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 for optimizing your retirement benefits and maintaining financial security in your golden years.
The OAS clawback is calculated based on your “net income before adjustments,” which corresponds to Line 23400 of your Canadian income tax return. This figure encompasses most taxable income sources and forms the foundation for determining whether you’ll be subject to the 15% recovery tax on income exceeding the annual threshold.
At Avenue Investment Management, we recognize that successful retirement planning requires a comprehensive understanding of how various income sources interact with government benefits. Our disciplined approach to financial planning ensures that clients can make informed decisions about their retirement income strategies while preserving their hard-earned OAS benefits.
What Counts as Income for OAS Clawback?
Taxable Income Sources That ARE Included
The Canada Revenue Agency includes virtually all taxable income sources in the Line 23400 calculation, which directly impacts your OAS clawback assessment. Understanding these sources is crucial for effective retirement income planning.
Employment and Self-Employment Income: All employment income, including wages, salaries, and self-employment earnings, contributes to your net income calculation. For retirees who continue working or consulting, this income can significantly impact their OAS benefits, particularly when combined with pension income and investment returns.
Government and Private Pension Income: Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) benefits are fully included in the calculation, as are distributions from registered pension plans. These income sources typically represent substantial portions of retirees’ total income and cannot be modified for clawback purposes.
Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) Withdrawals: All withdrawals from RRSPs and RRIFs are considered taxable income in the year they are taken. Beginning at age 72, mandatory RRIF withdrawals increase annually, often pushing retirees into higher income brackets and potentially triggering or escalating OAS clawback.
Investment Income: Investment income requires careful consideration due to varying tax treatment:
- Interest Income: Fully taxable and included at 100% of the amount received
- Eligible Canadian Dividends: Subject to a 38% gross-up, meaning the taxable amount exceeds the actual cash received
- Capital Gains: Only 50% of realized capital gains are included in taxable income
- Foreign Investment Income: Generally included at full value, subject to applicable foreign tax credits
Rental Income: Net rental income, after deducting eligible expenses, is fully included in the Line 23400 calculation. This can represent a significant income component for retirees who maintain real estate investments.
Other Taxable Income: This broad category includes various income sources such as employment insurance benefits, workers’ compensation benefits, and other government transfers that are subject to taxation.
Income Sources That Are NOT Included
Strategic retirement income planning leverages income sources that do not contribute to the OAS clawback calculation.
Tax-Free Savings Account (TFSA) Withdrawals: TFSA withdrawals represent one of the most effective tools for managing OAS clawback risk. These withdrawals are completely tax-free and do not impact your net income calculation, making TFSAs invaluable for retirement income planning.
Gifts and Inheritances: Funds received through gifts or inheritances are generally not considered taxable income and therefore do not affect OAS clawback calculations.
Life Insurance Proceeds: Life insurance benefits paid to beneficiaries typically do not constitute taxable income and are excluded from the clawback calculation.
Return of Capital Distributions: Certain investment distributions classified as return of capital are not immediately taxable, as they represent a return of the investor’s original capital rather than income generation.
Common Misunderstandings
- Dividend Gross-Up Implications: The dividend gross-up mechanism significantly impacts retirees’ tax calculations. Eligible dividends from Canadian corporations are increased by 38% for tax purposes, meaning a $1,000 dividend becomes $1,380 for Line 23400 purposes. While this accounts for the dividend tax credit, it can substantially increase net income for clawback calculations.
- Capital Gains Tax Treatment: The preferential tax treatment of capital gains—where only 50% of gains are included in taxable income—makes capital appreciation strategies potentially more attractive than income-producing investments for retirees concerned about OAS clawback.
- TFSA Versus RRSP Withdrawal Treatment The fundamental difference between TFSA and RRSP withdrawals cannot be overstated. TFSA withdrawals never impact taxable income, while RRSP/RRIF withdrawals are always fully taxable and contribute to clawback calculations.
How Much Will You Have to Repay?
The OAS clawback follows a straightforward calculation based on current income thresholds, which are indexed annually to inflation.
