Canada Revenue Agency: How to Avoid the OAS Clawback in 2021

Those looking to avoid the pesky OAS clawback can explore ways of outmaneuvering the Canada Revenue Agency in their golden years.

| More on:
Senior Man Sitting On Sofa At Home With Pet Labrador Dog

Image source: Getty Images

Old Age Security (OAS) is a monthly payment you can receive in Canada if you are 65 and older. Service Canada should inform you if you have been automatically enrolled. Otherwise, Canadians can apply for the OAS. The OAS is a taxable benefit, which means you need to pay a cut to the Canada Revenue Agency.

In the beginning of 2020, I’d discussed how retirees could retire in comfort with just CPP and OAS payments. However, it is always preferable to add extra income to this duo. Another drawback is the OAS clawback. Today, I want to discuss how you avoid that drawback and duck the Canada Revenue Agency.

Canada Revenue Agency: How OAS works in Canada

The maximum monthly benefit for the OAS is $613.53 in 2020. That works out to an annual maximum of $7,362.36. However, the OAS clawback requires high-income earners to repay some or the entire OAS pension. The Canadian government refers to it as OAS recovery or OAS repayment. In any case, some Canadians are forced to fork over more to the Canada Revenue Agency.

In 2020, the OAS clawback starting threshold is $79,054. Canadians who have prepared well for retirement and are collecting income from a pension, and RRSP, and other streams will likely be at risk of crossing this threshold. Fortunately, there are strategies that can help you minimize paying back the Canada Revenue Agency.

Retirees: How to tackle the OAS clawback

The OAS clawback can be frustrating for retirees, because it can act as an additional 15% tax. However, Human Resource Development Canada has said that only about 5% of seniors receive reduced OAS pensions and only 2% lose the entire amount. Still, the question remains, how can we avoid the clawback?

Income splitting is one of the first strategies that should come to mind for married or common-law retirees. The introduction of pension splitting in 2007 really opened options for this cohort. Pension splitting lets spouses give up to 50% of their pension income to their spouse for tax-splitting purposes. This strategy can put you under the threshold for the OAS clawback.

Canadians can also look to spend their RRSPs before they turn 65. The benefits of the tax deferral wane in the later years of this Canada Revenue Agency-administered account. This is an unconventional route that not all investors will be comfortable pursuing.

You can also opt to defer the OAS. This new rule allows seniors to elect to defer the OAS to as late as age 70. Canadians planning to work past the age of 65 may find this option particularly useful.

Canada Revenue Agency: Retirees should pursue this strategy in 2021

Instead of looking for ways to reduce your retirement income, I want to see how we can beef it up to close out this article. The Tax-Free Savings Account (TFSA) is open to retirees who want to pursue capital growth or extra income. Best of all, these gains do not have to go to the Canada Revenue Agency.

Pembina Pipeline (TSX:PPL)(NYSE:PBA) is a dividend stock that is perfect for a retiree TFSA. This company provides transportation and midstream services for the energy industry in North America. Its shares have increased 20% month over month as of close on November 25. The stock is still down 24% so far this year.

In Q3 2020, Pembina saw net revenue increase to $849 million compared to $751 million in the prior year. Adjusted EBITDA climbed to $796 million over $736 million. Pembina stock possesses a price-to-earnings ratio of 21 and a price-to-book value of 1.3. That puts the stock in very solid value territory. Best of all, it offers a monthly distribution of $0.21 per share. That represents a tasty 7.3% yield. Retirees can gobble up gains and worry about the Canada Revenue Agency another day.

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 Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool recommends PEMBINA PIPELINE CORPORATION.

More on Investing

Business man on stock market financial trade indicator background.
Tech Stocks

1 Growth Stock Down 50 Percent to Buy Right Now

There are plenty of growth stocks in the market worth considering, but Shopify (TSX:SHOP) looks like one of the best…

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

edit Sale sign, value, discount
Stocks for Beginners

These 3 Growth Stocks Are on Sale and Set to Surge

Some growth stocks are on sale right now that offer massive long-term potential for investors. Here's a trio to consider…

Read more »

Cannabis grows at a commercial farm.
Cannabis Stocks

Why Canopy Growth Stock Could Double in 2024

Canopy Growth (TSX:WEED) stock saw its share more than double in the last two weeks. So, can it do it…

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »