The Motley Fool

Canada Revenue Agency: 3 Ways to Avoid the 15% OAS Clawback

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I suppose individual and corporate taxpayers have complied with the tax filing on June 1, 2020, or the new deadline for this tax season. The Canada Revenue Agency (CRA) promptly extended the tax-filing and tax-payment deadlines due to COVID-19. However, retirees are again facing the thorny Old Age Security (OAS) clawback.

Retirees are avoiding the 15% recovery tax to receive the full or most of the OAS benefit. If you’re an OAS pensioner, you need to be mindful of the income thresholds first and foremost. You can trigger the OAS clawback and receive less or none at all. Instead of blowing your top, play it smart with some proven ways.

Minimum and maximum thresholds

For the income year 2019, the minimum income recovery threshold is $77,580, while the maximum is $126,058. Your net income must not go beyond the prescribed minimum. The CRA will charge you 15% of the excess amount as the penalty tax. If your income reaches the maximum cap, you’ll get zero OAS.

Review your sources of income

Since the mechanics are precise, your move should be to review your sources of income. When a significant portion of your earnings are subject to tax, it will increase your overall income and trigger the OAS clawback. As much as possible, lessen your non-registered investments where income or gains are taxable.

Make full use of your TFSA

Consider your Tax-Free Savings Account (TFSA) as the vaccine for the OAS clawback. You can maximize your TFSA and invest in income-producing assets. The CRA will not treat all your investment as regular and taxable income.

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Slice your income in two

Another useful and proven ploy is to slice your income in two. Married individuals can split the income to bring down each spouse’s income. It’s one of the surefire ways to keep net income below the threshold levels.

If the first two ways don’t work, this third strategy should significantly negate the impact, if not eliminate the notorious OAS clawback.

Not a problem at all

The 15% recovery tax shouldn’t cause too much of a challenge to a retiree. There are legitimate ways to avoid it and not be a hostage of the OAS clawback.

Speaking of ways to avoid the 15% OAS clawback...

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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 owns shares of and recommends Enbridge.

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