Current Income Thresholds
| Tax Year | Clawback Threshold | Full Elimination (65-74) | Full Elimination (75+) |
| 2024 | $90,997 | $148,451 | $154,196 |
| 2025 | $93,454 | $151,668 | $157,490 |
Calculation Methodology
The clawback is assessed at 15% of net income exceeding the threshold. For example, a retiree with $100,000 in net income for 2024 would experience:
- Excess income: $100,000 – $90,997 = $9,003
- Annual clawback: $9,003 × 15% = $1,350
- Monthly impact: $1,350 ÷ 12 = $112.50
This reduction would be applied to their OAS payments for the following benefit year (July 2025 to June 2026).
Timing Considerations
The OAS clawback operates on a one-year lag, with benefits affected by the previous year’s income. This timing provides opportunities for strategic income planning and tax optimization.
How to Reduce Your Clawback Risk
Effective clawback management requires a comprehensive approach that considers all income sources and their tax implications.
Pension Income Splitting
Married couples and those in common-law relationships can split up to 50% of eligible pension income, potentially reducing the higher-income spouse’s net income below the clawback threshold. This strategy requires careful analysis to optimize the overall household tax situation.
TFSA Optimization
Maximizing TFSA contributions and strategically timing withdrawals can provide significant clawback protection. Since TFSA withdrawals do not contribute to taxable income, they represent an ideal source of retirement income for those at risk of OAS clawback.
Strategic RRSP and RRIF Management
Coordinating RRSP and RRIF withdrawals with other income sources can help smooth taxable income over multiple years. This may involve accelerating withdrawals in lower-income years or managing the timing of mandatory RRIF withdrawals.
Investment Portfolio Structuring
Structuring investment portfolios to generate more capital gains relative to interest and dividend income can reduce the taxable income component, given that only 50% of capital gains are included in net income calculations.
Comprehensive Tax Planning
Maximizing eligible deductions, including medical expenses, investment carrying charges, and professional fees, can directly reduce Line 23400 income. This approach requires careful documentation and ongoing monitoring to ensure all eligible deductions are claimed.
Professional Financial Planning
Given the complexity of retirement income optimization and the interaction between various income sources, professional guidance becomes essential. Our approach at Avenue Investment Management integrates OAS clawback considerations into comprehensive tax and estate planning strategies, ensuring that all aspects of your financial plan work together effectively.
For high-net-worth individuals, the stakes are particularly high, as the clawback can eliminate substantial government benefits. Our disciplined approach to wealth management considers these factors in developing long-term investment strategies that preserve wealth while maintaining eligibility for government benefits.
Frequently Asked Questions
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Do TFSA withdrawals count toward OAS clawback?
No. TFSA withdrawals are completely tax-free and do not contribute to your net income calculation for any purpose, including OAS clawback assessment. This makes TFSAs particularly valuable for retirement income planning.
How are foreign pensions treated for clawback purposes?
Foreign pensions are generally considered taxable income in Canada and are included in the Line 23400 calculation, even if taxes were paid in the foreign jurisdiction. Foreign tax credits may be available, but the gross pension amount typically contributes to clawback calculations.
What impact do capital losses have on the clawback calculation?
Capital losses can be used to offset capital gains in the current year or carried forward to offset future gains. Net capital losses (when losses exceed gains) can reduce your taxable income, potentially lowering your OAS clawback exposure.
Can I request a clawback reduction if my income drops?
Yes. If your current year’s income is expected to be significantly lower than the previous year’s income used for clawback calculations, you can request that Service Canada recalculate your benefits based on estimated current-year income.
How does pension income splitting affect clawback calculations?
Pension income splitting allows the transfer of up to 50% of eligible pension income to a lower-income spouse for tax purposes. This can reduce the higher-income spouse’s Line 23400 income, potentially eliminating or reducing their OAS clawback.
Have More Questions?
Optimizing Your Retirement Income Strategy
Understanding what income is included in OAS clawback calculations is fundamental to effective retirement income planning. The interaction between various income sources, tax implications, and government benefits requires careful analysis and strategic planning to optimize your financial position.
At Avenue Investment Management, we have developed sophisticated approaches to retirement income optimization that consider all aspects of your financial situation. Our independent perspective and disciplined investment process enable us to provide comprehensive guidance that preserves your wealth while maximizing your government benefits.
The complexity of retirement income planning, combined with the significant financial impact of OAS clawback, underscores the importance of professional guidance. Our team can help you navigate these challenges and develop a comprehensive strategy that aligns with your long-term financial objectives.
Contact Avenue Investment Management today to discuss how our expertise in retirement income planning can help you optimiz