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Avoiding the OAS Clawback: Strategies for Canadians

    The Old Age Security (OAS) pension is a government-funded program designed to provide financial support to seniors in Canada. While the OAS pension is a valuable source of income for many Canadians, it is subject to a clawback if the recipient’s net income exceeds a certain threshold. In this article, we will discuss various strategies for avoiding the OAS clawback.

    Understanding the OAS Clawback

    The OAS pension is clawed back (reduced) if the recipient’s net income exceeds a certain threshold. For the 2021 tax year, the threshold is $79,054. If a recipient’s net income is above this threshold, their OAS pension will be reduced by 15 cents for every dollar above the threshold. The clawback reduces the OAS pension by up to 100% if the recipient’s net income is above $128,137.

    Table 1: OAS Clawback Thresholds and Reduction Rates

    Net IncomeReduction Rate
    $79,054 – $128,13715 cents for every dollar over $79,054
    Over $128,137100%

    Strategies for Avoiding the OAS Clawback

    1. Delay Taking the OAS Pension

    One of the simplest ways to avoid the OAS clawback is to delay taking the OAS pension. The OAS pension can be taken as early as age 65, but the amount increases for each month that it is delayed, up to age 70. The increased amount can help offset the impact of the clawback.

    For example, if a Canadian delays taking their OAS pension until age 70, they will receive 36% more than if they took it at age 65. If their net income is above the clawback threshold, this increase in their OAS pension can help offset the clawback and result in a net increase in their total income.

    Table 2: OAS Pension Amounts at Different Ages

    AgeMonthly OAS Pension Amount
    65$601.45
    70$813.66
    1. Reduce Taxable Income

    Another way to avoid the OAS clawback is to reduce taxable income. This can be done through various means, such as contributing to a Registered Retirement Savings Plan (RRSP), taking advantage of tax deductions, or deferring income.

    For example, contributing to an RRSP can reduce taxable income by the amount of the contribution. This can help lower the recipient’s net income and potentially keep it below the clawback threshold.

    1. Split Pension Income

    Pension income splitting is another strategy for avoiding the OAS clawback. This strategy involves transferring a portion of the recipient’s pension income to their spouse, who has a lower income and therefore a lower clawback threshold.

    For example, if the recipient’s net income is $85,000 and their spouse’s net income is $35,000, the recipient can transfer $25,000 of their pension income to their spouse. This will reduce the recipient’s net income to $60,000 and lower the impact of the clawback.

    Pros and Cons of Avoiding the OAS Clawback

    Pros

    • Increased Total Income: By avoiding the OAS clawback, the recipient’s total income can be increased, providing them with a greater financial cushion.
    • Better Use of Government Benefits: By avoiding the OAS clawback, the recipient can make better use of the government benefits designed to support seniors.
    • Reduced Tax Burden: By reducing taxable income, the recipient can also reduce their overall tax burden, freeing up more money for other expenses.

    Cons

    • Complexity: Some strategies for avoiding the OAS clawback can be complex and may require the help of a financial advisor.
    • Opportunity Cost: Delaying the receipt of the OAS pension or transferring income to a spouse can also mean forgoing potential income in the meantime, which could have a significant impact on the recipient’s finances.

    The OAS clawback is a significant issue for many Canadians, reducing their total income and making it harder for them to make ends meet in retirement. However, there are strategies available for avoiding the clawback, such as delaying taking the OAS pension, reducing taxable income, or splitting pension income. While each strategy has its pros and cons, it is important for Canadians to carefully consider their options and choose the strategy that is best for their unique financial situation.

    Christopher - BSc, MBA

    With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.

    Christopher - BSc, MBA

    Christopher - BSc, MBA

    With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.

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