Old Age Security: Avoiding the Clawback
Posted 27 Aug 2015 by Rick Irwin, CFP, CLU
Just as CPP is an important piece of the retirement income puzzle for most Canadians, for many OAS is an equally important income source. Here are some common questions:
How much are the payments?
The payment amount for the OAS is determined by how long you have lived in Canada after the age of 18, with the maximum payment being payable to individuals who have lived in Canada for 40 years after age 18. In 2015, the maximum OAS benefit is $6,778.44 per person. You should apply for OAS six months prior to the age that you are entitled to receive it.
Won’t I just have to repay it?
OAS is taxable and is subject to a recovery tax for higher income Canadians. If you are eligible for OAS and your net income is more than a threshold amount, the government will “claw back” all or part of your OAS benefits at the rate of 15 cents on the dollar for each dollar of income above this threshold amount. For 2015, the income threshold at which the recovery tax begins is net income of $71,592. If your income exceeds $116,103 you end up paying back all of OAS.
When will I receive it?
Citing fears over the rapidly expanding senior demographic, a few years ago the federal government announced it will raise the age at which Canadians will be eligible to receive OAS (and, if you are eligible, the Guaranteed Income Supplement (GIS).) Anyone born after March, 1958 will now be receiving OAS later than the month they turn age 65. The increases to the eligibility age are phased in gradually such that anyone born after January, 1962 will not be eligible to draw OAS until age 67. If you were born between March 1958 and January 1962 in other words you will receive OAS between age 65 and 67.
Adding to the complexity, you now are able to defer taking OAS payments by up to five years, which may make sense if you’re still working past 65. If you wait to receive OAS until age 70 you will receive an income for life that is 36% higher than if you had drawn OAS at the conventional age. As with the decision of whether or not to defer CPP, careful consideration of life expectancy, desired retirement income goals and the opportunity cost of drawing on other retirement funds should all be taken into consideration.