Picture Linda, a 70-year-old retired engineer in Ontario. She’s a hypothetical retiree, but her story plays out in thousands of Canadian households every year.
During her working years, Linda saved diligently, earned a solid workplace pension, and built a diversified portfolio of blue-chip Canadian stocks.
Recently, Linda noticed her most recent Old Age Security (OAS) deposit was more than $200 lower. Basically, the Canada Revenue Agency issued an OAS clawback.
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What is the OAS clawback and how does it work?
OAS is a payment offered to retirees. Between October and December 2026, the average OAS payment for Canadians aged between 65 and 74 is $762.50. For Canadians over 75, the average payout is higher at $838.75. So, a retired Canadian couple can earn more than $18,000 annually on average from OAS.
However, the Canadian government can apply a pension recovery tax, or clawback, based on certain income thresholds. For every dollar of net income above a set threshold, you repay 15 cents of OAS.
The clawback begins if your 2025 income was over $93,454. It also means you are not eligible for the OAS payout if you earned more than $152,062 in 2025.
The Canada Revenue Agency uses your last tax return to estimate the clawback. It includes income earned from multiple sources, including the Canada Pension Plan, RRIF (Registered Retirement Income Fund) withdrawals, interest, taxable capital gains, dividends, and pensions.
How much does the OAS clawback actually cost?
Say Linda earned a net income of $110,000 in 2025, which is $16,546 above the threshold. A 15% clawback on that amount totals $2,481.90. It means between July 2026 and June 2027, Linda will see the OAS payment reduce by $207 every month.
Now imagine Linda had trimmed her income to $95,000. Her clawback would drop to just $231.90.
Six ways Canadians can reduce the OAS clawback
- Lean on your TFSA (Tax-Free Savings Account) as withdrawals don’t count as income. Anyone eligible since 2009 now has up to $109,000 in total TFSA contribution room.
- Start an RRSP (Registered Retirement Savings Plan) meltdown before 65. Mandatory RRIF withdrawals stand at 5.3% at age 71 and keep rising. So, early RRIF withdrawals spread out your taxable income.
- Split pension income as you can move up to 50% of eligible pension income to a lower-earning spouse.
- Delay the OAS to 70 and increase the payout by 36%.
- Spread out capital gains and avoid selling a sizeable equity position in a single year.
- File Form T1213 if your income has dropped. It can lower the amount withheld from your payments.
Why Royal Bank of Canada stock belongs in your TFSA
The best strategy is to own quality stocks in a TFSA during retirement, since withdrawals from this account are completely tax-free.
One blue-chip TSX dividend stock to own in the TFSA is the Royal Bank of Canada (TSX: RY). Over the last 20 years, a $10,000 investment in RBC stock would be worth close to $121,000 today, after adjusting for dividends.
Despite these market-beating returns, the TSX bank stock offers you a forward yield of 2.6% in October 2006.
At the Barclays Global Financial Services Conference on September 16, 2026, Chief Financial Officer Katherine Gibson described RBC as a business that keeps getting more profitable. Return on equity climbed from 15.5% in 2024 to 16.7% in 2025. It reached just over 18% in the third quarter of 2026.
“It’s very important to us to deliver a sustained dividend increase,” Gibson said. The bank targets a 40% to 50% payout ratio, which means “basically growing our dividends in line with our earnings per share.”
The Foolish takeaway
The OAS clawback is a good problem to have. It means your retirement income is healthy. But a 15% repayment on top of regular tax is an expensive problem to ignore.
The smartest moves happen in your late 50s and early 60s, long before the first OAS cheque arrives. Where you hold your dividend stocks matters just as much as which ones you pick.
Before making any significant moves, run the numbers with an independent financial planner or tax professional.
