As retirement approaches, many Canadians look forward to the financial security provided by government programs like Old Age Security (OAS). However, what many don’t realize is that certain income thresholds can trigger a clawback of these benefits—a scenario that could cost you thousands of dollars annually.
With changes coming in 2025 and inflation adjustments affecting thresholds, understanding the OAS recovery tax (commonly called the clawback) has never been more important. Based on information from Canada.ca and analysis from financial experts, here are the five most common mistakes that trigger OAS clawback and how you can avoid them.
Understanding the OAS Clawback Mechanism
Before we examine the common mistakes, let’s briefly review how the OAS clawback works. For 2025, the OAS clawback threshold is $93,454. This means that if your net world income exceeds this amount, you must repay 15% of the excess income until the entire OAS benefit is recovered. For example, if your income is $103,454 ($10,000 above the threshold), you would repay $1,500 (15% of $10,000) of your OAS benefits.
Now, let’s explore the five common mistakes that could push your income over this threshold.
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1. Poor Timing of Registered Retirement Income Fund (RRIF) Withdrawals
The Problem: Many retirees automatically set up their RRIF to make minimum withdrawals each year without considering how these withdrawals affect their OAS benefits. As you age, the mandatory RRIF withdrawal percentages increase significantly—reaching 7.38% at age 80 and 20% at age 95. These increasing withdrawals can easily push your income over the clawback threshold.
The Solution: Consider strategic RRIF planning that might include:
- Withdrawing more than the minimum in lower-income years before OAS begins
- Using younger spouse’s age for RRIF calculation to lower minimum withdrawals
- Splitting RRIF income with your spouse (if eligible) to lower individual income
2. Ignoring Tax Implications of Non-Registered Investments
The Problem: Many retirees focus on registered accounts (RRSPs, RRIFs, TFSAs) but neglect the tax efficiency of their non-registered investments. Interest income from GICs, bonds, or high-interest savings accounts is 100% taxable at your marginal rate and counts directly toward your net income for OAS clawback purposes.
The Solution: Optimize your investment strategy by:
- Prioritizing dividend-paying Canadian stocks (eligible for dividend tax credit)
- Considering capital growth investments (taxed at 50% of marginal rate)
- Using TFSA accounts for interest-bearing investments
- Timing the realization of capital gains to manage income thresholds
3. Failing to Plan for Unexpected Large Income Years
The Problem: Life events can create unexpected high-income years that trigger the clawback. These might include:
- Receiving a large inheritance that generates investment income
- Selling a rental property or secondary residence
- Receiving a retiring allowance or severance package
- Realizing significant capital gains from investment portfolios
The Solution: Implement proactive strategies such as:
- Spreading large capital gains over multiple years when possible
- Using charitable donations of appreciated securities to offset gains
- Considering the timing of property sales relative to other income sources
4. Overlooking Income Splitting Opportunities
The Problem: Many Canadian couples have imbalanced retirement incomes where one spouse has significantly higher income than the other. Without proper planning, the higher-income spouse may face OAS clawback while the lower-income spouse doesn’t fully utilize their tax brackets.
The Solution: Take advantage of income splitting strategies including:
- Pension income splitting (eligible pension income can be split with spouse)
- Spousal RRSP contributions before and during retirement
- Ensuring both spouses hold appropriate investments in their names
- Considering prescribed rate loans for income splitting with spouse
5. Miscalculating the Impact of Other Government Benefits
The Problem: Many retirees don’t realize that certain government benefits count toward net income for OAS clawback purposes. These include:
- Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) benefits
- Employment Insurance benefits
- Registered pension plan payments
- Rental income from properties
The Solution: Create a comprehensive retirement income plan that:
- Accounts for all sources of income in clawback calculations
- Considers the timing of when to start CPP/QPP benefits
- Evaluates whether delaying OAS (to increase benefits) makes sense in your situation
Proactive Planning to Avoid the OAS Clawback
The key to avoiding OAS clawback is thoughtful income planning well before and during retirement. Here are some additional strategies to consider:
Utilize TFSA Accounts Strategically
Unlike RRSP/RRIF withdrawals, TFSA withdrawals do not count as income for OAS clawback purposes. Maximizing TFSA contributions during your working years can provide tax-free income in retirement that won’t affect your OAS benefits.
If you’re charitably inclined, donating appreciated securities directly to charities can eliminate capital gains tax while providing tax credits. This can help manage your net income to stay below clawback thresholds.
Evaluate the Timing of OAS Benefits
You can delay receiving OAS benefits up to age 70, which increases your benefit by 0.6% for each month you delay (7.2% annually). This strategy can be valuable if you expect your income to decrease in later years.
Seek Professional Advice
Because everyone’s financial situation is unique, consulting with a qualified financial planner or tax professional who understands retirement income planning is crucial. They can help you develop a personalized strategy to minimize OAS clawback while maximizing your retirement income.
The OAS clawback can significantly impact your retirement income if not properly managed. By being aware of these common mistakes and implementing strategic planning, you can potentially avoid or minimize the recovery tax and keep more of your hard-earned benefits.
Remember that the clawback threshold is indexed to inflation, so it increases slightly each year. For 2025, the threshold is $93,454, but careful planning remains essential regardless of the exact amount.
Start your OAS clawback planning today—your retirement self will thank you tomorrow.