A reader asked me to write about retirement benefits so instead of writing a huge article, I thought I would split it up into separate topics. Lets start with Old Age Security as it’s perhaps one of the more popular seniors benefits for Canadians. As the information is spread across numerous government websites, I’ll attempt to summarize the main points in this article.
What is Old Age Security (OAS)?
Old Age Security is a (Canadian) government program that pays a monthly benefit (adjusted to inflation) to seniors ages 65 and over. OAS is is paid out of the current Government tax base (unlike CPP) and is counted as taxable income.
To qualify for this program has nothing to do with if you’ve worked in Canada but how long you’ve lived here. According to the OAS website, here are the qualifications:
- be 65 or older;
- be a Canadian citizen or a legal resident of Canada on the day before your application is approved;
- have been a Canadian citizen or a legal resident of Canada on the day before you left Canada, if you no longer live in Canada;
- have lived in Canada for at least 10 years since your 18th birthday to receive OAS in Canada; and
- have lived in Canada for at least 20 years since your 18th birthday to receive OAS outside of Canada.
For 2011, the maximum OAS benefit is $540.12/month or $6,481.44/year. To receive this, you would need to have lived in Canada for 40 years after the age of 18. Anything less than 40 years results in a reduced old age security benefits. As mentioned above, these benefits are adjusted to inflation which means that they increase over time.
Here is an OAS calculator that you can play around with to get a feel for what you are entitled to (or will be entitled to).
Old Age Security Clawback
You may of heard of the OAS clawback before, but how does it really work? It’s basically a tax on high income seniors in the form of reduced old age security benefits. If you’re 65 or older in 2011, the government will clawback 15% of income over $67,668k. Old age security will be completely eliminated for incomes over $110,877.60.
For example, if you make $75,000 in 2011 and currently receiving OAS, then you will have to pay back some of the benefit. How much? It will be 15% of your income over $67,668 or $1,099.80.
Dividends and the Clawback
As you may know, receiving dividend distributions from Canadian public companies qualify for the dividend tax credit which makes investing in dividend paying companies extremely tax efficient.
However, what you may not know is how the dividend tax credit works. Dividend income is “grossed up” by 45% by which the dividend tax credit is calculated. This is all well and good for those not receiving old age security, but for seniors, the grossed up amount is used when calculating the upper OAS threshold.
For example, $20k in dividend income is now considered $29k of income which, in certain circumstances, could be just enough to push a senior over the upper OAS limit when accounting for other income sources.
I’m not sure how fair this clawback is, but seniors should consider structuring their portfolios accordingly to reduce the OAS clawback. Perhaps consider taking advantage of the TFSA as withdrawals are not taxed and do not affect income tested seniors benefits.
Ed Rempel has a great article on TFSA and seniors clawbacks for more details on the topic.