The Motley Fool

Retirees: Fight Back Against the 15% OAS Clawback

Image source: Getty Images.

Retirees in Canada love to hate the 15% Old Age Security (OAS) clawback for one good reason. It reduces the OAS benefits if net income exceeds the set threshold. Many are fighting back to minimize the recovery tax.

For the tax year July 2020 to June 2021, you don’t want your net income in 2019 to go beyond $77,580. If it does, then you trigger the clawback. Thus, it would be best if you were to plan your strategies before retirement comes.

Splitting pension with the spouse

The primary purpose of a pensioner fighting back is to bring down income. One smart approach is to split a pension and other income with your spouse.

With the spousal Registered Retirement Savings Plan (RRSP), for example, you can place a substantial portion of your income in your spouse’s name to reduce your net income.

Make RRSP withdrawals when in a lower tax bracket

Assuming you’re retiring early, withdraw from the RRSP while in a lower tax bracket. This approach will effectively reduce your minimum Registered Retirement Income Fund (RRIF) withdrawal and your net income.

Maximize your TFSA

The antidote to the OAS clawback is your Tax-Free Savings Account (TFSA). Withdrawals from this investment account are non-taxable income, and therefore, it’s untouchable by the CRA.

TFSA investors can fast track tax-free income generation with high-yield dividend stocks like Alaris Royalty (TSX:AD) and Boston Pizza (TSX:BPF.UN). Both royalty companies are dividend monsters. The former yields 7.69%, while the latter offers a lucrative 8.52% dividend.

If you have both in your TFSA, the average yield is 8.1%. A total of a $40,000 investment ($20,000 in each stock) should produce an annual income of $3,242. By holding the shares for nine years, your TFSA savings will more than double to $80,662.56.

Alaris, a $754.57 million private equity firm, receive royalties or monthly cash distribution from private companies it has helped with equity or long-term working capital. The thrust is unconventional because Alaris extend financial assistance to profitable companies seeking to achieve maximum potential.

Thus far, Alaris has recorded $1.3 billion total investments in companies across various industries that are producing at least $3 million free cash flow. The transaction size ranges from $10 million to $100 million. This royalty company realizes 80% EBITDA margins, since overhead expenses are very minimal.

Boston Pizza is a well-known casual dining brand. This $300.67 million limited purpose open-ended trust derives revenue from 396 Boston Pizza restaurants under a franchise system sales set-up. In 2019, system-wide gross sales amounted to $1.1 billion, although it was 1.5% lower than the previous year.

The pizza chain attracts over 50 million customers yearly, but increased competition resulted in a decline in restaurant guest traffic. The bright spot is the increasing customer preference for takeout and delivery. Boston Pizza also cites seasonal fluctuation as the reason why the payout ratio rises from time to time.

Boston Pizza’s initiatives in 2020 include elevating food quality and consistency, along with its core beverage programs. Management is preparing to launch a new digital ordering platform to capitalize on changing customer preferences.

Great equalizer

Steady investment income from high-yield stocks like Alaris and Boston Pizza can significantly reduce the impact of the 15% OAS clawback if other strategies don’t work out.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.

Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends ALARIS ROYALTY CORP.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.