The tax season will be upon us soon, and the Canada Revenue Agency (CRA) will find itself going up against Canadian retirees who are upset about the recovery tax. After working hard for so long to earn a comfortable retired life, Canadian retirees subject to the 15% Old Age Security (OAS) clawback must find the tax unfair.
If you are facing the OAS clawback for the first time, you should know that this battle takes place every year, because it can take out a chunk of your pension income. With no active income sources, it makes sense that you would want to keep as much of your pension as possible and free from the CRA’s tax-hungry clutches.
I will discuss three ways that you can legally reduce the 15% OAS clawback and possibly eliminate it entirely.
1. Defer collecting your OAS until you turn 70
The ideal method to avoid paying it is to defer collecting the OAS until you turn 70. Typically, the OAS benefits start from 65. You can begin collecting them early at 60 or delay it till you turn 70. For each month you delay collecting OAS after turning 65, you can receive a 0.6% higher monthly amount.
By the time you turn 70, you could earn 42% more in retirement income. This strategy could be ideal when you finally stop working and your income is smaller. It is possible that you will not exceed the minimum threshold for the 15% clawback if you do not earn active income alongside OAS benefits.
2. Split the pension income with your spouse
The CRA allows you to split your pension to reduce your individual pension. This approach is simple. By transferring up to 50% of eligible pension income to their spouse, a higher-income individual can draw income away from the OAS clawback threshold. Pension splitting does not break any tax laws, and you can lower your chances of having to pay the recovery tax.
3. Focus investments in your TFSA
Consider moving your investments to a Tax-Free Savings Account (TFSA) if you have one. Canadian retirees who maximize the contribution room in their TFSAs can create non-taxable passive income that the CRA does not consider when calculating whether your retirement income is reaching the threshold.
Maximizing your TFSA contribution room with a diverse portfolio of high-quality, income-generating assets like Fortis (TSX:FTS)(NYSE:FTS) could help you supplement your OAS and Canada Pension Plan (CPP) income without incurring any taxes because withdrawals from a TFSA are also tax-free.
Fortis is an ideal stock for long-term and risk-averse investors seeking reliable dividend income that provides them with consistently increasing returns. The utility provider generates most of its revenues through contracted and regulated utility assets, providing it with predictable cash flows.
Fortis is also a Canadian Dividend Aristocrat with a dividend-growth streak nearing 50 years. The company plans to continue increasing its dividends by 6% annually through 2024. It is a top dividend stock to buy and hold forever.
Foolish takeaway
The 15% OAS clawback is a painful nuisance that many Canadian retirees, unfortunately, have to face. However, these methods have proven to be effective in minimizing this tax, so you can keep more of your retirement income free from the CRA’s clutches.
Creating a TFSA portfolio could be an excellent method to generate a tax-free passive income that can supplement your retirement income without worrying about the CRA counting it as taxable income. Fortis is a Canadian Dividend Aristocrat with bond-like features in terms of the returns on your investment. It is an excellent investment to consider for such a portfolio for your retirement.
