Canadian citizens and permanent residents age 65 or older can apply for Old Age Security (OAS). While seniors don’t need an employment history, they must meet certain requirements to receive money from the pension program. However, the benefit is taxable, and a fight looms against a recovery tax if your income exceeds a set threshold.
Retirees aren’t happy with the OAS clawback or recovery tax. For income year 2023, the starting threshold is $86,912. A senior will pay 15% of any amount exceeding the minimum income threshold during the recovery tax period (July 2024 to June 2025).
Also, the OAS benefit is clawed back or reduced to $0 if earnings are above the maximum income recovery threshold ($141,917 for 65 to 74 years old and $147,418 for 75+). Fortunately, the Canada Pension Plan (CPP) isn’t subject to a clawback. Retirees can counter or lessen the recovery tax’s impact through the CPP.
Pension sharing
If you and your spouse are eligible to receive the CPP, consider sharing the retirement pension with a lower-income spouse to realize tax savings for the family and avoid the OAS clawback. This sharing arrangement will not change the combined total amount of the two pensions.
Delay until 70 for permanent increases
Retirees with no immediate financial need or health concerns can opt to delay CPP and OAS payments until age 70. The deferral option is an incentive that permanently increases both pension benefits. For the CPP, the boost is 42% or 8.4% for each year of deferral after 65.
The OAS rewards retirees with a 36% increase in the final payment or 7.2% for each year you delay after 65. If the average CPP monthly payment is $760.07 (April 2023), the benefit rises to $1,079.30. Your OAS becomes $939.76 monthly instead of $691 (maximum for 2023).
Canadians who turned 75 after July 2022 get another 10% permanent increase in their OAS.
Use your TFSA for tax savings
Some retirees limit their dividend income to ensure earnings don’t exceed OAS income thresholds. However, an effective strategy to be tax-free and not worry about excessive dividend income is to maximize your annual Tax-Free Savings Account (TFSA) contribution limits. All interest, gains, and income inside the TFSA are non-taxable.
Ideal for retirees
The National Bank of Canada (TSX:NA) is an ideal holding in a TFSA and a dependable passive income provider for retirees. Canada’s sixth-largest bank is the top-performing Big Bank stock thus far in 2023, with its 15.6% market-beating year-to-date gain. At $103.24 per share, the dividend yield is 3.94%.
This $34.9 billion Montreal-based lender aims to diversify its commercial loan portfolio and extend support to dynamic and innovative tech firms. NA will acquire Silicon Valley Bank’s Canadian portfolio, particularly in the Technology, Life Science and Global Fund Banking sectors.
NA’s Technology and Innovation Banking Group is growing, and the acquisition will accelerate growth and strengthen the bank’s presence in Canada’s tech industry.
Play it smart
Retirees dread anything that reduces their retirement income. The key to avoiding or weakening the teeth of the OAS clawback is to build a solid retirement income plan to include the three smart strategies above.
