The Old Age Security (OAS) clawback territory is not the place to be for retirees. If you land there, you’ll be paying an additional 15% tax, thereby reducing the OAS payment due to you. So how will you fall into the taxable territory?
For the recovery tax period between July 2020 and June 2021, the minimum income recovery threshold is $77.580. You will trigger the OAS clawback if your income in 2019 exceeds the threshold. The maximum income recovery threshold is $126,058. If your income exceeds the maximum, your OAS benefit payment will be reduced to zero.
Let’s say your income in 2019 is $90,000. Your repayment would be 15% of the difference between $90,000 and $77,580. Hence, for reference purposes, the clawback is $1,863 ($12,520 X 0.15) or $155.25 monthly deduction.
Retirees dread the OAS clawback. However, there are smart ploys to minimize the effect of the notorious recovery tax. If you play it right, you can avoid entering the OAS clawback territory.
Revisit your income sources
Retirees should be mindful of their investment income. Usually, when a substantial portion of your income is taxable, it bumps up your overall income to the set income threshold. Income derived from non-registered investments is fully taxed. The same thing goes for GICs, dividends, and savings.
Prioritize tax-free accounts
Your Tax-Free Savings Account (TFSA) is the best weapon against the OAS clawback. Assuming you want to invest in a high-yielding real estate investment trust like Crombie (TSX:CRR.UN). You can own shares of this $2.38 billion for $15.06 per share and partake of the generous 5.63% dividend.
An investment of $25,000 in Crombie will reward you $1,407.50. If you withdraw the principal plus interest ($26,407.50) from your TFSA, the entire amount is tax free. Other equities that pay higher dividends and are listed on the TSX are acceptable investments in the TFSA.
Crombie is one of the leading national retail property landlords in Canada. The main thrust of this REIT is to own, operate, and develop a portfolio of high-quality rental properties. The focus is grocery- and drug store-anchored shopping centres, freestanding stores, and mixed-use developments.
Most of the locations are in the country’s top urban and suburban markets. At present, Crombie’s portfolio consists of 287 commercial assets, and the total value of the assets is around $4.8 billion. Crombie also has a growing development pipeline that you will soon see in Canada’s fastest-growing metropolitan areas.
Split the income
Married individuals have one more leeway to avoid or minimize the impact of the OAS clawback. In case there’s no way to prevent your net income from going beyond the income threshold, split the income with your spouse.
This strategy is proven to lower the individual income of either spouse. By eliminating the OAS clawback, you keep whole your OAS benefit.
There are other strategies to counter the OAS clawback that could work for you. However, the three ploys are the simplest and less cumbersome approaches to deal with the clawback. Get smart and don’t be among the 5% of seniors who receive reduced OAS payments.
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