Millions of Canadians receive Old Age Security (OAS) benefits, meaning that millions of Canadians may be subject to the OAS “recovery tax” or, as it is more commonly referred to, the clawback. Unfortunately, very few Canadians are familiar with that tax or how it works, and even fewer incorporate the possibility of having to pay the tax into their retirement income planning. There are, however, strategies which allow taxpayers to minimize or avoid the OAS clawback in retirement.
Old Age Security (or OAS) is one the two main components of Canada’s government-sponsored retirement income system—the other being the Canada Pension Plan (CPP). There are also federal and provincial supplements which are available to lower-income seniors. While many retired Canadians receive both OAS and CPP benefits every month, the two plans are quite different. The only determinants of the amount of Canada Pension Plan benefits receivable are one’s contribution amount and the age at which one elects to begin receiving benefits; other sources of available income or one’s overall income level are not considered. Eligibility for OAS, on the other hand, is based on Canadian residency. Essentially, a person aged 65 and older who has lived in Canada for at least forty years after the age of 18 is eligible for full OAS benefits. Where the length of Canadian residency after age 18 is less than forty years, a partial pension is earned at the rate of 1/40th of the full monthly pension for each full year lived in Canada. OAS benefits are fully indexed to inflation.
Over the past few years, there have been a lot of changes to the Canada Pension Plan, both in terms of contributions made to the plan, and with respect to the receipt of CPP retirement benefits. One of the least well-known and least understood of those changes is the CPP Post-Retirement Benefit, or PRB.
The PRB exists because, for the first time, Canadians who are already receiving CPP retirement benefits can (or in some cases are obliged to) continue making CPP contributions through their employment or self-employment income. Before 2012, once an individual began receiving CPP retirement benefits, no further contributions to the CPP were possible.
Every year, thousands of Canadians (mostly retirees) escape our winter by traveling south, usually to the U.S., for periods lasting up to even the entirety of winter. And while the value of the Canadian dollar relative to the U.S. dollar changes on a daily basis, the two currencies have been close to par now (or the Canadian dollar above par) for the last few years, making the cost of such a vacation easier to manage.
For many Canadians planning their retirement, a pervasive worry is outliving one’s savings. A big part of the reason why they fear such an eventuality is that such savings could as a result of unexpected major medical costs be depleted.
The baby boom generation, whose members are now between the ages of 48 and 67, is also known, with good reason, as the “sandwich generation”. Many baby boomers are now in the position of needing to provide some degree of practical support or care to aging parents while also trying to save for their own retirement and to provide for their children. Those children are, in many cases, enrolled in costly post-secondary education programs or, having finished their education, remain living in the family home.
