should focus on owning investments that produce capital gains and dividends in your non-registered accounts. And own investments that pay interest in your TFSA and RRSP.
Avoid Purchasing Mutual Funds at the end of the year
Mutual funds own a variety of investments and throughout the year the manager of the fund is likely changing what investments are owned. Which leads to capital gains.
It’s also likely that throughout the year the investments within the mutual fund have paid dividends are interest.
The problem with mutual funds is that regardless of when you made the purchase you are responsible for the entire year’s worth of taxable activity.
So if you purchased a mutual fund in December, you will have to declare taxable events that occurred in the fund in February. Even though you did not benefit from those dividends or capital gains that occurred within the fund.
For funds that generate a large amount of taxable activity that can result in an unexpected rise in your reported income which could subject you to OAS clawback.
If you are planning to make investments in a mutual fund, try to avoid doing so in the last quarter of the year.
Income Splitting
Income splitting is a great strategy to reduce your taxable income. This can be used for pensions received from
- Canada Pension Plan
- RRIF withdrawals
- LIF withdrawals
- Registered Pension Plans through work
If one spouse had a pension of $40,000 per year and the other spouse had no pension. Up to half of the $40,000 of pension income could be put on the other spouse’s tax return. Resulting in each of them reporting $20,000 of income.
This not only will result in less income tax, but it will reduce your income for OAS purposes.