Picture this – you’ve finally retired, and now you’re ready to start collecting those fat OAS cheques from the government, which can max out at $9,481 each year into your wallet. But, that ENTIRE amount can be clawed back by the government if you aren’t careful with it.
Let me show you how that works.
Overview of OAS Clawback (Recovery Tax)
The OAS clawback kicks in when your income exceeds the threshold of $90,997 for the 2024 income year period. If your income reaches or exceeds $153,771, you will lose all of your OAS payments for that period.
For July to September 2024, the maximum monthly OAS payments are:
- Ages 65 to 74: $718.33 per month ($8,619.96 annually)
- Ages 75 and over: $790.16 per month ($9,481.92 annually)
Example: Income in 2024
Meet David, a 75-year-old collecting OAS in Canada. In 2024, his income hits $160,000, which is well over the clawback threshold. Here’s the bad news: because of the OAS clawback, he’ll lose all his OAS benefits.
Why? The 15% recovery tax on the amount over the threshold ($90,997) adds up to $10,350. Since David’s annual OAS benefit is below that at $9,481, he’ll get nothing from July 2025 to June 2026.
Alright, now that you know you could potentially be saving over $9,000 a year, let’s see some ways to reduce or avoid that altogether. I’m going to go over 7 ways to avoid the OAS clawback, starting from the easiest to the hardest.
Strategies to Avoid OAS Clawback
1. Delay CPP
One of the most effective strategies to reduce the OAS clawback is to delay your CPP payments until a later age, such as 68, 69 or 70. By doing this, not only do you increase your CPP payments by up to 42%, but you also lower your taxable income between the ages of 65 and 70—when the OAS clawback typically kicks in.
Example:
Let’s say you’re eligible to receive $1,000 per month in CPP at age 65. If you delay until age 70, your monthly CPP payment will increase by 42%, bringing it up to $1,420 per month. Over time, this can make a big difference in your retirement income. Plus, because CPP is indexed to inflation, these higher payments will continue to grow in value.
For example, meet Peter Parker. Peter is experiencing a clawback of around $8,111 at age 65 due to a higher taxable income, because he is drawing both CPP and other sources of retirement income.
However, by choosing to delay CPP, Peter’s taxable income is reduced, resulting in a smaller OAS clawback of $5,844. This represents a savings of $2,267 on the OAS clawback just by delaying CPP.
Not only do you save on the OAS clawback by delaying CPP, but he also secures higher CPP payments later, making it a win-win scenario.
2. Delay OAS
Another smart strategy is to delay your OAS payments until age 70. This increases your monthly OAS payments by about 36%, which gives you more income later while reducing or even eliminating the clawback during the earlier years of retirement.
Example:
If you’re receiving $500 per month in OAS at age 65, delaying until age 70 increases your monthly payments to $680—a 36% increase. This is a substantial boost to your retirement income, especially when combined with delayed CPP.
Y can see that Peter faces a clawback of $8,111 at age 65, meaning a significant portion of their OAS benefits is being reduced due to his high taxable income. This clawback occurs because their income exceeds the threshold, causing them to lose part of their OAS benefits.
However, you’ll notice a significant difference—by delaying OAS until age 70, the entire clawback is eliminated (you can see that the OAS clawback column is gone). This happens because delaying OAS when you know you’ll have higher income is a smart strategy. As a result, you avoid losing benefits and, in turn, receive higher monthly OAS payments after age 70, which increases by about 36%.
In short, delaying your OAS until age 70 can provide a dual benefit: not only do you avoid the clawback entirely, but you also get the advantage of higher payments later in life.
Note that it isn’t always wise to delay CPP and OAS. For example, if you have health issues or a shorter life expectancy, delaying may not be the most beneficial option.
3. Use Your TFSA (Flexible Option)
A Tax-Free Savings Account (TFSA) is one of the best tools to help avoid the OAS clawback because withdrawals from your TFSA are completely tax-free. This means you can access the funds for your living expenses without increasing your taxable income, helping you stay below the OAS clawback threshold.
Example:
Imagine you have $100,000 saved in your TFSA. If you withdraw $20,000 per year to cover your living expenses, you won’t owe any taxes on this amount, and it won’t be counted as taxable income. This strategy is particularly helpful if your taxable income is already near the OAS clawback threshold of $90,997. By using your TFSA for additional income, you avoid pushing your taxable income higher, allowing you to stay under the threshold and preserve your full OAS benefits.
