If you’re turning 65 soon, and planning to continue working, you might be wondering how much income you can earn before your Old Age Security (OAS) pension is reduced. This reduction, often referred to as the "OAS clawback," is something many Canadians face when their income exceeds certain thresholds. Here's a closer look at how the clawback works and what you can do about it.
What is the OAS Clawback?
The OAS clawback, officially known as the OAS Recovery Tax, reduces your OAS payments when your net income exceeds a certain threshold. In 2024, this threshold starts at $90,997. For every dollar of net income above this amount, you lose $0.15 of your OAS benefit. The clawback continues until your net income reaches $148,451, at which point the entire OAS payment is eliminated.
These thresholds increase each year with inflation, so it’s important to check the updated amounts for 2025 as you plan.
How Much Will You Lose?
Let’s look at a simple example to understand the math:
- If your net income is $100,000, you are $9,003 over the threshold ($100,000 - $90,997).
- The clawback is calculated as $9,003 × 0.15 = $1,350.
- If your annual OAS benefit is $8,752, the clawback reduces it to $7,402 before taxes.
If you factor in a marginal tax rate of 30%, the after-tax OAS you receive would be even lower—around $945 less in spending money than you would have had without the clawback.
Additional Income Sources and Their Impact
Your net income includes more than just your salary. It encompasses worldwide income from sources like:
- Canada Pension Plan (CPP) payments
- Other pension income
- Rental income
- Dividends
- Interest and capital gains
For instance, if your salary is $100,000, you receive $15,000 from CPP, and $8,752 from OAS, your total net income would be $123,752. Using the clawback formula, you’d lose $4,910 of your OAS:
($123,732 – $90,997) × 0.15 = $4,910
This highlights why it's essential to account for all income sources when planning your retirement finances.
Strategies to Minimize the OAS Clawback
1. Delay Taking OAS
If you’re concerned about losing OAS to the clawback, consider delaying it. For each month you delay past your 65th birthday, your OAS payment increases by 0.6%, or 7.2% per year. Delaying until age 70 results in a 36% increase in your OAS payments.
For example, instead of receiving $8,732 annually at 65, delaying to 70 would increase your annual benefit to $11,875. Additionally, the upper limit of the clawback zone rises as your OAS payment increases, allowing for a higher net income before the clawback applies.
2. Split Income with a Spouse
If you have a spouse, splitting pension income can reduce your net income:
- Defined Benefit (DB) Pensions: Can be split at any age.
- Registered Retirement Income Fund (RRIF): Can be split after age 65.
However, employment income cannot be split, even after age 65.
3. Plan Around Other Income Sources
If you expect significant CPP or investment income, factor these into your calculations. Delaying CPP may also be beneficial, as CPP payments increase by 0.7% per month delayed, with no clawback applied.
Additional Benefits of Delaying OAS
- Higher Base for Inflation Adjustments: OAS increases annually with inflation. A larger starting benefit leads to larger future adjustments.
- Extra 10% at Age 75: Starting at 75, OAS payments increase by an additional 10%. For someone delaying until age 70, this 10% is based on the higher delayed benefit, compounding the advantage.
Next Steps: Evaluate Your Situation
To determine the best strategy for your OAS:
- Review Your Tax Return: Look at your most recent tax return to estimate your net income for 2025, including salary, CPP, and other sources.
- Check Updated Thresholds: In late 2024 or early 2025, confirm the OAS clawback thresholds for the coming year.
- Seek Professional Advice: Work with an accountant to project your income and explore the implications of delaying OAS and CPP.
By understanding how the OAS clawback works and planning accordingly, you can make informed decisions to optimize your retirement income while continuing to work.
To discuss your tax situation and establish a financial plan contact Koroll & Company to speak to a helpful staff member. We're a public accounting firm located in Newmarket, Ontario, and we provide a full range of services including accounting, auditing, taxation and business advisory services.
