How Does Old Age Security Clawback Work?

by Craig Anthony

2 min read

The Canadian government pays a monthly payment, called the Old Age Security pension, to individuals who are 65 years or older. While most Canadians include the OAS as a foundational piece of their retirement plan, a certain amount of this payment can be taken back depending on individual income levels.

What Is the Old Age Security Clawback and How Does It Work?

In Canada, the government imposes a special tax on OAS payments for certain individuals. This “clawback” is officially known as the OAS recovery tax. If an individual’s income for the year exceeds a certain annual threshold, 15 cents is due on each dollar of income above the threshold. The clawback is typically based on the net income reported for the previous calendar year, but there is a provision in the Income Tax Act that allows the clawback to be based on the current year if current year income is drastically different than the previous year’s income.

Current OAS Thresholds

Income level thresholds are adjusted annually for inflation, and there is a minimum income recovery threshold and a maximum income recovery threshold. For the recovery tax period of July 2016 to June 2017, or income year 2015, the minimum threshold is $72,809 and the maximum threshold is $118,055. For the recovery tax period of July 2017 to June 2018, or income year 2016, the minimum threshold is $73,756 and the maximum threshold is $119,615.

An Example OAS Calculation

As a simple example, assume the recovery tax period is July 2017 to July 2018. An individual’s income for 2016 is $85,000. The minimum threshold for that year is $73,756. Thus, 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 is helpful to use one of the many OAS calculators available online. Other factors can influence the 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.

  1. Time capital gains – If you are planning to sell an asset that can cause capital gains, it may be wise to sell it before turning 65.
  2. Tax-free accounts – It is possible to use tax-free accounts to generate income from investments. In these accounts, capital gains are not taxed and do not count toward an individual’s net income.
  3. Clever borrowing – One way to potentially reduce income amounts is to deduct the interest on funds that were borrowed to generate investment income.
  4. Share pension payments – If a spouse has lower income, up to half of an individual’s pension payments can be transferred to him or her. This transfer amount should reduce an individual’s overall income.

References & Resources

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