Avoiding OAS claw back

Higher-income earning retirees could face a shocking surprise if they suddenly find their Old Age Security (OAS) payments clawed back. What exactly is OAS? How do you qualify? And what can you do to avoid having your payments clawed back?

OAS is a taxable monthly pension program available to most Canadians over the age of 65.

Unlike CPP payments, which are based on your prior employment history and contributions, OAS is not employment-based and may even be available to people who have never worked in Canada.

For someone to be eligible for OAS payments, they must be age 65 or older, be a Canadian citizen or legal resident at the time of approval and must have resided in Canada for at least 10 years since the age of 18.

For those living outside of Canada at the time of OAS application, you need to have resided in Canada for at least 20 years since the age of 18.

As of 2017, the OAS program will pay each eligible recipient a base amount of $583.74 per month.

This amount can increase or decrease based on your marital status.

If your spouse also qualifies, you will receive less and a widower can get a higher amount.

However, if your income in 2017 exceeds $74,788 your OAS will be clawed back and you will be required to repay part or all of these payments.

The claw back is a graduating scale and the entire amount would be clawed back if your income goes over the $121,279 amount.

These thresholds are very important to remember as some simple income-and-tax planning could help you avoid any potential required repayments.

To avoid claw back, you need to find ways to reduce your overall taxable income in a given year. You could: 1. Consider pulling funds from your TFSA account if you need to do a one-time lump sum withdrawal for a specific expense such as buying a new car or a big vacation that you have planned.

2. Base your RRIF minimum withdrawals on your spouse’s age if they are younger than you.

This way you would be allowed to pull a smaller amount of taxable RRIF income out annually.

3. Look into all available income splitting option between you and your spouse.

If your spouse has a much higher or lower net income, splitting available income sources such as RRIF, CPP and pension income might help you both land under the claw back threshold.

4. If you’re still working past age 65, consider deferring your OAS for a few more years until you retire.

OAS pension can be deferred up to age 70 and each month you defer increases your benefit amount by 0.6 per cent.

5. Invest your non-registered money in corporate-class mutual funds instead of using mutual fund trusts, bonds, GICs or dividend-paying stocks.

A corporate-class fund will typically have lower taxable distributions each year which can help keep your net income down.

6. In particular, limit your exposure to dividend-producing stocks outside of registered accounts since OAS claw back is based on net income and this includes dividends received from Canadian corporations on a grossed-up basis.

That gross-up can increase net income above what is actually earned.

OAS claw back can be frustrating for those who face it but some simple changes to your retirement income plans can help to partly or completely avoid it.

A few minutes of your time could be all it takes to ensure you receive the entire available amount.