Koroll & Company Blog

Older taxpayers who have recently completed and filed their tax returns for 2016 may face an unpleasant surprise when that return is assessed. The unpleasant surprise may come in the form of a notification that they are subject to the Old Age Security “recovery tax” – known much more familiarly to Canadians as the OAS clawback.

The OAS clawback is a product, in part, of the way in which Canada’s government-sponsored retirement income system is structured. OAS is one of the two main components of that system – the other being the Canada Pension Plan (CPP).

While many retired Canadians receive both OAS and CPP benefits, the two plans are quite different. 

The Canada Pension Plan (CPP), together with the Old Age Security (OAS) program, forms the cornerstone of Canada’s retirement income system. There are other retirement savings options available to Canadians, but the CPP is unique in that it is Canada’s only compulsory retirement savings program.

Canadians can, of course, contribute to registered retirement savings plans (RRSPs) and individuals who were residents of Canada for at least 20 years of their adult lives will be able to receive OAS benefits after age 65. And, an ever-decreasing minority of Canadians can look forward to receiving payments from an employer-sponsored registered pension plan (RPP).

However, despite the availability of these options, the hard fact is that many Canadians, now in the work force, will not have enough income from all sources, public and private, to ensure a financially comfortable retirement – or even, in some cases, to provide a reasonable standard of living.

The Canada Pension Plan (CPP) provides income to CPP contributors and their families in the case of retirement or disability.

Working Canadians contribute a percentage of their pensionable earnings to CPP every year. The amount of those earnings is, however, capped by a figure known as the maximum pensionable earning amount, and contributions on income amounts over that cap are not permitted.

Once daily weather reports begin to include wind chill factors or frost warnings, the thoughts of many Canadian turn to the idea of spending part of the Canadian winter somewhere much warmer – most often, in one of the southern U.S. states.

And, while the anemic state of the Canadian dollar has required Canadians to downsize some of those plans, it is still the case that thousands of Canadian “snowbirds” fly south every winter.

When it comes to questions around personal finance, two issues tend to dominate current discussions. The first is whether and to what extent Canadians are financially prepared for retirement, and the second is the seemingly inexorable increase in the value of residential real estate. For many retired Canadians, those two issues are very much interlinked. 

Most Canadians are eligible to receive Canada Pension Plan(CPP) and Old Age Security (OAS) payments in retirement. While those two programs provide the “backbone” of retirement income in Canada, they are almost never enough, on their own, to provide for a comfortable standard of living in retirement.

There has been much discussion, in recent years, about whether Canadians are adequately prepared for retirement and, more specifically, whether Canadians are saving enough to ensure a retirement free of undue financial stress. While the financial health of current and soon-to-be-retirees is a concern, the more pressing question is whether, under our current system, younger Canadians can expect to have some degree of financial security in retirement.

In recent years, there has been a great deal of public discussion about the availability and viability of federal income support programs for retirees. It’s not news that Canada’s population is aging, and the demands placed on government-sponsored retirement income programs will increase as greater numbers of Canadians reach the age at which they will be entitled to receive monthly benefit payments from those programs.

There are, essentially, three federal retirement income programs which are generally available to Canadians: the Canada Pension Plan (CPP), the Old Age Security (OAS) Program, and the Guaranteed Income Supplement (GIS) and Allowance.

Any taxpayer told of a strategy that offered the possibility of saving hundreds or thousands of dollars in tax and increasing his or her eligibility for government benefits while requiring no advance planning, no expenditure of funds, and almost no expenditure of time could be forgiven for thinking that what was proposed was an illegal tax scam. In fact, that description applies to pension income splitting which is a government-sanctioned strategy to allow married taxpayers over the age of 65 (or, in some cases, age 60) to minimize their combined tax bill by dividing their private pension income in a way which creates the best possible tax result.