Canada Revenue Agency: How to Generate $418 in Extra Monthly Pension Income and Avoid OAS Clawbacks

Here’s how retirees can supplement their pension payments with a recurring stream of dividend cash flows.

Happy retirement

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The Government of Canada has a couple of pension plans to help retirees. The Canada Pension Plan and Old Age Security (OAS) are two such plans that provide residents with a monthly payment.

When will the Canada Revenue Agency tax your OAS?

The OAS security program is the Government of Canada’s largest pension program. It’s a monthly payment available to individuals over the age of 65. Further, to be eligible for this payment, you need to be a Canadian citizen or a legal resident and have resided in the country for at least 10 years since the age of 18.

The maximum monthly payment amount for an OAS pension holder is $613.53. However, according to the Canada Revenue Agency, if your net world income is above the threshold amount of $79,054, you would need to pay a part of your OAS pension in taxes.

The Canada Revenue Agency will charge a 15% tax on your OAS for any income above the threshold limit. If your income crosses the maximum threshold limit of $128,137, your entire OAS pension will be recovered.

One way to avoid these OAS clawbacks is to generate income inside a TFSA (Tax-Free Savings Account). As the name suggests, any withdrawal from this investment account in the form of capital gains or dividends is tax-free. That means any withdrawals from a TFSA are not included in your net world income.

According to the Canada Revenue Agency, the contribution limit for your TFSA in 2020 stands at $6,000. The total, cumulative contribution limit is $69,500. You can allocate this amount to high-quality dividend-paying stocks that will help generate a stable stream of recurring income.

These dividend stocks can create long-term wealth

Shares of TransAlta Renewables are trading at $14.8 which is 19% below its 52-week high. TransAlta is recession-proof as it generates stable cash flows and is part of the renewables sector that has considerable growth potential in the upcoming decade. With a dividend yield of 6.4%, this stock needs to be on the radar of income investors.

Enbridge is Canada’s energy giant. It has a market cap of $87.6 billion and the stock is currently trading 24.5% below its 52-week high. The low energy prices should not impact Enbridge to a large extent as it is not an oil producer. Its vast network of pipelines helps to transport energy commodities. A significant portion of its cash flows is protected by long-term contracts. It has a forward yield of 7.5% and has enough cash reserves to sustain these payouts.

An investment company that has lost significant ground in recent times in Fiera Capital. This asset management firm saw outflows as investors have withdrawn capital amid the sell-off. Fiera shares have lost 35% in market value since January. This has driven its dividend yield to a tasty 9.8%.

North West Company is a Canada-based multinational grocery and retail company. The stock is trading at $25.5 which is 20% below its 52-week high. North West’s grocery business is recession-proof, making its dividend yield of 5.2% safe in this uncertain environment.

If you allocate a total of $69,500 to these four stocks, the annual dividend payment will be approximately $5,021. This indicates a monthly dividend payment of $418. As these stocks are trading significantly below their 52-week highs, investors might also benefit from capital appreciation on a market rebound.

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.

The Motley Fool owns shares of and recommends Enbridge. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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