The Canadian government pays you a monthly payment, called the Old Age Security(OAS) pension, if you’re 65 years or older. While you probably include the OAS as a foundational piece of your retirement plan, a certain amount of this payment can be taken back depending on individual income levels.
What is the Old Age Security 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.
2017-2018 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 2018 to June 2019, or income year 2017, the minimum threshold is $74,788 and the maximum threshold is $121,314. 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.
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.
These are among the options available to make sure that you receive all the benefits you deserve during tax time. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.