If you’re receiving Canada Pension Plan (CPP) benefits, you may be concerned about the Old Age Security (OAS) clawback. This clawback reduces OAS benefits by $0.15 for every dollar of income earned above $90,977 (as of 2024).
Once income exceeds $149,000, OAS payments are fully clawed back. Understanding the clawback and implementing effective strategies can help you retain more of your retirement income.
Understanding the OAS Clawback
The OAS clawback is a recovery tax applied to high-income retirees. It starts when net income exceeds $90,977 and increases proportionally until OAS payments are fully clawed back at $149,000.
The clawback calculation considers various sources of income, including CPP benefits, employer-sponsored pensions, and investment returns.
Key Thresholds for 2025
| Income Level | Recovery Rate | Impact on OAS Payments |
|---|---|---|
| $90,977 and below | No clawback | Full OAS payments retained |
| $90,977–$149,000 | 15% clawback | Partial OAS payments retained |
| Above $149,000 | Full clawback | No OAS payments received |
How CPP Income Affects OAS Clawbacks
CPP benefits are part of your taxable income and can push your earnings above the OAS clawback threshold. For instance:
- An $80,000 employer pension alone does not trigger the clawback.
- Adding $20,000 in annual CPP benefits raises income to $100,000, activating the clawback.
To avoid this scenario, careful income planning is essential.
Effective Strategies to Minimize CPP and OAS Clawbacks
1. Income Splitting
If you have a spouse or common-law partner with lower income, splitting eligible pension income can reduce your taxable earnings. This approach helps lower your net income and keeps you under the clawback threshold.
2. Deferring CPP and OAS Benefits
Postponing CPP and OAS benefits can delay the clawback and increase your future payments:
- Deferring CPP past age 65 increases payments by 0.7% per month, up to a 42% increase at age 70.
- Delaying OAS benefits boosts payments by 0.6% monthly, up to a 36% increase at age 70.
This strategy allows for more significant benefits when you need them most, while minimizing taxable income during your working years.
3. Contribute to a Tax-Free Savings Account (TFSA)
Investing in a TFSA is an excellent way to grow your wealth without increasing your taxable income. TFSA withdrawals do not count toward net income, helping you stay below the clawback threshold.
4. Optimize RRSP Contributions and Withdrawals
Contributing to a Registered Retirement Savings Plan (RRSP) reduces your taxable income for the year. However, strategic withdrawals before turning 65 can help avoid higher tax brackets and clawbacks in retirement. Balancing contributions and withdrawals is crucial for long-term tax efficiency.
5. Utilize Tax Deductions and Credits
Taking advantage of available tax deductions and credits can lower your net income. Consider claiming:
- Charitable donations
- Medical expenses
- Tuition or education-related fees
Tracking these deductions ensures you reduce your taxable income and minimize the clawback impact.
6. Choose Tax-Efficient Investments
Investments that generate capital gains or return of capital are taxed more favorably than interest income. These options can help you keep more of your retirement income while lowering the likelihood of OAS clawbacks.
Additional Considerations
Timing of Withdrawals
Managing the timing of withdrawals from registered accounts like RRSPs or Registered Retirement Income Funds (RRIFs) can significantly impact your taxable income. Early withdrawals may help spread your income over more years, avoiding large tax bills and clawbacks later in retirement.
Partial OAS Pension
If you’ve lived in Canada for fewer than 40 years after age 18, you may qualify for a partial OAS pension. The amount is prorated based on the years you’ve resided in Canada, which can reduce your taxable income and clawback risk.
Inflation Adjustments
OAS payments are adjusted quarterly to reflect inflation. These increases help offset the rising cost of living but can also impact your clawback calculations if your income approaches the thresholds.
Comparing Strategies to Minimize Clawbacks
| Strategy | Impact on Taxable Income | Benefits |
|---|---|---|
| Income Splitting | Reduces combined taxable income | Keeps income below clawback limit |
| TFSA Contributions | Not included in net income | Tax-free withdrawals |
| Delaying CPP and OAS | Lowers income temporarily | Higher future benefits |
| RRSP Optimization | Lowers current taxable income | Provides long-term tax savings |
| Tax-Efficient Investments | Reduces income tax liability | Increases net retirement income |
Managing CPP and OAS clawbacks requires careful financial planning and strategic decisions. By leveraging income splitting, delaying benefits, optimizing RRSPs, and using TFSAs, you can effectively reduce your taxable income and maximize your retirement savings.
Implementing these strategies ensures you retain more of your government benefits and enjoy a financially secure retirement.
If you’re unsure about the best approach for your unique situation, consulting a financial advisor is a wise step.
What is the OAS clawback threshold for 2025?
The clawback begins when your net income exceeds $90,977, with full repayment occurring at $149,000 or above.
Can CPP benefits trigger the OAS clawback?
Yes, CPP income is taxable and can push your net income above the clawback threshold.
How can delaying CPP and OAS benefits help?
Delaying these benefits reduces taxable income during high-earning years and increases payments in later years.
