The Old Age Security (OAS) benefit is Canada’s largest pension program available to support senior Canadians. Unlike the Canada Pension Plan or private pension/retirement funds, you do not have to pay into OAS to receive it. It is instead paid for by general tax revenues.
To receive OAS, you must have lived in Canada and be 65 years of age. The maximum benefit is $613.53 for the second quarter of 2020 and will be received in full if you have lived in Canada for 40+ years since turning 18. If you have not lived in Canada for 40+ years, your payment will be 1/40 x $613.53 x the number of years you have lived in Canada.
This payment used to be automatically paid as soon as the taxpayer turned 65 until 2013 when Canadians were given the option to defer the receipt of this pension payment up until the age of 70. If a taxpayer chooses to go this route, their monthly payment will go up by 0.6% per month that the receipt of OAS is deferred.
If you were to wait until the age of 70 to start collecting, your monthly payment will be increased by 36%.
Now the question is, should you defer your receipt of the OAS benefit? And, if so, until when?
What You Need to Consider
You must first determine how much money you will require to meet your current financial needs. This includes paying your mortgages, utilities, insurance, car payments, food, incidentals, medical, clothing, etc. but you also need to consider the lifestyle you want in retirement – will you travel, buy recreational vehicles, purchase a golf membership, etc.?
Once you know how much your desired lifestyle will cost, determine the total amount of income you will be bringing in. Where will your income come from to pay these bills?
Possible income sources include
- employment income
- investment income
- incomes from other retirement savings tools
Then ask yourself, will you be able to make do without the OAS or do you need it to pay critical bills?
Income Tax Implications
Before committing to when you will start collecting OAS, you need to consider your tax strategy and the consequences of collecting now or later.
Your goal is to ensure you can live a comfortable lifestyle while minimizing tax owing and the loss of tax credits and benefits.
2020 rates and limits you will want to consider during your tax planning strategy include, but are not limited to:
Federal Tax Brackets
15% on up to $48,535 in income
20.5% on next $48,534
26% or more on remaining income up to a rate of 33%
The Age Amount
This non-refundable tax credit provides those 65 and older with a $7,637 credit against tax owing. This amount is reduced gradually for any income over $38,508
GST/HST Refundable Tax Credit
If your net family income is less than $38,507 you will receive the full GST/HST credit
OAS Clawback
OAS recovery tax paid at a rate of 15% of income over $79,054
Note that these benefits, credits, clawbacks and tax rates, as well as their limits, can change from year to year, so you will have to continually analyze the tax implications as well any changes to income or expenses.
To further discuss your retirement plan and whether you should defer your OAS benefit and for how long, contact us today. We would be happy to look at your unique situation to help you make the best possible decision for your tax planning strategy.
