You’ve made it and now you are planning your retirement income but there is a bunch of tax implications to consider starting with understanding the old age security (OAS) pension. OAS is one of the pillars of Canada’s retirement framework to help retirees transition into retirement.
While the other two pillars of the Canadian retirement framework are the Canada Pension Plan (CPP) and the Registered Retirement Savings Plan (RRSP), OAS does’t require you to have worked or invested and is therefore available to all. As such, it’s important you understand it and know how it works.
As soon as you reach 65 years old, you are eligible to receive OAS even if you are still employed or have never worked. The word ‘eligible‘ is really important here as you can delay your payments for higher payments later on.
The Guaranteed Income Supplement is another program that you can enrolled in at the same time as you enrolled with the OAS Pension for extra income.
Eligibility for OAS Pension
For OAS, the eligibility is pretty simple and depends on whether you live in Canada or not when you r3each 65 years old.
If you are living in Canada, you must:
- be 65 years old or older
- be a Canadian citizen or a legal resident at the time your OAS pension application is approved
- have resided in Canada for at least 10 years since the age of 18
If you are living outside Canada, you must:
- be 65 years old or older
- have been a Canadian citizen or a legal resident of Canada on the day before you left Canada
- have resided in Canada for at least 20 years since the age of 18
OAS Payments for 2020 – Calculation & Table
How much OAS benefits you can receive is a little complicated and each situation is different.
- The maximum monthly OAS payments you can get in 2020 is $614.14.
- To receive any OAS payments, you need an annual income lower than $128,149.
To dive into the details, your OAS payments are based on how long you have lived in Canada after you turned 18. If you have been in Canada for less than 40 years, your payments will be reduced by 1/40 for each year. Another way to calculate it is to use the following formula.
Your OAS payment = Full OAS Payment * (Years in Canada / 40)
If your income is higher than $79,054 (2020), you may have to repay part or your entire Old Age Security pension. It’s called a recovery tax when you have to pay back part, or all, of your OAS payments, or OAS Clawbacks.
For your awareness, OAS payment rates are reviewed in January, April, July and October to ensure they reflect cost of living increases, as measured by the Consumer Price Index (CPI).
- If the cost of living goes up, your monthly payment rates will increase.
- If the cost of living goes down, your monthly payment rates will not decrease.
The payment dates for OAS usually are towards the end of the month and it can start on the first month after you turn 65 if your application is all set and processed.
|Year||Maximum Monthly Benefits||Maximum Annual Benefits|
OAS Payment Dates For 2020
- January 29, 2020
- February 26, 2020
- March 27, 2020
- April 28, 2020
- May 27, 2020
- June 26, 2020
- July 29, 2020
- August 27, 2020
- September 28, 2020
- October 28, 2020
- November 26, 2020
- December 22, 2020
How to Apply for OAS?
Application starts when you turn 64. Your employer may initiate the process on your behalf or you may need to apply. Service Canada may send you a letter when you turn 64 to inform you that you need to apply.
If you are not automatically enrolled, you will need to apply. You can do so online or by filling the necessary form and one key decision you will need to make is if you are delaying your OAS for a larger payment.
When to Start OAS or OAS Deferral Options
During your application, you’ll be asked to choose when you want to start receiving your OAS:
- Start receiving your OAS pension at age 65.
- Start receiving your OAS pension at a specific date of your choosing.
However, you need to understand when is the best time which is all about your income expectations from when you turn 65 and onwards.
While you can receive your first Old Age Security pension payment the month after you turn 65, you can receive a higher amount for each month you decide to delay your first payment. You can delay receiving OAS payments until you are 70, or 60 months (5 years) after you turn 65. The longer you delay, the larger your pension payment will be each month. It’s not magic, you mostly delay getting the money you are due until later which allows you to ensure you can minimize the OAS clawbacks depending on your income.
At this point, if you are still working and earning more than the maximum threshold ($128,149) or the minimum ($79,054) for the OAS recovery tax (or OAS Clawbacks), you need to make a decision. Between your employment income, your work pension income and your investment income, you need to start extrapolating your income from when you turn 65 until you are 70.
In short, can you ensure your income stays below the minimum of $79,054 in 2020. See the OAS Clawback details.
|Recovery tax period||Income year||Minimum income recovery threshold||Maximum income recovery threshold|
|July 2019 – June 2020||2018||$75,910||$123,386|
|July 2018 – June 2019||2017||$77,580||$126,058|
|July 2017 – June 2018||2016||$79,054||$128,149|
How is OAS Clawback Calculated
The formula is pretty simple and the tax rate is 15% of the income you earn above the minimum threshold.
For example, if the threshold for 2019 is $77,580 and if your income in 2019 was $90,000, then your repayment would be 15% of the difference between $90,000 and $77,580:
$90,000 – $77,580 = $12,420
$12,420 x 0.15 = $1,863
You would have to repay $1,863 for the July 2020 to June 2021 period. Going back to what you receive above, the amount is fixed but you may have to pay taxes so be careful and be aware of potential taxes you may have to pay.
How To Minimize OAS Clawback
As you can see above, what you need to do is minimize the amount of income you report so you can stay under the thresholds or very close to it. To achieve that, you have a number of options.
Maximize your TFSA as withdrawal are completely tax-free. If you can grow a $1M TFSA, you can withdraw from it without paying taxes and reaching the $1M milestone is actually easy if you contribute to your TFSA every year. See the potential TFSA growth table at the bottom.
Income splitting is a way to assign some of your income to your spouse (or vice versa). RRIF, for example, can easily be split but RRSP cannot until it converts to an RRIF so making deposit in your spousal name is something that you need to do much much earlier so that you can withdraw from each account.
Defer OAS / CPP until later. By deferring, you essential push an additional income until later when you may have a lower income. This is why it’s important to understand your future income. However, you need to be careful as the future OAS income will be higher so you need to balance it all.
Use your RRSP contribution room if you have some available. You can contribute to an RRSP until the end of the year in which you turn 71. If you are still employed and receive an income, you can use the contribution room to lower your income and avoid an OAS clawback as long as you don’t put yourself in hardship financially. You can also consider a spousal contribution if it makes sense depending on your spouse’s income.
Last but not least, optimize your investments for income tax purposes. Ensure you have the right investments in the appropriate accounts. For example, GICs and interest income are fully taxable whereas dividends tax and capital gains tax have different advantages.