Retirees: How to Get $2,432 Tax-Free Income While AVOIDING OAS Clawbacks!

If you want to avoid OAS clawbacks, make sure you hold dividend stocks like Fortis Inc (TSX:FTS)(NYSE:FTS) in a TFSA.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The OAS recovery tax is the bane of many a Canadian retiree. If you earn over $79,054, you’re legally required to pay some of your OAS back. The amount you have to pay back depends on how far you are over the threshold. If you earn over $126,058, you have repay the entire amount!

On the surface, this reasoning makes sense. OAS is designed to help seniors in need, and high earners don’t need the money as much as low earners. However, the recovery tax doesn’t account for cost of living differences from city to city, or personal debt levels. In practice, it’s entirely possible for a Canadian earning $100,000 to be worse off than a Canadian earning $75,000.

Fortunately, there are ways to combat the OAS recovery tax. If you’re way over the threshold, it may be unavoidable, but if you’re close to the line, you could avoid it. Particularly if a lot of your income comes from investments, you can lower your taxable income and avoid OAS clawbacks. You can even earn an extra $2,432 in tax-free income in the process. Here’s how.

Hold income-producing investments in a TFSA

If you’ve got a lot of investments, you’d be wise hold to the ones that pay interest or dividends in a Tax-Free Savings Account (TFSA). The reason is that these investments automatically generate income. With non-dividend stocks, you can avoid taxes by not selling.

However, that’s not the case with dividends and interest. Even if you automatically re-invest your dividends, they still count as taxable income. So, they push your taxable income higher.

Unless, that is, you hold them in a TFSA. By doing so, you not only avoid direct taxes, but also lower your taxable income for OAS purposes. The end result? Tax-free income and less OAS recovery tax.

How much you could save

To understand how much money you could save by holding dividend stocks in a TFSA, let’s consider a hypothetical example.

Imagine an investor holding $69,500 worth of Fortis Inc (TSX:FTS)(NYSE:FTS) shares in a TFSA. Let’s also imagine that this investor earns $79,000 in income each year–just $54 shy of the OAS clawback threshold.

Fortis is a dividend stock that yields 3.5%. That means that $69,500 worth of it produces $2,432 in dividend income each year. The actual taxes payable would depend on the investor’s marginal tax rate, and would have a 15% tax credit taken off. At any rate, the taxes, outside of a TFSA, would likely be several hundred dollars.

Within a TFSA, there would be zero taxes paid.

Not only that, but the investor would avoid OAS clawbacks.

In Canada, dividend income is treated as ordinary taxable income. That means that any money you earn in dividends increases the amount your OAS is calculated on. So, for an investor earning $79,000 the dividends on a $69,500 FTS position would easily put them above the OAS recovery tax threshold.

By holding those shares in a TFSA, the tax would be avoided. So by holding dividend stocks in a TFSA, you get a double whammy of tax savings.

What Stocks Should You Add to Your Retirement Portfolio?

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now. The Top Stocks that made the cut could produce monster returns in the coming years, potentially setting you up for a more prosperous retirement.

Consider when "the eBay of Latin America," MercadoLibre, made this list on January 8, 2014 ... if you invested $1,000 at the time of our recommendation, you’d have $20,697.16*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Andrew Button has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

analyze data
Dividend Stocks

How I’d Invest $28,000 in Canadian Natural Resource Stock to Amass Personal Wealth

Investing in TSX dividend stocks such as Enbridge can help you earn a passive-income stream in 2025.

Read more »

hand stacks coins
Dividend Stocks

Got $400? How I’d Start Building Income With 3 High-Yield Stocks for the Long Term

These high-yield dividend stocks have a solid payout history, making them compelling investments to generate passive income.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

I’d Put $15,000 in These 3 Dividend-Growth Champions for Increasing Income Potential

Want to offset some volatility? Here are three defensive dividend-growth champions that can generate a juicy yield right now.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Transform Your TFSA Into a Cash-Creating Machine With $7,000

Discover how the Tax-Free Savings Account can be your golden goose for generating cash without losing your investment.

Read more »

monthly desk calendar
Dividend Stocks

How I’d Invest $10,000 in Canadian Value Stocks for Monthly Dividend Income

A $10,000-diversified portfolio of value stocks focusing on dividend safety, yield, growth, and payment schedules can provide a reliable source…

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

Is This Correction Your Chance? Top 4 Canadian Dividend Stocks on Sale

Stocks may be down, but now is your chance to get some of these top dividend stocks on sale.

Read more »

Confused person shrugging
Dividend Stocks

Where to Invest $2,500 in the TSX Today

These TSX stocks offer attractive dividends and a shot at decent upside on a rebound.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Invest $25,000 in These Dividend Stocks for $1,956.66 in Annual Passive Income

Dividends stocks can make a huge difference, even if shares don't move an inch. And these might be the best.

Read more »