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People are often advised to invest in stocks that are eligible for the Canadian dividend tax credit, because such dividends are taxed more favourably than dividends from U.S. stocks. However, as I understand it, the Old Age Security “clawback” is based on a taxable income figure that is calculated using the grossed-up amount of the dividend, which would inflate one’s income and could lead to reduced OAS benefits. Would U.S. stocks be a better choice for seniors who have reached the OAS clawback threshold?

The short answer is no. While it’s true that Canadian dividends can increase the OAS clawback (formally known as the OAS recovery tax), that’s not a reason to avoid them. As I’ll demonstrate, thanks to the Canadian dividend tax credit, any reduction of OAS benefits is far outweighed by the favourable tax treatment of Canadian dividends compared with other types of investment income such as U.S. dividends or interest.

For the following example, I used numbers generated with the “Investment Income Tax Calculator” at

Consider two single seniors, Eugene and Catherine. We’ll assume both live in Ontario and have identical annual incomes of $50,860, consisting of a private pension ($35,000), Canada Pension Plan ($8,400) and Old Age Security ($7,460). Because their incomes are less than the OAS clawback threshold of $79,845 for 2021, neither is subject to the OAS pension recovery tax – yet.

Now, let’s assume Eugene and Catherine both inherit $1-million, which they plan to invest.

Eugene, who wants to minimize his OAS clawback, decides to avoid Canadian stocks and invest the entire $1-million in U.S. stocks, whose dividends are not grossed-up for tax purposes. Assuming an average dividend yield of 3 per cent, he would generate an additional $30,000 of income annually that would be taxed at his marginal rate. (I’m ignoring withholding tax on U.S. dividends to keep things simple.)

With his U.S. dividends included, Eugene’s total income would rise to $80,860. That’s just above the OAS clawback threshold, resulting in a modest OAS repayment of about $152 (calculated as 15 per cent of the amount by which his income exceeds the clawback threshold).

Eugene’s total income tax owing – including the small OAS clawback – would be $17,080, which would result in net after-tax income of $63,780.

Now, let’s turn to Catherine. She doesn’t buy the argument that Canadian dividends should be avoided because of the OAS clawback. She’s convinced that, because of the dividend tax credit, Canadian dividends are still the best choice even if she has to repay more OAS.

Let’s see whether she’s right.

Assuming Catherine earns the same 3-per-cent yield that Eugene does, she would also generate an additional $30,000 of income. But for tax purposes, the amount would be grossed up to $41,400, which is 1.38 times the actual amount of dividends.

So far, this seems like a bad deal for Catherine. She receives $30,000 of actual dividends, but would have to report $41,400 of dividend income on her tax return, pushing her total income to $92,260. This would trigger an OAS clawback of $1,862 – about 12 times the size of Eugene’s OAS clawback.

But this is where the dividend tax credit (DTC) comes in. The purpose of grossing up Canadian dividends is to approximate the amount of pretax profit a company would theoretically have to earn in order to pay its own income tax and distribute the rest as dividends. To avoid double taxation, the DTC, in effect, gives the investor “credit” for the corporate tax that’s presumed to have already been paid.

In Catherine’s case, the effect of the DTC is dramatic. Even though the gross-up of Canadian dividends would make her taxable income significantly higher than Eugene’s, the combined federal and provincial DTC would reduce her total taxes payable – including the higher OAS clawback – to just $11,700. Result: Catherine would pocket $69,160 in after-tax income – $5,380 more than Eugene.

Eugene’s mistake was to focus solely on reducing his OAS clawback, which caused him to miss out on the far more substantial tax savings from the DTC. U.S. stocks still have a place in a well-diversified portfolio, of course, but investing in them exclusively to reduce the OAS recovery tax is a misguided strategy.

“It’s always best for individuals to do some analysis of their own situation,” says Dorothy Kelt of She recommends using one of the many tax calculators on the site or consulting with a financial or tax adviser.

It’s worth noting that the increased taxable income from the dividend gross-up can affect other benefits and credits, such as the Guaranteed Income Supplement, Canada Child Benefit, GST/HST tax credit and age amount credit, Ms. Kelt says.

But for seniors, the bottom line is: “Don’t avoid Canadian dividends because of the OAS clawback. They are more tax-efficient than most other types of income, and can reduce your taxes even though your clawback is increasing,” she says.

E-mail your questions to I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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