Financial security is important at any stage of life, especially retirement. One of the financial benefits Canadian retirees rely on is Old Age Security (OAS). However, there is a clawback to consider which may reduce the amount of OAS money you receive. So, what is the clawback for OAS? In simple terms, the OAS clawback is a tax that applies when recipients of the benefit surpass a certain annual income threshold. Read on to learn more about the OAS clawback, how it might affect you and what amount of tax you can expect to pay.
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The Old Age Security (OAS) pension is a government-provided monthly income for seniors. To be eligible for the OAS pension, individuals must be 65 years of age or older and legal residents of Canada. The OAS pension is not means-tested, which means that it is not based on the applicant’s income or assets. Rather, your age and residency are the primary factors that determine your eligibility.
OAS is not meant to be a full source of income for retirees. Instead, it is meant to supplement your income. Retirees and seniors often claim Canada Pension Plan (CPP), employment pensions, make withdrawals from Registered Retirement Savings Plans (RRSPs) and more to support the cost of living during retirement.
Related Reading: Old Age Security Canada
The Old Age Security (OAS) clawback, also known as the OAS pension recovery tax, is a tax that is applied to individuals whose net annual income is above a certain threshold. For 2022, the threshold amount is $81,761. Your net annual income amount can be found on line 234 of your personal income tax return.
The OAS clawback tax is equal to 15% of the difference between the threshold amount and the individual’s actual income. This tax helps to ensure only those who truly need the OAS pension receive it, and that those who are able to support themselves do not receive benefits they are not entitled to. Thus, seniors with higher incomes will have a portion of their OAS pension clawed back by the Canadian government. The OAS clawback is an important part of Canada’s social safety net, and helps to ensure that the system is sustainable for future generations.
Related Reading: CPP vs OAS: What are the differences?
The clawback amount for OAS in 2022 is $81,761. The minimum income recovery threshold for the 2022 tax year is $81,761 and the maximum income threshold is $133,141. The clawback rate is 15% on the portion of your income that exceeds the minimum threshold. The clawback amount is applied to your OAS pension payment in July 2023. If you are a resident of Canada, you are required to pay Canadian income taxes on your OAS pension.
What is the threshold for OAS clawback?
Below is a table with more information about the OAS clawback thresholds and limits:
|Recovery tax period||Income year||Minimum income recovery threshold||Maximum income recovery threshold|
|July 2021 to June 2022||2020||$79,054||$128,149|
|July 2022 to June 2023||2021||$79,845||$129,757|
|July 2023 to June 2024||2022||$81,761||$133,141|
As shown, the clawback threshold is highest in 2020 at $79,054 and decreases slightly to $79,845 in 2021 and $81,761 in 2022. In other words, as the threshold goes up, you can earn a higher income without OAS clawback repercussions. The amount of the clawback is calculated using a sliding scale; those with higher incomes owing more. This means that if your total income exceeds the threshold for a given year, you will be required to repay some or all of your OAS benefits. As such, it is important to be aware of the clawback thresholds before applying for OAS benefits.
If your net income for 2022 was $85,000, you would exceed the minimum income threshold of $81,761 by $3,239. Your clawback would be 15% of that amount, which comes out to $485.85 annually or $40.49 monthly from July 2023 to June 2024. The clawback will result in you losing $40.49 of your monthly OAS.
Related Reading: How Much Money Do I Need to Retire in Canada?
OAS clawbacks can be costly for seniors, but there are a few ways to get around them. Below are some tips and tricks to avoid OAS clawbacks:
- Split eligible retirement income with a spouse or common-law partner, as this can help to reduce overall taxable income.
- You can withdraw money from your tax-free saving account (TFSA) at any time, for any reason. With TFSA, you are not required to pay any taxes on your withdrawals and they will not be counted as part of your income.
- By taking your OAS pension later, you can opt to begin receiving it when you’re older than 65 and your income is lower.
- Basing your Registered Retirement Income Fund (RRIF) withdrawals on the age of the younger spouse helps you decrease how much you are required to withdraw each year.
- Invest less in dividend-producing projects or hold them in a registered account.
- Draw money out of your RRSP before you turn 65. Because RRSPs only delay taxes, withdrawing from them earlier could lower the amount of income you get when you start collecting OAS pension payments.
- Control your income through RRSP withdrawals. You can keep your income lower this way so you don’t exceed the OAS clawback threshold.
- Invest by loaning money to earn interest, which is deductible and lowers your taxable net income.
Related Reading: What are the Best Retirement Plans?
OAS Clawback: Final Thoughts
The clawback is an important part of the Old Age Security system in Canada. It helps to ensure that people who have been receiving benefits for a long time do not end up with a higher income than those who have never received benefits. The clawback also helps to prevent people from becoming reliant on the government for their income. Lastly, it prevents people with higher incomes from unfairly benefiting from the OAS benefits when individuals with lower incomes could benefit more.
For individuals receiving OAS payments, it is important to understand your rights and responsibilities when it comes to clawbacks. If you have any questions about how clawbacks may affect you, please consult with an experienced professional or financial advisor.
Read More: Is OAS Taxable?