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 11300 of the tax return, line 113 prior to 2019) as well as any net federal supplements (line 14600, line 146 prior to 2019) if their annual income exceeds a certain amount. If 2020 line 23400 (line 234 prior to 2019) net income before adjustments is greater than $79,054 ($79,845 for 2021) 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.
For more information, see the Human Resources and Social Development Canada (HRSDC) web page Repayment of OAS Benefits. Use our Detailed Canadian Income Tax and RRSP Savings Calculators to determine if your OAS will be "clawed back".
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 2021 will be clawed back based on your income as per your 2019 tax return. OAS payments beginning in July to December 2021 will be clawed back based on your income as per your 2020 tax return. However, when your 2021 tax return is filed, the OAS clawback is recalculated based on your 2021 taxable income, 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 clawback 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 2021 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 previously advised you to include pension splitting in other deductions if this applied to you. However, the 2018 version of the T1213(OAS) was revised to explicitly exclude pension splitting from deductions. Although 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.
If your income exceeds the OAS clawback threshold level, the amount of the clawback will be deducted on line 23500 (line 235 prior to 2019) 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 42200 (line 422 prior to 2019) social benefits repayment, which adds the amount to your total payable.
In the following year, your OAS payments will be reduced for January to June by the same amount as the OAS clawback from July to December of the previous year - this is the OAS Recovery Tax. In July you will probably get a notice showing the revised monthly recovery tax that will be in effect for July to December - this should be approximately 1/12th of the previous year clawback.
Although the OAS recovery tax notices sent out in July 2020 have the correct monthly tax amount, the text below the 3 boxes repeats the information included on the July 2019 notices, instead of updating the threshold/years. See our July 2020 Recovery Tax notice example with snippets from the notice. Service Canada subsequently sent out corrected notices.
The recovery tax is treated like an income tax instalment. 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 OAS clawback is recalculated based on the taxable income on your tax return. Your income taxes payable including current year clawback, if any, will be reduced by the income tax (including recovery tax) that has been deducted from your income during the year. 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.
Note that the OAS clawback/recovery tax is different from a voluntary tax deduction from your OAS.
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 23400 of your tax return. The capital losses (and non-capital losses) carried forward are deducted after this, on line 25300 (line 253 prior to 2019). The total taxable income is on line 26000 (line 260 prior to 2019) 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. Also make sure that you carried back losses where possible in the prior tax returns. If you didn't when you could have, you can revise your previous tax return(s).
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.
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 (if that were possible!), although your taxable income would be lower, your taxes payable would be higher, even when a clawback is included in the taxes payable. This is because of the dividend tax credit for eligible dividends.
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 just because of the OAS clawback - they are more tax-efficient than most other income!
Revised: April 20, 2021
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