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Old Age Security and the OAS Clawback

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.







13 Comments, Comment or Ping

  1. So what percentage does the government take out of your paycheck in order to give out a measly $524/month?
    You might have been better off purchasing some TIPs instead with the money..

  2. Hey DGI, OAS is paid out of the current tax base, so there’s nothing “extra” taken out of our paychecks to fund it (besides income tax). CPP, on the other hand, is paid into by salaried employees.

  3. 3. cannon_fodder

    Interesting, the CPP benefits are revised annually while the OAS is revised quarterly. They both use the CPI as their baseline for calculation.

    One suggestion I read about reducing your taxable income (thus reducing the impact of clawbacks) would be to purchase annuities. Because they include a ROC component, only the interest portion would count against income.

    Of course, if you can defer or minimize withdrawing money from your RRSP that would also help.

    But, I also read that only about 5% of seniors face any kind of OAS clawback while only 2% lose it completely.

    Most people on this blog, IIRC, would be happy to be in the problem where their retirement income was so high as to impact their OAS benefits.

    You should apply 6 months before your 65th birthday (or, for recent immigrants, that might be 6 months before your 10th anniversary of living in Canada). However, there are provisions for retroactive payments covering up to 12 months.

  4. Interesting, the CPP benefits are revised annually while the OAS is revised quarterly. They both use the CPI as their baseline for calculation.

    One suggestion I read about reducing your taxable income (thus reducing the impact of clawbacks) would be to purchase annuities. Because they include a ROC component, only the interest portion would count against income.

    Of course, if you can defer or minimize withdrawing money from your RRSP that would also help.

    But, I also read that only about 5% of seniors face any kind of OAS clawback while only 2% lose it completely.

    Most people on this blog, IIRC, would be happy to be in the problem where their retirement income was so high as to impact their OAS benefits.

    You should apply 6 months before your 65th birthday (or, for recent immigrants, that might be 6 months before your 10th anniversary of living in Canada). However, there are provisions for retroactive payments covering up to 12 months.
    OH! You’re my new favorite blogger fyi

  5. 5. Garett

    Also remember that capital gains, even if eligible for the capital gains exemption, may trigger OAS clawback. Everyone seems to know that certain capital gains are exempt from tax and they merrily go on their way thinking the gov’t won’t get a dime, only to get slapped with a nasty surprise in the form of OAS clawback. There are, of course, some strategies to minimize or avoid this.

  6. 6. Ed Rempel

    Hi Cannon,

    The clawbacks are the problem many Canadians run into when their entire retirement savings are only pension and RRSP. With no tax deductions and every dollar of income being taxable, you can only avoid clawbacks by taking lower income.

    You are probably right that only about 5% of seniors have any part of their OAS clawed back, but I have not seen this figure for all clawbacks. The clawbacks on GIS, age credit and GST are all at lower brackets than the OAS clawback.

    My estimate it that about half of Canadians are affected by clawbacks at their MTR, which means that one extra dollar of income will be subject to one clawback program or another in addition to income tax.

    Annuities can help you when compared to bonds or GICs. However, you can get the same affect where part of your payment is your principal with a systematic withdrawal from a mutual fund. Then the taxable part will also be capital gains, instead of interest from the annuity.

    Ed

  7. 7. Bob

    $66,335.00 a year taxable income is $31.89 an hour based on a 40 hour work week X 52 weeks a year. Are you kidding me that people with this kind of income need OLD AGE SECURITY. Think about the word security, it doesn’t mean pension. There is something wrong with this picture.

    What gets me even more is that people with that income or higher are still looking for tax breaks. Low income people should be so lucky. Well they can always apply for INCOME ASSISTANCE.

    Most hard working people never get a chance to make that kind of money in their lifetime. It’s time society wasn’t so GREEDY!

  8. 8. cannon_fodder

    Bob,

    I can certainly understand that point of view. Here is another one – I’ve been working for over 20 years full time and have had several full time jobs but not once have I collected UI. So, I’ve helped supplement other people who have had periods of unemployment. If I’m fortunate, I will never have to dip into UI – on the other hand, I will never see any of that money back for being a productive worker.

    Secondly, I typically have paid income taxes at or near the highest rate for the last 15 years. I’ve never been incarcerated, in the hospital (except for 2 days when I was 10 for a tonsillectomy), needed to be rescued or any other sort of drain on the federal government except for my university education in Canada. If I pay $25,000 a year just in income taxes, do I get a larger share of government benefits than someone who pays $5,000 in taxes? What about when I pay $50k or even $100k a year in taxes?

