OAS Clawback
The Old Age Security (OAS) program provides monthly payments to most Canadians aged 65 and older, but for higher-income retirees, a significant portion of these benefits may be recovered through what’s known as the OAS clawback. Understanding how this recovery tax works and implementing strategic planning can help you preserve more of your retirement income.
At Avenue Investment Management, we help clients navigate the complexities of retirement income planning, including optimizing strategies to minimize the impact of the OAS clawback on their overall financial picture. Our disciplined approach to financial planning ensures that every aspect of your retirement income is carefully considered and strategically managed.
What is OAS clawback?
The OAS clawback, formally known as the Old Age Security pension recovery tax, is a mechanism that requires higher-income seniors to repay a portion of their OAS benefits. This recovery tax is calculated at 15% of your net income above a specified threshold, effectively reducing your monthly OAS payments.
The income calculation is based on your “net income before adjustments,” which corresponds to Line 23400 of your income tax return. This includes most forms of taxable income such as:
- Employment and pension income
- RRSP and RRIF withdrawals
- Investment income (interest, dividends, capital gains)
- Rental and business income
However, certain income sources don’t count toward the clawback calculation:
- Tax-Free Savings Account (TFSA) withdrawals
- Gifts and inheritances
- Life insurance policy payouts
- Return of capital distributions
The OAS clawback is designed to ensure that OAS benefits are more targeted toward those who need them most, while higher-income retirees contribute back to the system’s sustainability.
Do You Have to Pay the OAS Recovery Tax?
Whether you’ll be subject to the OAS recovery tax depends on your annual net income and the current thresholds, which are indexed to inflation each year. The clawback is based on your previous year’s income and affects your OAS payments in the following benefit year.
2024 and 2025 Income Thresholds
| Tax Year | Clawback Begins | Full Clawback (65-74) | Full Clawback (75+) |
| 2024 | $90,997 | $148,451 | $154,196 |
| 2025 | $93,454 | $151,668 | $157,490 |
If your net income falls between the minimum and maximum thresholds, you’ll pay a partial clawback. If your income exceeds the maximum threshold, your entire annual OAS benefit will be recovered.
Many middle to high-income retirees find themselves affected by this recovery tax, particularly those with substantial registered retirement savings, private pension income, or investment portfolios generating taxable income.
How OAS clawback is calculated
The OAS clawback calculation follows a straightforward formula, but understanding its application can help you plan more effectively for its impact on your retirement income.
The Calculation Process
- Determine your net income: Start with Line 23400 from your tax return
- Calculate excess income: Subtract the minimum threshold from your net income
- Apply the recovery rate: Multiply the excess by 15%
- Calculate monthly impact: Divide the annual clawback by 12
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Real-World Example
Consider a retiree with $100,000 in net income for 2024:
- Excess income: $100,000 – $90,997 = $9,003
- Annual clawback: $9,003 × 15% = $1,350
- Monthly reduction: $1,350 ÷ 12 = $112.50
This means their monthly OAS payment would be reduced by $112.50 starting in July 2025.
Government Processing
The Canada Revenue Agency automatically calculates your OAS recovery tax and will send you an Advisory Letter if you’re subject to the clawback. The recovery amount is typically deducted from your monthly OAS payments rather than requiring a separate payment.
Income Reduction Requests
If you expect your current year’s income to be substantially lower than the previous year’s income used for the clawback calculation, you can file Form T1213(OAS) to request a reduction in the recovery tax being withheld. This proactive approach can help you avoid overpayment and improve your monthly cash flow.
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Common Strategies to reduce the clawback
Effective OAS clawback management requires a comprehensive approach that considers your entire financial picture. At Avenue Investment Management, we implement disciplined strategies that align with our clients’ long-term financial goals while minimizing unnecessary tax burden.
Income Splitting Strategies
Pension Income Splitting: Married couples and common-law partners can split up to 50% of eligible pension income, potentially reducing the higher-income spouse’s net income. Eligible income includes registered pension plan payments and RRIF withdrawals for those 65 and older.
The optimal split percentage depends on your specific circumstances, including both spouses’ income levels, tax brackets, and other benefit eligibility. Our team analyzes multiple scenarios to determine the most effective approach for your situation.
Tax-Sheltered Account Optimization
TFSA Maximization: TFSA withdrawals don’t count toward your net income for clawback purposes, making these accounts particularly valuable for retirement income planning. By maximizing TFSA contributions during your working years and strategically timing withdrawals, you can create a source of income that won’t trigger or increase the OAS clawback.
