The first old-age pension in Canada was enacted by the federal parliament back in 1927. At the time, the program was jointly financed by both federal and provincial governments and administered by provincial officials. Unsurprisingly, old-age pension programs have undergone significant changes over the past century. In 1951, the federal government was permitted to operate a universal pension program. That same year, parliament passed the Old Age Security (OAS) Act. That provided Canadians with a universal pension.
Today, the OAS pension is a monthly payment that Canadians can get if they are 65 and older. To qualify, you must also be a Canadian citizen and have lived in Canada for at least 40 years since turning 18. In most cases, Canadians do not have to apply to obtain this benefit. However, Canadians should be aware of potential clawbacks that can reduce their monthly payout. Better yet, they should know how to sidestep the clawback.
Today, I want to explore three ways Canadians can avoid an OAS clawback.
What is the OAS clawback?
When your taxable income reaches a certain level, you will be forced to pay back some or all your OAS income. Officially, this is called the OAS recovery tax. In this instance, you will be forced to pay back 15% of the amount of your total taxable income that is above the OAS clawback threshold.
In the 2022 tax year, the OAS clawback started at $81,761 or above. This is called the minimum income recovery threshold. The threshold is set at $86,912 for the 2023 tax year.
Below are three ways Canadian seniors can look to avoid the OAS clawback in 2023 and beyond.
1. Maximize your TFSA contributions every year
The money that you withdraw from your Tax-Free Savings Account (TFSA) is entirely tax free. Thus, it is not counted as taxable income. Canadian seniors can use the money in their TFSA to bolster their retirement income to a level that they require while avoiding the minimum income recovery threshold.
2. Explore income splitting (if you can)
Married Canadians have many tax-friendly tools at their disposal. So, if you can’t marry for love, the incremental tax benefits might warm your heart just the same.
Income splitting is one way married or common-law couples can massage their retirement income numbers. For example, your joint income may be $160,000 for the 2023 tax year. By splitting your income to each person, you would come in under the minimum income recovery threshold.
3. Defer your OAS payments
Fortunately, it is possible to delay your OAS payments in a similar fashion to your Canada Pension Plan (CPP) payments. Indeed, you may delay your OAS payments until you reach the age of 70. That can potentially reduce your taxable income for half a decade, giving you more time to adjust your future earnings below the clawback threshold.
Here’s how you can churn out consistent income in retirement
Canadian seniors who have entered retirement ideally have OAS and CPP to draw upon. For those who have a TFSA, I’d suggest a super-consistent dividend stock like Fortis (TSX: FTS). This St. John’s-based utility holding company has achieved 49 consecutive years of dividend growth. That means Fortis is months away from becoming a Dividend King: a stock that has delivered at least 50 straight years of dividend growth.
Shares of Fortis have dropped 5.2% month over month as of close on Tuesday, August 15. That has dragged the stock into negative territory so far in 2023.
Retirees should feel good about holding utility equities for the long term. Fortis currently possesses a favourable price-to-earnings ratio of 18. Moreover, the stock offers a quarterly dividend of $0.565 per share. That represents a 4.2% yield.
