Canadian workers have lots of options when they’re ready to retire, including Old Age Security (OAS) payments. But taking your payments as soon as you reach the age of eligibility might not make sense for you if you still work or draw a comfortable private pension.
In those instances, deferring your OAS benefits can help bolster your retirement income down the road. By deferring these benefits for as long as possible, you can even increase the monthly payments you receive.
Advantages of Deferring OAS Benefits
As of 2018, you become eligible for OAS benefits at age 65, but for every month you defer the benefits, your payment increases by 0.6%. For instance, if you have a $570 monthly OAS benefit and you defer payment for three months, you receive a 1.8% increase. This results in $10.26 extra per month.
This means if you defer your payment for all five of the allowable years (until you turn 70), you can enjoy a monthly benefit increase of up to 36%. (That’s the 0.6% increase multiplied by 60 months). If you deferred your $570 payment for five years, you boost your benefits by $205 per month, giving you a monthly OAS benefit of $775. Once you begin receiving payments, the five-year deferral results in $2,460 extra in your pocket every year.
Side Effects of OAS Deferral
When making your OAS deferral decision, keep in mind that you lose your eligibility for the Guaranteed Income Supplement (GIS) when you defer your benefits. This also means your spouse can’t collect GIS allowance benefits during this time.
The GIS program applies to those with incomes lower than the maximum annual threshold, and the Canada Revenue Agency (CRA) reviews your eligibility for this program every year based on your federal Income Tax and Benefit return.
If you make more than $74,788 annually, you may have to return some or all your OAS benefits to the CRA. To calculate your income from this threshold, the CRA includes your net income before adjustments, minus payments you receive from the Canada Child Benefit (CCB) program or your Registered Disability Savings Plan (RDSP) and plus any repayments you made to the CCB or RDSP.
Affording the OAS Deferral
While turning down immediate funds might not pay off in the short term, the long-term advantages in terms of extra income outweigh the disadvantages. In some cases, this might mean living below your actual means while you wait. Of course, if you have interest income, you can opt to defer retirement until age 70 while living off your earnings.
Alternatively, if you have other retirement savings, you can tap into those amounts during the deferral, and you can also use your Canada Pension Plan (CPP) benefits, though deferring those payments has advantages too.
Ultimately, you may want to work out your finances so you withdraw more from your savings at age 65 to 70. You can then reduce your withdrawals after age 70 while enjoying your larger OAS benefit.
How to Defer OAS Benefits
The month after your 64th birthday, you should get a letter from Service Canada concerning your selection for automatic enrollment in OAS and, if you qualify, also GIS. This means you don’t have to apply for your benefits so long as the information in your letter proves accurate. If you want to defer your OAS, GIS, or both, you can do so online via your My Service Canada account.
If you don’t get a letter from Service Canada the month after your 64th birthday, then the government didn’t choose you for automatic enrollment. At that point, OAS deferral is easy — simply don’t apply for your benefits when you turn 65.
Instead, wait until you’re ready to start drawing your monthly entitlement, and then submit the Application for the Old Age Security Pension to Service Canada. You can indicate when you want your benefits to start on that form.
If you already receive your OAS pension, you can cancel it within six months of the day it starts to take advantage of the deferral benefits, and you then have six months to repay the benefits you received. Once you repay the amount you drew, you can defer collecting benefits until you’re ready.
In addition to considering deferring your own payments, you may want to talk with your clients about the benefits of OAS deferral. As their accountant, your help with their retirement planning can potentially set them up better for future success.
What is the OAS Clawback?
The term “clawback” refers to a situation in which an organization, in this case the government, takes back money that it has previously paid. When the government imposes a special tax on OAS payments for certain individuals, this “clawback” is officially known as the OAS recovery tax.
If your income for the year exceeds a certain annual threshold, 15 cents out of each dollar of income above the threshold s due to the government. This clawback is typically based on the net income reported for the previous calendar year, but there’s a provision in the Income Tax Act that allows the clawback to be based on the current year if your current year income is drastically different than the previous year’s income.
2018-2020 Clawback Thresholds
Income level thresholds are adjusted annually for inflation, and there’s a minimum income recovery threshold and a maximum income recovery threshold.
- For the recovery tax period of July 2019 to June 2020, or income year 2018, the minimum threshold is $75,910 and the maximum threshold is $123,386.
- For the recovery tax period of July 2020 to June 2021, or income year 2019, the minimum threshold is $77,580 and the maximum threshold is $126,058.
- For the recovery tax period of July 2021 to June 2022, or income year 2020, the minimum threshold is $79,054, and the maximum threshold is $128,137.
OAS Reduction Formula
As a simple example, assume the recovery tax period is July 2017 to July 2018. Your income for 2016 is $85,000. The minimum threshold for that year is $73,756. The estimated clawback and OAS payment reduction can be calculated as:
Income subject to clawback = $85,000 – $73,756 = $11,244_ Estimated clawback amount = $11,244 x 15% = $1,686.60*Monthly OAS payment reduction = $1,686.60 / 12 = $140.55
This is an estimated calculation only. To figure out your precise OAS clawback amount, it’s helpful to use one of the many OAS calculators available online. Other factors can influence your clawback amount, such as net federal supplements and OAS pension paid back the previous year.
Strategies to Reduce the OAS Clawback
There are some legal ways to help reduce the amount of your OAS clawback in a given year.
- Timing of capital gains – If you’re planning to sell assets that can trigger capital gains tax, it may be wise to sell them before turning 65.
- Tax-free accounts – In tax-free accounts, capital gains aren’t taxed and don’t count toward an individual’s net income.
- Clever borrowing – One way to potentially reduce income amounts is to deduct the interest on funds that were borrowed to generate investment income.
- Share pension payments – If your spouse’s income is lower than yours, you can transfer up to half of your pension payments to them to reduce your overall income.
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