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 2018 net income before adjustments is greater than $75,910 ($77,580 for 2019) 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".
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 2019 will be clawed back based on your income as per your 2017 tax return. OAS payments beginning in July to December 2018 will be clawed back based on your income as per your 2017 tax return. However, when your 2018 tax return is filed, the OAS clawback is recalculated based on your 2018 tax return, so you may recover some of the tax.
Note that when your OAS is clawed back, you are still receiving the OAS income, but it is being reduced by a withholding tax (recovery tax). The recovery tax is treated like an income tax instalment. When you get your OAS tax slip at the end of the year, it will show the OAS income in box 18 and the tax withheld in box 22. The net amount of box 18 less box 22 is what you have received during the year. The box 18 amount is included in your income for the year. Your OAS is recalculated based on the taxable income on your tax return. The box 22 amount is used to reduce your income tax payable.
If you know your 2019 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. 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.
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.
CRA and Service Canada Resources:
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: December 14, 2018
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