Seniors -> Old Age Security pension clawback
Old Age Security Pension (OAS) Clawback
Income Tax Act s. 180.2
High income seniors must pay back all or a portion of their OAS if their annual income exceeds a certain amount. If 2014 net income before adjustments is greater than $71,592 ($70,954 for 2013) 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.
OAS Clawback and Your Tax Return
In the first year that 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. 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). 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) 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?
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.
Tax Tip: Don't avoid Canadian dividends because of the OAS clawback - they are more tax-efficient than most other income!
Revised: October 04, 2014
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