Strategic RRIF Withdrawals: RRIF withdrawals are fully taxable and contribute to your net income. Consider these approaches:
- Base minimum withdrawals on the younger spouse’s age to reduce required amounts
- Increase RRSP/RRIF withdrawals in lower-income years before age 65
- Time withdrawals to smooth income across multiple years
OAS Deferral Considerations
You can defer OAS payments for up to five years until age 70, with payments increasing by 0.6% for each month of deferral. This strategy can result in up to 36% higher monthly payments, which may offset clawback impacts if your income decreases in later retirement years.
However, deferral isn’t suitable for everyone. The decision should be based on your complete financial picture, including other income sources, life expectancy considerations, and immediate cash flow needs.
Investment Structure Optimization
Tax-Efficient Investment Selection In non-registered accounts, the type of investment income you generate significantly impacts your clawback exposure:
- Capital gains: Only 50% is included in taxable income
- Eligible Canadian dividends: Grossed up by 38% for tax purposes
- Return of capital distributions: Generally not taxable
Our investment approach at Avenue focuses on quality investments that can generate returns over long periods while considering the tax implications of different income types.
Deduction Maximization
Every eligible deduction reduces your Line 23400 income, directly impacting your clawback calculation. Key deductions to consider include:
- RRSP contributions (if still eligible)
- Investment management fees and carrying charges
- Medical expenses
- Charitable donations
- Professional fees related to investment management
Comprehensive Planning Integration
Effective OAS clawback management cannot be viewed in isolation. It must be integrated with your broader tax and estate planning strategy. Our approach considers:
- Long-term wealth preservation goals
- Estate planning implications
- Integration with other government benefits
- Risk management through our tail hedging strategies
As a fiduciary, Avenue Investment Management is committed to understanding fiduciary duty and how it benefits Canadian investors. We don’t just focus on minimizing the clawback – we help you optimize your entire retirement income strategy to support your long-term financial goals.
Frequently Asked Questions
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What income sources count toward the OAS clawback?
The clawback is based on your net income before adjustments (Line 23400), which includes employment income, pension payments, RRSP/RRIF withdrawals, investment income, and rental income. However, TFSA withdrawals, gifts, inheritances, and life insurance payouts are not included.
Can I reduce my clawback if my income drops significantly?
Yes, you can file Form T1213(OAS) with the Canada Revenue Agency to request a reduction in the recovery tax being withheld if you expect your current year’s income to be substantially lower than the previous year’s income used for the clawback calculation.
How does pension income splitting affect the OAS clawback?
Pension income splitting allows couples to allocate up to 50% of eligible pension income to the lower-income spouse, potentially reducing the higher-income spouse’s net income and associated clawback. The optimal split depends on both spouses’ complete financial situations.
Should I defer my OAS to avoid the clawback?
OAS deferral can increase your monthly payments by up to 36% if delayed until age 70, but it’s not automatically beneficial for everyone. The decision should be based on your complete financial picture, including other income sources, life expectancy, and immediate cash flow needs.
How often do the OAS clawback thresholds change?
The income thresholds are indexed to inflation and typically increase each year. The government announces the new thresholds annually, and they’re applied to the previous year’s income to determine the following year’s clawback.
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Conclusion
The OAS clawback represents a significant consideration for retirement income planning, but it’s not an insurmountable challenge. With proper strategic planning and a comprehensive understanding of the rules and optimization strategies, you can minimize its impact while maintaining your desired retirement lifestyle.
At Avenue Investment Management, we’ve spent over 20 years helping Canadian investors navigate complex financial challenges. Our independent approach, combined with our disciplined risk management process and commitment to putting clients first, allows us to develop tailored strategies that address your unique circumstances.
The OAS clawback is just one component of comprehensive retirement income planning. When integrated with quality investment management, strategic tax planning, and careful estate planning, it becomes a manageable part of your overall financial strategy.
Don’t let the OAS clawback undermine your retirement security. Understanding how wealth managers navigate the financial life can help you make informed decisions about your retirement income strategy.
Contact Avenue Investment Management today to discuss how our disciplined approach to financial planning can help you optimize your retirement income strategy and achieve your long-term financial goals.
Additional Resources
Learn more about OAS Clawback, Retirement and Tax & Estate Planning.
What Income is Included in OAS Clawback?
For Canadian retirees, the Old Age Security (OAS) pension recovery tax—commonly known as the OAS clawback—represents a significant consideration in retirement income planning. Understanding precisely which income sources contribute to this calculation is essential.
Tax-Efficient Retirement Withdrawal Strategies
Creating a tax-efficient retirement withdrawal strategy requires careful coordination of multiple account types, government benefits, and tax planning techniques.
Tax & Estate Planning
For high-net-worth investors, it’s crucial to have comprehensive estate planning, including wills and powers of attorney, to protect your wealth, estate and beneficiaries. We specialize in complex tax and estate planning and trustee services.