What is the Old Age Security (OAS) clawback in 2023?

Understanding the 2023 Old Age Security (OAS) Clawback: Implications and Insights

OAS Clawback in Canada: Understanding, Rates, and Strategies

As Canadians approach retirement, they may be eligible for Old Age Security (OAS) pension, a federal government-funded program that provides a basic income for seniors. However, not all seniors receive the same amount of OAS pension, as those with higher income may face a clawback. In this article, we will discuss the OAS clawback in Canada, its rates and limits, and strategies to reduce its impact.

What is OAS clawback?

OAS clawback is a mechanism used by the Canadian government to recover some or all of the OAS pension paid to seniors with higher income. The clawback is designed to ensure that the OAS pension is targeted towards seniors with lower income who need it the most.

OAS eligibility criteria

To be eligible for OAS pension, seniors must meet the following criteria:

• Be 65 years of age or older
• Have Canadian citizenship or legal status in Canada
• Have resided in Canada for at least 10 years after turning 18
  

OAS clawback threshold

The OAS clawback threshold is the income level above which seniors must repay a portion of their OAS pension. The clawback threshold for 2023 is $86,912 net. Seniors with income above this threshold will face a clawback of 15% of their OAS pension.

Calculation of OAS clawback

The OAS clawback is calculated based on a senior's net income for the previous year, which includes all sources of income such as employment, self-employment, pension income, investment income, and rental income. The formula for calculating OAS clawback is:

(Clawback Threshold - Net Income) x 0.15

For example, if a senior's net income for the previous year was $90,000, the OAS clawback would be:

($86,912 - $90,000) x 0.15 = $463.2

The senior's OAS pension would be reduced by this amount for the current year.

OAS clawback rates and limits

OAS clawback rates

The OAS recovery tax is the amount of OAS pension that seniors must repay, seniors with income above the clawback threshold will face a clawback of 15% of their OAS pension. The clawback rate increases by 15% for every additional $1 of income above the threshold, up to a maximum clawback rate of 100% when income reaches $142,124 or higher.

OAS clawback limits

There is a maximum limit on the OAS clawback amount, which is the lesser of the following:

• The total amount of OAS pension received for the current year
• The amount of OAS pension that would have been received if the senior's net income was equal to the clawback threshold
  

Strategies to reduce OAS clawback

Seniors can implement various strategies to reduce the impact of OAS clawback on their retirement income:

Income splitting with a spouse

Income splitting allows eligible couples to allocate their pension income between them in a way that reduces their combined tax burden. By splitting pension income, seniors can reduce their net income and potentially lower their OAS clawback.

Delaying OAS pension

Seniors can delay their OAS pension until age 70, which can result in a higher monthly pension amount. By delaying OAS pension, seniors can increase their retirement income and potentially reduce their reliance on other sources of income that may trigger OAS clawback.

Using tax-efficient investments

Seniors can invest in tax-efficient vehicles such as Tax-Free Savings Accounts (TFSAs) and non-registered accounts that generate capital gains and dividends, which are taxed at lower rates than regular income. By investing in tax-efficient vehicles, seniors can reduce their net income and potentially lower their OAS clawback.

Deferring RRSP withdrawals

Seniors can defer their Registered Retirement Savings Plan (RRSP) withdrawals until age 72, which can result in a lower taxable income in the short term. By deferring RRSP withdrawals, seniors can reduce their net income and potentially lower their OAS clawback.

Withdrawing from RRSP’s / RRIF’s early

The thing about RRSP’s and the inevitable RRIF conversion is that mandatory withdrawal payments commence at age 72 and those payments are based on a percentage of assets. With this, the longer we leave that money to grow we could be forced to withdraw more in dollars down the road. This in turn can trigger OAS clawback on withdrawing funds you may not even want to spend at the moment.

In doing a proper financial plan you can see if there is a benefit to withdrawing some of  these funds early to eliminate  future OAS clawback. In addition, strategies like this can help to avoid hefty estate taxes when you pass away by gradually withdrawing the RRSP funds at reduced taxation rates. 

Consequences of OAS clawback

The OAS clawback can have significant consequences for seniors, particularly those with lower income:

Reduction in retirement income

The OAS clawback can result in a reduction of retirement income for seniors with higher income. This reduction can impact their lifestyle and financial well-being in retirement.

Impact on low-income seniors

The OAS clawback can also impact low-income seniors who rely on OAS pension as their primary source of retirement income. These seniors may face a clawback if they have other sources of income, which can result in a further reduction of their already limited income.

Examples of OAS clawback scenarios

Consider the following examples:

• A senior with a net income of $90,000 in 2023 would face an OAS clawback of $463.20, resulting in a reduction of their OAS pension by this amount.
• A senior with a net income of $125,000 in 2023 would face an OAS clawback of $5,713.20 resulting in a reduction of their OAS pension by this amount.
• A senior with a net income of $150,000 in 2023 would face a maximum OAS clawback of $8,292(all of it).
  

Pros and cons of OAS clawback

Pros of OAS clawback

The OAS clawback helps to ensure that the OAS pension is targeted towards seniors with lower income who need it the most. By reducing the OAS pension for seniors with higher income, the government can redirect funds towards other social programs that benefit low-income seniors.

Cons of OAS clawback

The OAS clawback can penalize seniors who have worked hard to save for their retirement and have accumulated a higher net worth. Seniors who have planned their retirement based on the assumption that they will receive the full OAS pension may face a financial setback if they are subject to the clawback.

Important Note:

The OAS clawback is an important policy that helps to ensure that the OAS pension is targeted towards low-income seniors who need it the most. However, the clawback can have significant consequences for seniors with higher income, particularly those who have not planned their retirement to account for the reduction in OAS pension. Seniors can implement various strategies to reduce the impact of the clawback, such as income splitting, delaying OAS pension, using tax-efficient investments, and deferring RRSP withdrawals. It is important for seniors to be aware of the OAS clawback and to plan their retirement income accordingly to avoid any unexpected reductions in their retirement income.

Frequently Asked Questions (FAQs) About the OAS Clawback Threshold for 2023