The second-most hated tax measure targeting seniors is actually a niche problem – but that niche is growing fast and will continue to do so for some time.
The Old Age Security recovery tax, known widely as the OAS clawback, starts to kick in when a recipient makes more than $90,997 in 2024. A little more than 500,000 seniors were affected by the clawback, or 8.3 per cent of total OAS recipients, according to the most recent data from Statistics Canada.
That may sound like a modest number, but it’s enough to rank the clawback second on the retiree’s fear-and-loathing scale, behind mandatory annual withdrawals from registered retirement income funds. Expect more clawback exasperation ahead.
With an aging population, the number of people paying the OAS recovery tax is rising quickly. Also, financial strains on the federal government’s finances will eventually require some fresh thinking on the cost of paying OAS. A more aggressive clawback is one way to contain costs.
OAS is not a pension like the Canada Pension Plan, where workers and employers make contributions that are invested to build the assets used to pay out benefits. OAS is paid out of federal government revenues and accounted for about 15.5 per cent of the tot al amount of money taken in by the feds last year.
One way of addressing the cost of OAS is to claw at least some of it back from recipients with high incomes. Fifteen per cent of the amount by which your income exceeds $90,997 in 2024 will be clawed back. The threshold where your entire benefit is clawed back is $148,065 for retirees aged 65 to 74 and $153,771 for people aged 75 and up.
The number of people affected by the clawback is rising faster than the overall growth in OAS recipients. Employment and Social Development Canada says the number of OAS recipients grew 14 per cent to 6.6 million from 2016 to 2020, while the number of recipients affected by the recovery tax jumped 42 per cent to 549,000.
The average amount of recovery tax paid was $3,500 in 2020, down from between $3,600 to $3,700 for the previous four years. The median total income of OAS pensioners affected by the clawback was $107,500 in 2020, up just 1.5 per cent from 2016.
It’s worth noting that the median total income for all people aged 65 and up in 2020 was $33,200, according to Statistics Canada. The clawback is an issue strictly for the financially secure.
One reason why the more people are facing the clawback is the strong investment returns of the past 10 years, said Aaron Hector, a Calgary-based certified financial planner. Recently, retirees have been able to get returns of 4 to 5 per cent or more even on money parked safely in savings or guaranteed investment certificates, and better returns from stocks.
Another factor in the rise of the clawback is a fast-growing cohort of people reaching the age where they must take money out of their RRIFs. Combined with CPP and company pensions, RRIF withdrawals can push incomes into clawback territory.
One thought for fending off the clawback is to withdraw money from a RRIF, or a registered retirement savings plan, early in retirement. The idea is to take the tax hit early to lower income later and thereby get below the clawback threshold.
Mr. Hector isn’t enthused about this idea, though. “You end up paying a bunch of tax earlier than you need to,” he said.
Pension income splitting is a first line of defence against the clawback. Income from company pensions and RRIFs is split between spouses or common-law partners, which leads to a lower combined tax burden for the couple and potentially less exposure to the clawback.
Single seniors are denied this benefit, which is an issue for lifelong singles and people with partners who have passed away. Mr. Hector said the loss of income splitting can result in a higher tax bill for the surviving spouse.
Even the decision on when to start CPP retirement benefits may affect the clawback. CPP benefits increase if you delay from the standard starting age of 65 to as late as 70. But waiting for higher CPP payouts could result in losing some OAS to the recovery tax.
Mr. Hector finds that he’s often one to raise the OAS clawback in discussions with clients. “But I do have a few clients that are acutely aware of it,” he added. “They get really quite frustrated when they see it on their tax return as the recovery tax.”
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Rob Carrick