What is the OAS clawback and how does it affect Ontario retirees?
Old Age Security (OAS) is a federal retirement benefit paid to Canadians 65 and older regardless of employment history. However, if your income exceeds a threshold set by the federal government, you must repay part or all of your OAS through the OAS Recovery Tax (commonly called the clawback). This rule applies equally to Ontario retirees.
The clawback is calculated as 15 cents for every dollar of net income above the threshold, up to the point where your OAS is fully repaid. The threshold is adjusted annually. If your income is substantially above the threshold, you may have your entire OAS clawed back. The CRA calculates the clawback based on your prior year's income and either withholds it from future OAS payments or assesses it on your return.
For planning purposes, various strategies can reduce net income and minimize or eliminate the clawback. These include making RRSP contributions (if you have room and are not yet 71), splitting eligible pension income with a lower-income spouse, optimizing the timing of RRSP/RRIF withdrawals, and using TFSAs for investment income (TFSA withdrawals do not count as income for OAS clawback purposes). The interaction between income sources, pension splitting, and the clawback threshold makes retirement tax planning complex — a financial advisor or tax professional can model the best approach.
Key takeaways
- OAS is clawed back at 15 cents per dollar above the federal threshold — check the current amount.
- The clawback can reduce OAS to zero for high earners.
- TFSA withdrawals are not counted as income for clawback purposes.
- Pension splitting and RRSP strategies can reduce net income and preserve OAS payments.