Without this strategy, if you had to withdraw the same $20,000 from a taxable account like an RRSP, your income could exceed the threshold, triggering the clawback and reducing your OAS payments. The TFSA gives you flexibility to access tax-free income and protect your OAS benefits, making it an essential tool for retirees looking to optimize their finances.
Pro tip: The RRSP-to-TFSA Ladder:
- Consider gradually withdrawing from your RRSP and contributing to a TFSA before age 71. This keeps your taxable income lower later on and lets you withdraw tax-free from the TFSA in retirement, minimizing the clawback effect on your OAS.
4. Pension Income Splitting
Pension income splitting can be a great way to reduce your taxable income and avoid the OAS clawback, especially if one spouse earns significantly less than the other. This strategy allows you to transfer up to 50% of your eligible pension income to your lower-income spouse, helping you keep your taxable income under the OAS clawback threshold.
Example: Peter Parker and Mary Jane
Let’s take Peter Parker and his wife, Mary Jane, as an example. Peter earns $60,000 annually from his pension, while Mary Jane has a much lower income. By using pension income splitting, Peter can transfer $30,000 of his pension income to Mary Jane. This reduces Peter’s taxable income from $60,000 to $30,000, putting him in a lower tax bracket and reducing the risk of triggering the OAS clawback.
Meanwhile, Mary Jane, who is in a lower tax bracket, is now taxed on the $30,000 she receives, which means they pay less tax as a couple overall. More importantly, by reducing Peter’s taxable income, they can keep his total income below the OAS clawback threshold of $90,997, preserving his full OAS benefits.
This strategy can be especially useful for couples like Peter and Mary Jane, where one spouse earns significantly more than the other. Not only does it lower their overall tax burden, but it also helps protect Peter’s OAS payments from being reduced by the clawback, making it a valuable tool for retirement planning.
5. Manage RRIF Withdrawals
When you turn 71, your RRSP converts into a RRIF, and you must start making minimum annual withdrawals, which are considered taxable income. These withdrawals can push your income over the OAS clawback threshold if not managed carefully. However, there are ways to minimize this impact, such as using your younger spouse’s age to reduce the withdrawal rate or tapping into non-taxable accounts like a TFSA first.
Example:
Peter, now 71, and his wife Mary, who is 65, can use her younger age to reduce the required RRIF withdrawal rate. Normally, at age 71, Peter would need to withdraw 5.28% from his RRIF. But by basing the withdrawal on Mary’s age, the rate drops to 4%. For a $200,000 RRIF, this means withdrawing $8,000 instead of $10,560, lowering their taxable income by $2,560. This reduction helps them stay below the OAS clawback threshold, preserving more of their benefits.
6. Invest Strategically in Non-Registered Accounts
The type of income you earn from non-registered accounts can significantly increase your taxable income and potentially trigger the OAS clawback. Interest income from bonds or GICs is fully taxed at your marginal rate, while dividend income is taxed at a lower rate but still adds to your taxable income.
However, capital gains are only taxed at 50% of your marginal tax rate, making them a much more tax-efficient option. By focusing on growth investments like stocks, which primarily generate capital gains instead of interest or dividends, you can reduce your taxable income and stay below the OAS clawback threshold, protecting your benefits.
Example:
If your portfolio generates $10,000 in interest income, the full amount is taxed, potentially pushing you over the OAS clawback threshold. But if you shift to growth investments that have mostly capital gains only, only half of your gains are taxed, so instead of $10,000, only $5,000 is taxable. This strategy helps preserve more of your OAS and lowers your overall tax burden in retirement.
7. Capture Capital Gains Before Age 65
Timing is key when managing capital gains to avoid the OAS clawback. By capturing gains before you turn 65, you can avoid large taxable events once OAS kicks in. Capital gains occur when you sell assets like stocks or property for a profit, and while they are taxed more favourably than other income, large gains can still push you over the clawback threshold in retirement.
A smart approach is to realize these gains between the ages of 60 and 64, before you start receiving OAS. This allows you to pay taxes earlier and
Example:
If you plan to sell a property or investments for a $50,000 gain, doing so at age 63 or 64 ensures this gain won’t count toward your taxable income during the crucial years when OAS begins, keeping you under the clawback threshold and saving you thousands in reduced benefits and taxes.
Comprehensive Retirement Planning – Tying It All Together
When it comes to retirement planning, it’s important to be aware of how strategies like delaying CPP and OAS, using your TFSA, and managing RRIF withdrawals can help you avoid the OAS clawback and keep more of your benefits.
These smart moves can save you thousands of dollars in retirement. Check out our services on this website, and book a free consultation when you’re ready!
