As Canadians approach retirement age, one of the items on their radar will be the Old Age Security (OAS) pension. Designed to provide a source of income for individuals aged 65 and above, OAS offers monthly payments to eligible recipients. That said, for higher-income earners, they could face a total or partial clawback that would reduce or eliminate their OAS pension payments.
OAS Eligibility
You don’t have to contribute to the program to be eligible for the benefit, but you must meet three mandatory requirements. One must be 65 years or older, a Canadian citizen or a legal resident, and have lived in Canada for at least 10 years since turning 18.
Applying for OAS
For most Canadians, enrollment in OAS is automatic– you’ll receive a notification letter from Service Canada the month after you turn 64. If you don’t want to defer your pension benefit and would like it to begin at 65, you don’t have to take any further action. However, if you don’t receive the notification, you need to apply for your OAS pension.
Full or Partial OAS Pension
In general terms, eligibility for the full Old Age Security (OAS) pension is contingent upon a residency period of at least 40 years following the individual's 18th birthday. Conversely, individuals may qualify for a partial OAS pension provided they have resided in Canada for a minimum of 10 years upon approval of their OAS application. For instance, those who have resided in Canada for 20 years following their 18th birthday may be eligible to receive a proportional fraction, specifically 20/40th, of the full OAS pension.
The OAS Clawback
Your basic OAS pension is taxable. For higher income earners, a portion or the entirety of their OAS pension may need to be paid back if their income surpasses a specified minimum threshold for the fiscal year. This is referred to as the OAS clawback or OAS pension recovery tax. In 2024, the repayment range for individuals aged 65 to 74 spans from $90,997 to C$148,065 in net world income. There is more detailed information regarding the annual income thresholds for OAS pension repayment on the Service Canada Website.
Strategies to Minimize the Clawback
Reducing the likelihood or existence of a clawback will require one to reduce their net income reported. One may explore with their advisor the following avenues:
- Consider earning capital gains instead of dividends
- Consider mutual funds that have Return of Capital (ROC) distributions
- Consider earning investment income through an investment holding company
- Consider investing in a Tax-Free Savings Account (TFSA)
- Consider deferring the receipt of the OAS Pension to years with an expected lower income
- Consider using new and unused RSP contribution room to create income deductions
- Consider all personal income deductions that is available to an individual or couple
- Consider charitable giving strategies to create income deductions
- Consider income splitting strategies with spouses
Individual approaches will depend on your unique financial circumstances and retirement goals. Consult with a wealth advisor on our team for tailored insights, ensuring that you navigate the OAS landscape with confidence to maximize your retirement income.