TaxTips.ca
Canadian Tax and
Financial Information
OAS Clawback

Ads keep this website free for you.
TaxTips.ca does not research or endorse any product or service appearing in ads on this site.  Before making a major financial decision you  should consult a qualified professional.

Looking for US tax information?
See
USTaxTips.net

Need an accounting, tax or financial advisor? Look in our Directory.      Stay Connected with TaxTips.ca!      Internet Explorer - Use compatibility view for calculators to work properly!

Home
What's New
Calculators
Personal Tax
Business
Sales Taxes
Free in 30!
Financial Planning
RRSP RRIF TFSA
Real Estate
Stocks Bonds etc.
Seniors
Disabilities
Canada
Alberta
British Columbia
Manitoba
Ontario
Quebec
Saskatchewan
Atlantic Provinces
Territories
Federal Budget
Provincial Budgets
Statistics etc.
Glossary
Site Map
Directory
Advertise With Us
Contact Us/About Us
Links & Resources



Seniors -> Old Age Security pension clawback

Old Age Security Pension (OAS) Clawback

Income Tax Act s. 180.2

Seniors must pay back all or a portion of their OAS (line 113 of the tax return) as well as any net federal supplements (line 146) if their annual income exceeds a certain amount.  If 2017 net income before adjustments is greater than $74,789 ($73,756 for 2016) then you will have to repay 15% of the excess over this amount, to a maximum of the total amount of OAS received.  The clawback threshold is indexed each year in the same manner as federal tax brackets and personal tax credits.  The clawback is called the "OAS recovery tax".

For more information, see the Human Resources and Social Development Canada (HRSDC) web page Repayment of OAS Benefits.  Use our Income Tax Calculators to determine if your OAS will be "clawed back".

Previously High Income Earners Applying for the OAS Pension

Income Tax Act s. 180.2(3), (4)

When a high income earner first starts receiving the OAS pension, it may be immediately clawed back based on prior tax returns.  If you start receiving your pension in the first 6 months of the year, the amount will be reduced based on your income as per the tax return filed in the 2nd preceding taxation year.  If you start receiving your pension in the last 6 months of the year, the amount will be reduced based on your income as per your tax return filed in the preceding taxation year.  Example:  OAS payments beginning in January to June 2017 will be clawed back based on your income as per your 2015 tax return.  OAS payments beginning in July to December 2016 will be clawed back based on your income as per your 2015 tax return.  However, when your 2016 tax return is filed, the OAS clawback is recalculated based on your 2016 tax return, so you may recover some of the tax.

If you know your 2017 income will be substantially lower, so that your clawback will be less, or even zero, you can complete Form T1213(OAS) to request a reduction of the OAS recovery tax that is or will be deducted from your OAS pension.  A reader contacted us to let us know that he had completed this form to provide his estimated 2016 taxable income, and included the pension splitting deduction that he would be applying on his 2016 income tax return.  However, he was told that the pension splitting deduction was not allowed as a deduction on the T1213(OAS).

On Form T1213(OAS), the income section asks for current-year income from all sources, as per page 2 of the income tax return, and the deductions section asks for deductions from current-year income as per page 3 of the income tax return.  The only specific deduction listed is carrying charges and interest expenses, followed by "other deductions". The pension splitting deduction is included on page 3 of the income tax return.  We're looking into this issue.  In the meantime, if you are completing form T1213(OAS)and pension splitting applies to you, we advise you to include it in other deductions.  There is very little room in the field to describe the other deductions being claimed, so if you have more than 2 other deductions you may have to indicate "see attached", and attached a separate list.  The same applies to other income.  Although UCCB and RDSP income should not be included on the form, there are no instructions to this effect.

Tax Tip:  File a T1213(OAS)form long before starting your OAS pension if your income in the year starting the pension will be lower than prior years.

