Toronto, Canada – The Old Age Security recovery tax, commonly known as the OAS clawback, has become an increasingly concerning issue for seniors as the number of those affected continues to rise. Surpassing $90,997 in income in 2024 triggers the clawback, affecting more than 500,000 seniors, which accounts for 8.3% of total OAS recipients, according to data from Statistics Canada.
As Canada’s population ages, the financial burden on the federal government to sustain the OAS program will necessitate innovative solutions. One potential approach is a more aggressive clawback system, wherein 15% of income exceeding the threshold is reclaimed. The escalating number of individuals impacted by the clawback, growing at a faster rate than the increase in overall OAS recipients, is a cause for concern.
Unlike the Canada Pension Plan, OAS is not funded through contributions and investments but rather from government revenues. With OAS constituting 15.5% of federal revenue, the cost of the program is a significant factor to consider. The average amount of recovery tax paid in 2020 was $3,500, with the median total income of affected OAS pensioners reaching $107,500.
The rise in clawback instances can be attributed to strong investment returns and withdrawals from registered retirement income funds (RRIFs) as individuals reach retirement age. Financial planners recommend early RRIF withdrawals to mitigate the clawback impact, although some caution against this tactic due to potential tax implications.
Pension income splitting emerges as a strategy to alleviate the clawback, enabling spouses to distribute income from pensions and RRIFs more evenly. However, single seniors are disadvantaged by this approach, facing higher tax liabilities. Timing the commencement of CPP benefits also influences the clawback, as delaying payments may impact OAS eligibility.
Financial advisors like Aaron Hector emphasize the importance of understanding and strategizing to minimize the impact of the OAS clawback. For many seniors, the presence of the recovery tax on their tax returns becomes a source of frustration and concern, underscoring the need for proactive financial planning and awareness.