    Typically people with larger incomes also spend more – generating additional tax revenue to municipal (property taxes with larger homes), provincial (PST) and federal (GST) coffers. I believe that is more fair since I get the same benefit of paying $6.50 in taxes on a $50 pair of shoes than anyone else does buying that pair of shoes.

    I am proud that Canada is socialist in that we collectively put our resources together to help the less fortunate. I also understand that there will be people who will be net contributors (as I have so far in my fortunate life) and there will be others who take more than they give.

    I know that I’ve contributed more money towards the various governments than the average person in my working lifetime. There are people who have contributed much, much more and people who have contributed much, much less. I don’t criticize them or think of them either as greedy or lazy.

    I don’t think there is a tax system that will be considered fair by all segments of the society.

    I do think that most people would like to be net contributors, especially those from previous generations.

    I think it would be unfair to label people with high incomes as greedy – I’ve seen greed in people from all ranks of income levels, just like I’ve seen generosity in all ranks.

    Would I support lowering the limit at which OAS gets cutback? Yes, because, unlike the CPP, you are not directly contributing to it in a visible way. Obviously it is based on federal tax revenues so as long as I’m earning or buying goods and services, I’m contributing to the program. Which means I’m probably contributing more than most people.

    People (e.g. entertainers or entrepreneurs) who make millions of dollars and pay hundreds of thousands of dollars in all forms of taxes help out more people (indirectly) than you or I. While it is involuntary, the fact is they do. Wouldn’t it be ironic if the people helped out the most, those at the lowest end of the scale, would then turn around and criticize their benefactors for their excesses?

    According to this paper http://www.springerlink.com/content/f445236200lg2137/fulltext.pdf, it measures, among other things, the “inequality index”. The countries with the lowest difference between the rich and the poor are dominated with European names and the Scandinavian countries especially. Canada is beaten by 22 countries out of the 126 listed (US was used as the benchmark). I guess it has to be some consolation to we Canucks that we get Ikea, some very good hockey players (and Volvo if that’s your thing).

  9. 9. Roy Hardman

    We have sold our business and understand there is a capital gains tax exemption of $750K. Do we have to include this amount as income on our tax submission? How will this affect our OAS?

    I would really appreciate an answer. Thanking you in advance.

    Regards,

    Roy

  10. 10. Ed Rempel

    Hi Roy,

    Interesting question. I assume you are asking about your GIS, not OAS. I’m not 100% sure, but I believe that the net capital gain (net of the exemption) would be the amount included in your income for determining your GIS.

    I was not able to easily find the answer, but they do include net capital gains, meaning only half of capital gains. I believe it is only the taxable portion of the capital gain that will be relevant for you, as well.

    Are you sure you qualify for the capital gains exemption? There are a bunch rules.

    Ed

  11. 11. Phyl

    Cannon_fodder thanks for your comments as that is exactly how I feel. Bob, please don’t loosely throw around adjectives such as “greedy”. As far as I’m concerned, a person who has been in the workforce for almost 50 years is not greedy. They darn well deserve every cent they make. I have just finished a 7 year stint (as a teacher) in Northern Canada in a fly-in community. And, yes, I made $100 000 but I paid rent there as well as the upkeep on my house at home…anyone want my tax bill and my property tax, water and sewer, electricity?? I was born and raised in Canada, lived here my whole life, paid for 6 years of university training, parts of that while working and raising my children, entered the workforce at age 17…finished in June, 2012. Now, someone wants to me to downsize, get a smaller house, don’t make any extra money or we’ll grab back your pension (rightfully mine by virtue of being a Canadian citizen) and make no mistake, right now it’s OAS, but watch out for future claw backs! So, now I have to buy a rocking chair and knit and make quilts while waiting to die or until I’m relegated to a senior’s facility…where…poof…all my pensions disappear anyway?? I don’t think so. I will continue to find ways of making extra money to keep me in the lifestyle I worked for, and fought and paid for as long as I am healthy enough to do so! Call me greedy if you wish.Do I sound bitter and disillusioned?? You betcha. With all of the thousands of hard earned dollars I’ve paid in to the Canadian economy, I resent that my government feels it’s ok to keep taking and taking and taking and to dictate to me how I should live my live. I’ve never drawn one cent of EI, rarely use the health care system. There are many like Bob and me. In my opinion, we should be rewarded for what we’ve contributed to the system instead of having more taken from us. After all, those of us who work with children know that reward is wayyyyy better than punishment for bring about desired results. Oh well…probably too much to hope for (smile). It’s not easy growing old!!!

  12. 12. Eric

    The clawback on OAS is it based before or after tax dollars?

  13. 13. Dan

    Eric, it’s based on pretax dollars

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