OAS Clawback and Your Current Year Tax Return

If your income exceeds the OAS clawback threshold level, the amount of the clawback will be deducted on line 235 social benefits repayment.  This reduces your taxable income so that you are not taxed on the amount being paid back.  The clawback will also be shown on line 422 social benefits repayment, which adds the amount to your total payable.

In the following year, your OAS payments will be reduced by the same amount as the OAS clawback from the previous year.  The amount deducted from your OAS is called OAS recovery tax - see link at bottom.  If you know that your income will not exceed the OAS threshold, or will not exceed it by as much as the previous year, you can request that less or no recovery tax be deducted, by completing form T1213(OAS) - see link at bottom.  If OAS recovery tax has been deducted during the year, when you receive your T4A (OAS), it will show the amount of the deduction in Box 22 income tax deducted.  When you complete your tax return, your income taxes payable including current year clawback, if any, will be reduced by the income tax deducted.  If you are using our Tax Calculators, you will include the T4A (OAS) Box 22 amount as part of income taxes paid.

Box 20 overpayment recovered is not related to the clawback.  It is for situations where perhaps a double payment or overpayment was erroneously made, or a person died in the year and OAS payments were not immediately cancelled.  If you are using our Tax Calculators, you will include any box 20 overpayment as other deductions.

Capital Gains Can Increase Your OAS Clawback

Yes, this is true even if you have capital losses carried forward that will eliminate the capital gains, and is also true of the age amount clawback.  This is because the OAS clawback is calculated based on your net income before adjustments on line 234 of your tax return.  The capital losses (and non-capital losses) carried forward are deducted after this, on line 253.  The total taxable income is on line 260 of your tax return.  See our article on how to calculate Total Income For Tax Purposes, Net Income For Tax Purposes, and Taxable Income.

Does the following describe you?

bulletapproaching 65, so will be collecting OAS soon
bullethave significant unrealized capital gains
bullethave significant capital losses carried forward
bulletwill have enough income that the realization of capital gains will cause or increase an OAS clawback

If so, you may want to consider some investment disposals in order to trigger the capital gains prior to the year you will start collecting your OAS.

Once you turn 65, if you have current year capital losses, and also have some unrealized gains, it would be wise to realize some of those capital gains to offset the losses in the same year.

In order to trigger capital gains, you can sell an investment one day, and buy it back the next day, or even the same day - just  make sure the buy back is after the sale. If it happens before the sale, it will increase your average cost and thus reduce the capital gain.  If buying back the next day, make sure you check the record date for dividends to ensure you don't lose a dividend.  This process also has the risk that the stock price may rise (or fall) in price between the sale and buyback, so it may cost more to buy it back.  If you are going to do this with several investments, it may be best not to do them all at the same time.

Canadian Dividends and the OAS Clawback

The amount of Canadian eligible dividends included in income is 138% of the actual dividend amount.  This may increase your income such that your OAS is clawed back.  However, if you were to replace the eligible dividends with an equal amount of interest income, although your taxable income would be lower, your taxes payable would be higher, even when a clawback is included in the taxes payable.  To see the effect of different types of investment income on your taxes payable, see our Investment Income Tax Calculator.

As usual, we recommend that you seek personalized advice from a tax professional before making any major financial decisions.

CRA and Service Canada Resources

    OAS Recovery Tax

    Form T1213(OAS) - Request to reduce OAS recovery tax at source

Tax Tip:  Don't avoid Canadian dividends because of the OAS clawback - they are more tax-efficient than most other income!

 

Revised: October 30, 2016

 

 

Copyright © 2002 - 2016 Boat Harbour Investments Ltd. All Rights Reserved  See Reproduction of information from TaxTips.ca

Facebook  | Twitter  |  Google + |  Monthly Newsletter Sign-up  What’s New E-mail Notification RSS News Feed
The information on this site is not intended to be a substitute for professional advice.  Each person's situation differs, and a professional advisor can assist you in using the information on this web site to your best advantage.
Please see our legal disclaimer regarding the use of information on our site, and our Privacy Policy regarding information that may be collected from visitors to our site.