Watch For The Claws!

WHAT IS OLD AGE SECURITY?

The OAS pension is a Government of Canada lifetime taxable pension, paid monthly to seniors who are aged 65 and older and who meet the eligibility requirements. Unlike the CPP, Old Age Security benefits are not tied to your employment history.

Eligibility:
You may be eligible to receive the OAS pension even if you have never worked or are still employed.  To qualify for OAS, you must be a Canadian citizen or legal resident and have resided in Canada for 40 years after age 18. You can still qualify for a partial OAS pension if you have spent at least ten years in Canada after the age of 18 or have lived in a country with a social security agreement with Canada.

Deferral:
You can also defer receiving OAS pension payments for up to five years, or until your 70^th birthday. Your monthly OAS pension will increase by 7.2% for each year of delay, up to a maximum of 36%.

OAS CLAWBACK:
Your OAS benefit may be reduced by a clawback if your net income for the previous calendar year exceeds $77,580 for 2019. If your net income exceeds this amount, you must pay back 15% on the excess income up to a maximum of the total OAS benefit received. This deduction is like an additional 15% tax on top of your current tax rate and is officially known as the OAS recovery tax since you still receive OAS payments but with this withholding tax applied, thereby reducing the monthly amount you receive. If you started your OAS at age 65, then the full payment will be clawed back when your income reached $126,058 in 2019. The income threshold amounts are updated every year.

HOW TO MINIMIZE YOUR CLAWBACK?

A few strategies that may be deployed to limit OAS clawback include:

Income Splitting:
Splitting eligible pension income with your spouse, including workplace pensions and RRIFs and utilizing spousal RRSPs, can lower the individual spouse's overall income and limit or eliminate OAS clawback.

Defer OAS/CPP:
Seniors can defer OAS pensions for up to 5 years from when they are eligible. CPP can be deferred as well. However, note that deferring OAS or CPP will increase your benefits later down the road and could then trigger OAS clawback at that time. In some cases, taking CPP much earlier may be a better option.

Maximize TFSA Contribution:
Income generated from investments in a TFSA are not taxable and do not count towards your net income.

Optimize other Investments:
Interest income from Guaranteed Income Certificates, savings, etc., are taxed fully. Dividends are grossed up (138%) and may push your income over the maximum threshold. Only 50% of capital gains are included in taxable income.

Corporate Class Mutual Funds:
Using Corporate-Class Mutual Funds instead of mutual fund trusts, dividend-paying stocks or bonds lowers the investment income (distributions) that must be reported on your tax return.  If you want to receive cash flow from your investments, then using T-Class Funds (which are available only within a corporate structure) will allow receiving tax-free capital while deferring the taxable income in the future.