If you’re a high-income earner, there’s a chance your Old Age Security (OAS) payments may be reduced through a program called the Old Age Security Clawback. If you collect OAS payments, it’s important you know about the clawback so you can spend within your means and prevent financial issues due to unforeseen tax payments.
What is Old Age Security?
The Old Age Security (OAS) pension is a monthly government benefit you can receive if you’re 65 and over. The OAS pension provides a base retirement income that Canadians can add to from other sources, including the Canada Pension Plan (CPP), employer-sponsored pension plans, or registered retirement saving plans (RRSPs).
Who qualifies for OAS?
Unlike the Canadian Pension Plan, your employment history doesn’t matter for OAS. You can receive OAS payments even if you’ve never worked or you’re still working. To qualify for OAS payments when you’re living in Canada, you must meet the following criteria:
- 65 years or older
- Canadian citizen or legal resident when the government approves your OAS application
- Resided in Canada for at least 10 years since the age of 18 (or 40 years to receive the full OAS payment)
What is the Old Age Security Clawback?
The Old Age Security clawback, also known as the OAS recovery tax, requires high-income earners to repay part, or all, of their OAS pension. The amount of income you earn each year determines if your OAS payments will be reduced. CPP payments are not subject to government clawbacks.
For the 2024 income year, the government starts clawing back OAS benefits when your income reaches $90,997.2 The maximum income threshold, which is the point when your entire OAS payment is clawed back, is:
- $148,065* for those aged 65 to 74
- $153,771* for those aged 75 and over
*Note that these amounts are subject to change. OAS payments are inflation-linked and the amount can change based on adjustments in the final quarter – October to December 2024.
How to Calculate OAS Repayment Amount
Your repayment amount is based on the difference between your income and the threshold amount for that year. Once you know how much higher your income is than the threshold, you owe 15% of that amount. In other words, you have to repay $0.15 per dollar over the threshold.
To calculate how much you owe:
Step 1: Figure out how much higher your income is than the threshold
Step 2: Calculate 15% of that amount
Here’s a simple example to demonstrate the calculation. Let’s say you make $100,000.
Step 1: $100,000 (your income) – $90,997 (the threshold for 2024) = $9,003.
Step 2: $9,003 x 0.15 = $1,350.45
You’ll have to repay $1,350.45 for the July 2025 to June 2025 recovery tax period, which is $112.54 per month.
Don’t worry, you don’t have to do the calculation yourself. Before the government starts clawing back your OAS payment, you’ll receive a letter with all the details as with other government programs.
Why do OAS Clawbacks Matter?
If you receive OAS payments, it’s important you know about the clawbacks so you can budget and prepare. Many seniors are on a fixed income that doesn’t allow for flexibility in their spending. Losing a portion of their OAS payments can affect their retirement income. In some cases, it can lead to debt and other financial issues.
How to Deal with OAS Clawbacks
If you’re concerned about the OAS clawbacks, you can speak to a financial advisor or tax expert to discuss retirement tax planning.
Some other ways to avoid OAS clawbacks include:
- Delay OAS payments. You can choose to delay OAS payments until you’re 70 years old. During the time you delay, your taxable income may drop putting you in a lower tax bracket and reducing or eliminating the amount you owe in clawbacks.
- Use TFSAs as income. Income withdrawn from a Tax-Free Savings Account (TFSA) is tax-free. If you can use TFSAs to support your retirement income, you can lower your overall taxable income and try to avoid OAS repayments.
- Pension income splitting. If your income is higher than your spouse or common-law partner, you can consider income splitting. You can allocate up to 50% of your eligible pension income to your partner. This can help to drive down your income so you can minimize or eliminate your OAS repayment tax.
- Contribute to RRSPs. You can also look for ways to reduce your taxable income. One option is to contribute to an RRSP. RRSP contributions are tax-deductible and can lower your taxable income.
Struggling due to Old Age Security Clawbacks?
If you’re concerned that the Old Age Security clawbacks will reduce your income and cause financial stress, speak to a Licensed Insolvency Trustee (LIT). Trustees are debt professionals who offer an array of debt-help solutions, from credit counselling to Consumer Proposals and Bankruptcy.
To schedule a free consultation with a LIT at Allan Marshall, call us at 1-888-371-8900 or fill in our online contact form. LIT’s are debt professionals who will ask you questions about your financial situation and inform you of the different debt solutions available. You don’t have to deal with debt alone, we’re here to help.
