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Money Management Newsletter: Retirement
Surprised by the Old Age Security "clawback"
on last years income tax return?
How to lessen the impact for you or your
If you are 65 years old or older, you are eligible for
the Old Age Security (OAS) benefit that is worth up to $5,300 annually.
That's the good news, the bad news is that these benefits have to be reported
as taxable income and are subject to a "clawback" if your overall
income is too high.
Here's how it works. If your taxable income is greater than $56,960, you
will have to pay back a portion of the OAS benefit to the government.
The clawback is equal to 15% of your income over the $56,960 threshold
which may not seem like much, but it can be quite costly for people in
higher income brackets. If your taxable income is greater than $92,380,
the clawback will totally eliminate the OAS benefit.
For those earning income above the threshold level, there are various
strategies that can be used to reduce the impact of the clawback. The
first thing to understand is that the OAS clawback is based on the amount
reported on line 234 (net income before adjustments) of your tax return.
Any credits or deductions that are reported after that line will not reduce
the clawback, so any corrrective measures will have to focus on those
areas of the tax return that precede this line. For the sake of brevity,
this article will only look at some of the adjustments you can make to
your investments to reduce the amount of income reported and thus preserve
more of your OAS payment. Of course there would only be a reduction of
reported income as your actual income would have to remain the same to
maintain your lifestyle.
One item to consider would be line 120 of the tax return that reports
taxable dividends from taxable Canadian Corporations. This figure is 25%
higher than the actual amount of any dividends received and thus inflates
the amount of net income before adjustments that you must report. You
will receive a dividend tax credit elsewhere on the return but the damage
has already been done with respect to any OAS clawback. Because of this
noted gross up, it may be more advantageous to restructure some of your
investments and replace some of your dividend income with interest income
or capital gain income which are not grossed up. Only a recalculation
of your return using the replacement figures will let you know if a change
would be worthwhile.
Another thing to review would be the amount of income you obtain from
your registered investments such as RRSPs or RRIFs if you also have non
registered investments available. Rather than withdrawing money from RRSPs
or taking more than the required RRIF minimum, every dollar of which is
taxable, it may make sense to supplement your income with some principal
from your non-registered investments if you are able to do so. This is
especially true if you withdraw principal from non registered GICs or
savings accounts as these amounts would not be subject income tax. In
this way you would be able to meet your current income requirements, reduce
your reported income and thus save some or all of your OAS income.
Other options may include:
spouse is under 69 years old, consider contributing to a spousal RRSP
to offset large capital gains with any built up capital losses by
the strategic sale of investments
the reduced tax liabilities on annuities over GICs
Before undertaking any change to your
investments you will have to review the impact on your estate planning
and any future tax consequences. A short term solution to save some OAS
income may prove to be detrimental to your long term planning if proper
precautions are not taken.
* * *
For more information on how to reduce your total taxable income, and ultimately,
the impact of the OAS clawback, please call your Fiscal Agents Investment
advisor or request a portfolio review by calling
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