When approaching retirement, most Canadians begin to focus on where their retirement income will come from. One of the programs that leads to confusion is the Old Age Security (OAS) benefit, particularly when it gets clawed back.
Here are the answers, to the most common questions about OAS reductions, and strategies to help avoid the claw back in the first place.
WHAT IS OAS?
OAS is a taxable, monthly, social security payment program available to most seniors aged 65 and older. Since the benefit is not based on employment history, it may be available even if a person has never worked in Canada.
AM I ELIGIBLE FOR OAS?
In order for a person to be eligible for OAS pension, he or she must:
- be at least 65 years old;
- be a Canadian citizen or legal resident at the time the OAS application is approved; and
- have resided in Canada for at least 10 years since age 18, continuously and immediately before approval of the OAS pension.
IF SOMEONE LEAVES CANADA, ARE THEY STILL ELIGIBLE FOR OAS?
Yes; as long as they meet the first two criteria above. With respect to the third point, however, instead of residing in Canada for 10 years since the age of 18, they would have had to reside in Canada for at least 20 years (cumulatively).
If an individual doesn’t qualify based on the criteria above, they may still be eligible for OAS if they lived in a country with a social security agreement with Canada, or they’ve contributed to the social security system in a country with which Canada has a social security agreement. Examples include the U.S., Germany, France and Australia.
CAN I WORK WHILE RECEIVING OAS?
It is possible to work and receive OAS simultaneously but the income earned may create a reduced OAS benefit. The government applies the OAS recovery tax, or claw back, once a person’s net income (including employment and investment income) exceeds $73,756 (2017). The claw back is at a rate of 15% until OAS has been eliminated completely, which occurs once net income reaches $119,615 (2017).
HOW DO I MINIMIZE OAS CLAWBACK?
If you have income near or above the threshold, use your T1 personal tax return in order to decipher the types of income you are needing to report. Consider these common OAS claw back reduction strategies:
- If you need to supplement income, you can consider making withdrawals from a TFSA. TFSA withdrawals are not taxable and are not included in a taxpayer’s income, making them exempt from claw back.
- If you are working and have income between $73,756 and $119,615, you may want to delay receiving your OAS until income is lower. This is a new option that allows seniors to delay OAS until sometime between age 65 and age 70. If individuals decide to delay OAS, they are able to increase their future monthly payments by 0.6% per month for every month they delay receiving OAS — to a maximum of 36% at age 70. If you are approaching 65 and are still earning income, be sure to understand your options.
- Consider using corporate-class mutual funds within a non-registered account instead of mutual fund trusts, dividend-paying stocks or bonds. Corporate-class funds generally have lower distributions than their mutual fund trust equivalents. Making this change can help seniors who have sizeable non-registered investment portfolios invested in mutual fund trusts or other higher-taxed investments
- Consider basing RRIF withdrawals on the younger spouse’s age to reduce the amount that is required to be withdrawn on an annual basis.
- Find out if you are eligible to income split your RRIF, CPP or pension income with your spouse or common-law partner. If you are, doing so will help reduce net income and hopefully avoid or reduce claw back.
OAS is a very complicated and important part of retirement planning for most Canadians. Knowing the facts and making appropriate adjustments to your financial plan can significantly reduce or even eliminate the OAS claw back.