Old Age Security (OAS) is an income benefit that is paid to Canadians once they reach the age of 65.
It’s smart tax planning for retirees to arrange their income to avoid this clawback if possible. Some strategies to review are:
- Income split with your spouse/CLP (Common Law Partner)
- Tax effective non-registered investments
- Review the start date of your RRIF
- Use the younger spouse/CLP’s age for RRIF payments
- Use TFSAs
- Trigger large capital gains prior to age 65
- Defer OAS
How do you collect Old Age Security?
To collect Old Age Security (OAS), the criteria is:
- Age 65 or older
- Citizen of Canada
- Resided in Canada at least 10 years since the age of 18
- To get the maximum OAS benefit
- you must have resided in Canada at least 40 years after the age of 18.
- resided in Canada 10 continuous years prior to receiving OAS
How to APPLY for OAS HERE
How much can you get at age 65?
- Maximum payment as of January 2021
- Monthly: $615.37
- Annually: $ 7,384.44
- Inflation Adjustment
- Increases if you delay OAS past age 65
- If you delay applying for OAS, each month past the age of 65, the payment is increased by 0.6% to age 70, with a maximum increase of 36%.
- OAS is taxable income
- You can request to have taxes withheld on the payments.
What is the OAS Recovery Tax?
Once your net income reaches:
- $79,845 for 2021, reductions start at 15 % of the income above that,
- and you lose all your OAS once your income is $129,075 and over.
Please note, this is based on individual income and not family income.
Let’s say your income in 2021 is $85,000.
The reduction is:
- ($85,000 – $79,845) x 15 % = $ 773.25 per year or $64.44 per month.
- The OAS payment would be reduced to $550.93 from $615.37/month.
Let’s say your income in 2021 is $129,075.
The reduction is:
- ($129,075 – $79,845) x 15 % = $7,384.50 per year or $615.37per month.
- Your OAS payment would be eliminated.
Strategies to Minimize OAS Clawback or Recovery Tax.
To reduce your income below the OAS clawback zone, there are some strategies that can be implemented.
Income splitting with your spouse
A smart tax strategy to reduce a family’s overall tax burden is to split the income. This means to shift income from a spouse or common-law partner (CLP) who is in a higher tax bracket to one who is in a lower tax bracket.
With income splitting, you could potentially reduce or eliminate any OAS clawback for the higher income spouse.
Specific strategies include:
Pension splitting: you can allocate up to 50% of your pension eligible income to your spouse/CLP.
Sharing CPP Retirement Pension Benefits: once both spouses/CLPs start to collect CPP you can share benefits and allocate more income to the lower-income spouse/CLP. (The total payments remain the same)
For non-registered investments, you can use a spousal loan to shift income from a higher taxed spouse/CLP to a lower-taxed spouse/CLP to take advantage of their lower marginal tax rate.
Spousal RRSPs: occur when a higher income spouse/CLP contributes to the lower-income spouse/CLP’s RRSPs, who is the annuitant (owner). This requires planning ahead of time and allows you to split income at retirement.
- Tax Effective Non-Registered Investments
One of the best ways to keep your taxable income low is to have tax-efficient investments in your non-registered investment accounts. Some key strategies to review include:
Utilize Capital Gains: For retirees, it can be beneficial to use investments that generate capital gains for non-registered investments as the tax on the income is lower than investments that generate dividends or interest income.
- With capital gains, only 50% of a capital gain is included income
- With dividends, the payments are grossed up by 138%
- Interest income is 100 % taxable.
Corporate class funds are tax effective for non-registered investments, as they can only generate capital gains and dividends which are taxed less than interest income.
T-Series Funds are a class of mutual funds that can be tax-effective. They allow a portion of the income you take each year to be considered a return of capital (ROC), so no income tax is payable, nor is it included in the OAS clawback calculation.
- Review the start date of your RRIF.
You will want to review the start date or the conversion date of your RRSPs to an RRIF. It may make sense to start the income prior to age 71, and for some, it may make sense to delay it until after age 71. You will have to look at your projected income levels at different ages to do the comparisons.
- Use the younger spouse’s/CLP’s age for RRIF payments.
If your spouse/CLP is younger than you, you can base the minimum RRIF amount on their age, resulting in a lower amount you must withdraw each year and lower taxable income.
- Use TFSA investments
Prior to and in retirement, any excess cash flow should be redirected into a TFSA.
- There is no tax paid on the income earned
- No tax when you redeem
- and no attributions rules with your spouse/CLP
- Defer OAS
If you are in the OAS clawback situation, you may want to delay OAS to age 70. By doing so the amount of OAS will increase, and you may get some as a result. If your other income reduces as you get older, your OAS will be more.
- Trigger large capital gains prior to age 65.
If you are planning a major purchase or rebalancing your portfolio, you may want to trigger large capital gains prior to age 65 to avoid the OAS clawback.
Smart tax planning is a key element for retirees to have a consistent and reliable income. You will want to review annually based on changes in your life, and the inevitable tax changes over time. Not only will this aid you in paying less tax, keeping more income benefits to allow more spending today, but it can also help you to preserve your wealth for the next generation.
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®
For your FREE Copy CLICK HERE
For your free retirement readiness assessment CLICK HERE
Buy Preserving Wealth CLICK HERE
Jack Lumsden, MBA CFP® Financial Advisor, Assante Financial Management Ltd.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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