A retirement portfolio can deliver exactly the income you wanted and still leave you with less money than expected. Old Age Security’s (OAS) recovery tax is one reason. Another is that your tax return can count more dividend income than actually reached your bank account.
For the 2026 income year, OAS recovery begins above $95,323 of net world income. The associated withholding period runs from July 2027 through June 2028. Current withholding from July 2026 through June 2027 instead uses 2025 income and the $93,454 threshold. Matching the income year to the payment period matters.
Generally, the recovery equals 15% of income above the applicable threshold, capped by the OAS you received. It sits alongside regular income tax. A taxable withdrawal can therefore cost more than its ordinary tax bracket suggests. So, what should investors watch?
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The dividend surprise
Consider someone with $65,000 of other income counted for recovery purposes, including their pensions, plus $25,000 in eligible Canadian dividends outside registered accounts. They received $90,000 in cash. That sounds comfortably below the 2026 threshold.
However, eligible dividends receive a 38% gross-up for tax reporting. The $25,000 becomes $34,500 of taxable dividend income. Our simplified recovery-income total rises to $99,500, leaving $4,177 above the threshold and an estimated $626.55 OAS recovery.
In short: ouch.
The dividend tax credit helps calculate income tax, but it doesn’t simply erase that grossed-up income from the OAS calculation. That’s why a high-yield taxable portfolio needs more planning than adding up its cash deposits. Other deductions and personal circumstances can change the actual return.
Stock and account
Power Corporation of Canada (TSX: POW) makes the issue concrete. Its interests in insurance and wealth-management businesses can appeal to investors building retirement income. Its quarterly dividend increased to $0.6675 in 2026, up roughly 9% from $0.6125.
Yet a dividend increase has two effects outside a registered account. It raises cash income and potentially raises the income used for benefit recovery. Learning how dividend investing works includes understanding both.
In this illustration, putting $5,000 of those annual dividends inside an eligible Tax-Free Savings Account (TFSA) would reduce the grossed-up taxable amount by $6,900. Recovery income would fall from $99,500 to $92,600, below the 2026 threshold. That’s an account-location comparison, not a suggestion to move $5,000 of capital and expect $5,000 of dividends.
The required investment could be substantial, and sufficient contribution room is essential. Moving existing appreciated shares from a taxable account into a TFSA can also trigger a taxable disposition. The transfer itself could create income in the year you’re trying to manage.
Testing and timing
Meanwhile, Power still needs to justify its purchase price. I’d compare its market price with current adjusted net asset value and examine the cash reaching the parent company from its holdings. A holding-company discount can persist, while investment markets and insurance results can weaken together.
A useful business isn’t automatically a useful holding in every account. Equally, avoiding recovery tax doesn’t justify overpaying for its shares. I’d compare the expected after-tax, after-recovery income from the full plan, including withdrawal flexibility.
Timing offers another lever. A large discretionary Registered Retirement Savings Plan (RRSP) withdrawal in 2026 can affect the same recovery calculation as this year’s dividend income. Splitting an optional expense across tax years may change that result, while mandatory Registered Retirement Income Fund (RRIF) withdrawals have their own rules. I’d also compare the two spouses’ individual income positions. OAS recovery is assessed individually, but a household total alone doesn’t show which person’s benefit is exposed.
Bottom line
Before year-end, I’d estimate 2026 recovery income using taxable amounts, then check which year drives the current OAS deduction. Power can be part of an income portfolio, but account placement may matter as much as the next dividend increase. The goal is spendable retirement income, not the biggest-looking deposit.
