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

The 15% OAS clawback is non-negotiable with the CRA, but avoidable if you use three proven strategies. For consistent dividend payments and tax-free money growth, the Loblaw stock is ideal for TFSA investors.

| More on:
edit Taxes CRA

Image source: Getty Images

Canadian retirees hate the 15% Old Age Security (OAS) clawback the most every tax season. The Canada Revenue Agency’s (CRA) so-called recovery tax is hurtful because it reduces retirees’ financial sustenance. While lower-income individuals are least affected, many still worry about triggering the notorious clawback.

The recovery period for the 2020 income year is from July 2021 to June 2022. If your net income goes beyond the minimum income recovery threshold of $79,054, you enter the clawback zone. The OAS benefit is zero if net income reaches the maximum threshold of $128,149.

Assuming your income in 2020 is $90,000, you exceed the threshold by $10,946. The CRA will charge a 15% tax on the excess, or $1,641.90. You would have to repay the amount during the recovery period. Fortunately, smart seniors have ways to fight back. There are proven strategies you can use to defang the OAS clawback.

1. Reallocate pension to spouse

Pension sharing is a popular strategy among retirees. The CRA allows Canadians over 65 to split the Canada Pension Plan (CPP), Retirement Registered Income Fund (RRIF) or pension income with their spouse or common-law partner. This approach is one of the savviest ways to lower individual income for either spouse to limit the tax bite.

2. Delay the start of OAS payments

Deferring the OAS pension by five years or until age 70 works best if your income level between 65 and 70 brings you closer to the OAS income threshold. You become eligible to receive a higher monthly pension with this option. The pension amount increases permanently by 36% (7.2% per year after 65) at age 70.

3. Create non-taxable income

Since the 15% OAS clawback applies only to taxable income, the third proven strategy is to created non-taxable income. Your vehicle to succeed with this ploy is through a Tax-Free Savings Account (TFSA).

Remember that all interest, gain, or dividends in a TFSA are 100% tax-free. Hence, it would be wise to utilize and maximize your TFSA contribution limits to produce more tax-exempt income. Withdrawals, regardless of amount, are similarly tax-free.

Defensive qualities

High-yield dividend stocks are not necessarily the best choices for TFSA investors. You must also pick assets with defensive qualities to ensure consistent dividend payouts and tax-free money growth. Loblaw (TSX:L) pays a 2.07% dividend, but the business model is recession-resistant and worry-free.

The $22.47 billion food and pharmacy company was resilient as ever during the 2020 health crisis and until the present. In the fiscal year 2020 (year ended January 2, 2021), total revenue increased by 9.7% to $52.7 billion versus the fiscal year 2019. Notably, Loblaw’s operating income grew 4.2% to $2.3 billion. The company spent approximately $445 million in COVID-19 related costs, although e-commerce sales grew by a whopping 178%.

Customer trends are changing due to the ongoing pandemic, but you can expect Loblaw to adapt and meet them head-on. Market analysts are bullish and forecast the stock to scale new heights. The price target in the next 12 months is $91, or a 40.6% increase from its current price of $64.70.

Tax planning

The 15% OAS clawback shouldn’t be a threat at all. You can incorporate the three legitimate and proven strategies in your tax planning to avoid the CRA’s unpopular recovery tax.

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.

More on Dividend Stocks

edit Sale sign, value, discount
Dividend Stocks

3 Top Dividend Stocks That You Can Buy Under $50

The global equity markets have turned volatile over the last few weeks amid the fear that the U.S. Federal Reserve …

Read more »

ETF chart stocks
Dividend Stocks

3 TSX ETFs to Buy for Big Dividends

Dividend-paying exchange-traded funds (ETFs) are excellent investment options for passive investors. Apart from instant diversification, would-be investors earn in two …

Read more »

grow dividends
Dividend Stocks

3 of the Best Dividend Growth Stocks That Money Can Buy

Long-term investing has several advantages, which is why so many well-known investors like Warren Buffett recommend it as a strategy. …

Read more »

investment research
Dividend Stocks

3 Cheap Canadian Stocks to Buy Now Before the Dividend Deadline!

Motley Fool investors have been searching high and low for safe stocks in this volatile market. The TSX today doesn’t …

Read more »

Glass piggy bank
Dividend Stocks

How to Accelerate Your TFSA Returns From Dividend Stocks

The stock market saw a correction in January, as investors booked profits ahead of the central bank’s interest rate hikes. The TSX …

Read more »

money cash dividends
Dividend Stocks

Top 3 Dividend Stocks in Canada for 2022

Canada is home to some of the best dividend stocks in the world. With finance, telecoms, and energy dominating the …

Read more »

calculate and analyze stock
Dividend Stocks

2 Top TSX Stocks to Put on Your TFSA Buy List

TFSA investors are searching for undervalued TSX stocks to buy that have the potential to deliver big gains in 2022. …

Read more »

Payday ringed on a calendar
Dividend Stocks

Get Unbelievable Monthly Income With High-Yield Dividend Stocks

The only thing better than a dividend stock is a stock that pays dividends every month. For people who live …

Read more »