Did you know that your old age security (OAS) benefits can be clawed back – potentially all the way to $0?
It’s not something many Canadians think about prior to retirement. But the fact is that it’s a very real problem for many retirees. The idea behind the OAS clawback is that a person with a high income (e.g., a juicy defined benefit pension or a big stock portfolio) shouldn’t get extra benefits intended for financially vulnerable seniors.
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Reasons for the clawback
The above logic sounds reasonable but it ignores the fact that many seniors have non-deductible expenses. A major category here is interest-bearing debts whose payments cannot be netted against income (e.g., credit card and mortgage debt). In fact, in Canada, interest payments of any type generally don’t count as ‘expenses’ for income tax purposes unless you are self-employed. The result of this is that seniors with juicy pensions and taxable investments are seen as too well off to qualify for the full OAS benefit – even if they are struggling under the weight of debt.
The current income threshold for the OAS clawback is $90,977. Your OAS income is clawed back 15% for every dollar beyond this level if you are between 65 and 75 years of age. Your OAS is fully clawed back (i.e., reduced to zero) at $148,451 – again if you are between 65 and 75 years of age. If you are 75 years of age or older, the full clawback amount is somewhat higher.
How to avoid the clawback
The best way to avoid the OAS clawback is to claim as many deductions as possible. Earlier, I wrote that many Canadians have expenses that they can’t claim as tax deductions, chiefly interest payments. That’s a true and very unfortunate fact of our tax system. However, there are many other types of deductions you can claim. These include:
- Charitable contributions.
- Registered retirement savings plan (RRSP) contributions.
- Home accessibility upgrade costs.
- Certain medical expenses.
If you claim as many such tax breaks as possible, you may be able to lower your income below $90,977 and avoid the OAS clawback completely.
About RRSP contributions
Among the tax breaks listed above, the one that is potentially the most beneficial is RRSP contributions. You can claim up to $32,490 worth of RRSP contributions in a single year (depending on what you earned last year), reducing your income considerably in the process. If you’re already retired and just a few years shy of mandatory RRIF withdrawals, then maybe more RRSP contributions isn’t the right move for you. On the other hand, if you are in your fifties and planning your retirement, more contributions could make some sense.
If you’re going to be making RRSP contributions, you need to invest the money sensibly. Generally speaking, index funds are ideal, because they offer a mix of low fees, high diversification, and decent potential returns.
Consider the iShares S&P/TSX Capped Composite Index Fund (TSX: XIC), for example. It’s an index fund that holds 220 stocks, pays a 2.6% dividend, and has a very low 0.05% management fee. The fund is one of the most liquid and widely traded in Canada, which lowers the bid-ask spread (a kind of hidden fee). Finally, it is 100% invested in Canadian stocks, so it’s built on companies you’re likely familiar and comfortable with. Overall, it’s a good RRSP asset to own.
