When receiving Canada Pension Plan (CPP) benefits or preparing to apply, concerns about the Old Age Security (OAS) clawback often arise. This clawback reduces your OAS payments if your annual income surpasses a government-set threshold. For the most recent tax year, the threshold stands at $90,977, with a 15% reduction applied to every dollar earned beyond this limit.
This reduction equates to a loss of $150 in OAS benefits for every $1,000 over the threshold. If your total income reaches or exceeds $149,000, you could lose the full annual OAS benefit, which can amount to $7,040. The clawback is calculated as part of your annual tax return and takes effect in July of the following year.
Effectively managing your income and understanding how CPP payments contribute to the clawback are key to optimizing your retirement finances. Below, we explore the workings of the OAS clawback and practical strategies to reduce or avoid its impact.
What Is the OAS Clawback?
The Old Age Security (OAS) clawback, officially called the OAS Recovery Tax, reduces OAS payments for retirees with higher incomes. Calculated based on the net income reported on your tax return, the clawback increases as income rises, potentially eliminating the entire OAS benefit if income surpasses the upper limit.
How CPP Contributes to the OAS Clawback
The Canada Pension Plan (CPP) benefits you receive are included in your net income, increasing the likelihood of a clawback. For example:
- If your income from other sources is $80,000 and you receive an additional $20,000 from CPP, your total income is $100,000.
- This total exceeds the clawback threshold and results in a partial reduction of your OAS benefits.
Strategies to Minimize or Avoid the OAS Clawback
1. Delay Taking CPP Benefits
Delaying your CPP benefits can help reduce your net income during your initial retirement years:
- CPP benefits can be deferred until age 70, unlike OAS, which typically starts at age 65.
- For each year you delay CPP after age 65, your monthly benefit increases by 8.4%, leading to higher payouts later.
By postponing CPP, you can lower your taxable income during the early years of retirement, potentially avoiding the clawback altogether.
2. Reduce Employment or Pension Income
Scaling back on employment or pension income can also help:
- If you continue working in your 60s, consider reducing your work hours or opting for a lower income distribution.
- Staying below the clawback threshold preserves your full OAS benefits.
3. Maximize Tax Deductions
Claiming eligible tax deductions can significantly reduce your net income:
- Common deductions include charitable donations, medical expenses, and other approved expenses.
- For example, medical expenses exceeding 3% of your net income or donations to registered charities are deductible.
Diligently documenting and claiming these deductions can lower your taxable income, helping to avoid the clawback.
4. Contribute to an RRSP
A Registered Retirement Savings Plan (RRSP) is an effective tool for reducing taxable income:
- Contributions to an RRSP are tax-deductible and can directly lower your net income.
- By contributing up to your allowed limit, you may fall below the OAS clawback threshold.
Additionally, RRSP contributions offer a tax-sheltered growth opportunity, deferring taxes until withdrawal.
Estimated OAS Clawback at Different Income Levels
| Income Level (CAD) | Clawback Rate | OAS Clawback Amount |
|---|---|---|
| $90,977 – $100,000 | 15% | $1,350 |
| $100,001 – $110,000 | 15% | $2,850 |
| $130,000 – $140,000 | 15% | $7,350 |
| $149,000+ | Full Clawback | Complete Reduction |
Additional Strategies
Spousal Income Splitting
For married or common-law couples, income splitting can help lower taxable income:
- By allocating some retirement income to a lower-earning spouse, you can reduce your income below the clawback threshold.
Tax-Free Savings Account (TFSA) Withdrawals
Unlike RRSP withdrawals, TFSA withdrawals are not considered taxable income:
- Using a TFSA for retirement expenses can help you avoid exceeding the clawback threshold.
- Ensuring a well-funded TFSA provides flexibility in managing retirement finances.
Summary of Strategies
| Strategy | Description | Effect on Income |
|---|---|---|
| Delay CPP Benefits | Postpone CPP until age 70 | Decreases taxable income |
| Reduce Employment Income | Scale back work or pension income | Lowers net income |
| Claim Tax Deductions | Utilize deductions like donations | Reduces taxable income |
| RRSP Contributions | Contribute to reduce net income | Minimizes OAS clawback risk |
| Income Splitting | Share income with spouse | Reduces individual income |
| TFSA Withdrawals | Use tax-free funds for expenses | Avoids income increase |
FAQs
What is the OAS clawback threshold?
The current threshold is $90,977, with a 15% reduction applied to every dollar above this limit.
How can I avoid the OAS clawback?
Strategies include delaying CPP, reducing income, claiming tax deductions, contributing to an RRSP, and utilizing TFSA withdrawals.
How much is the maximum OAS benefit?
The annual maximum OAS benefit is approximately $7,040, which may be reduced by the clawback.
