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.

Should you invest $1,000 in Bank of Montreal right now?

Before you buy stock in Bank of Montreal, consider this:

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… and Bank of Montreal wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” 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

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

5 Canadian Dividend Stocks to Buy and Hold for the Next 20 Years

These Canadian stocks have paid dividends for decades, making them reliable investments to generate regular passive income.

Read more »

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

This 10.6 Percent Dividend Stock Pays Cash Every Single Month

Are you looking to invest for a rainy day? This 10.6% dividend stock pays cash every month, irrespective of the…

Read more »