Avoid the OAS Clawback: Earn $560 a Year the Smart Way

The OAS clawback is a hated tax measure but pensioners can avoid it or lessen the tax bite with proven strategies.

| More on:
bulb idea thinking

Image source: Getty Images

Most Canadian pensioners hate the Old Age Security (OAS) clawback or recovery tax. If their annual income is above the OAS threshold, pensioners pay a 15% tax on excess earnings. Since its introduction in 1989, many have discovered strategies to avoid the OAS clawback, if not lessen the tax bite. 

However, a proven way to offset the recovery tax is to utilize the Tax-Free Savings Account (TFSA). Your OAS pension is not at risk if you generate additional income from the tax-advantaged account.

Defer OAS payment

Pensioners can boost OAS benefits by opting to delay the payments. The maximum amount ($713.34 in 2024) increases by 0.6% per month (7.2% per year) before 70 or a permanent 36% increase in five years. The rationale for this option is that you receive higher benefits when you are older and your income is lower.

Split the pension

The Canada Revenue Agency (CRA) allows spouses or common-law partners to split their pensions. Pensioners can transfer up to 50% of eligible pension income to a spouse who is earning less income. The CRA assumes that the transferring and receiving spouse or common-law partner are 65 or older.

Move income-producing assets to registered accounts

Many income investors invest in Freehold Royalties (TSX:FRU) for generous dividends. At $13.49 per share, the yield is 8.01%. Tax planners suggest reducing investments in non-registered accounts if you’re avoiding the OAS clawback.

Freehold Royalties is a significant energy sector player but is not an oil producer. The $2.03 billion energy royalty company owns oil and natural gas royalties in Canada (6.2 million acres) and a sizeable, expanding land base in the U.S. (1.1 million gross drilling acres).

The company has interests in more than 18,000 producing wells and benefits from the robust drilling activities in the royalty lands. It collects or receives royalty income from over 380 industry operators. Freehold is a royalty-interest owner, and operators spend for or cover all costs such as capital, equipment, operating, and maintenance.

Besides the hefty dividend yield, the $2.03 billion energy royalty company pays monthly dividends. A $7,000 investment will produce $560.70 annually, but taxable in a non-registered account.

Max out TFSA limits

All income, interest, or capital gains inside a TFSA are tax-free. Withdrawals are likewise tax-exempt. A cheaper and eligible stock in a TFSA is Rogers Sugar (TSX:RSI). At only $5.82 per share (+10.01% year to date), you can partake in the 6.19% dividend.

This $744.5 million company is Canada’s largest refined sugar distributor. It is also a producer of high-margin maple products. Sugar is a low-growth business but a very stable one. Furthermore, the consumer staple stock rarely experiences wild price swings, so price volatility is not a concern.

In the first half of fiscal 2024, revenue and net earnings increased 10.3% and 8% year over year to $589.6 million and $27.9 million, respectively. Rogers Sugar’s president and chief executive officer, Mike Walton, said, “The profitable growth we are generating in both our business segments showcases the combined benefits of strong demand for our products.” He added that Rogers Sugar will focus on harnessing this demand.  

Hated tax measure

The OAS clawback is a hated tax measure in Canada. If you’re retiring soon, the minimum income threshold for income year 2024 is $90,997. The recovery tax kicks in if your income exceeds the threshold.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Freehold Royalties. The Motley Fool has a disclosure policy.

More on Retirement

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Retirement

The Average TFSA at Age 50: Where Do You Stack Up?

The TFSA is a great way to save for retirement and during it, but what if you're still short of…

Read more »

Senior uses a laptop computer
Retirement

Here’s Why the Average RRSP for Canadians Age 65 Isn’t Enough

The RRSP is an excellent way to save for retirement. Yet most Canadians don't have enough! Here's how to catch…

Read more »

Senior uses a laptop computer
Retirement

Dividend Fortunes: 2 Canadian Stocks Leading the Way to Retirement

These two TSX stocks with an excellent track record of dividend growth are ideal for your retirement portfolio.

Read more »

Canada day banner background design of flag
Retirement

RRSP Wealth: 2 Great Canadian Dividend Stocks to Buy in November

Investors in these stocks have received annual dividend increases for decades.

Read more »

Close up of an egg in a nest of twigs on grass with RRSP written on it symbolizing a RRSP contribution.
Dividend Stocks

3 Evergreen RRSP Stocks Every Canadian Investor Should Own

If you're looking into RRSP stocks, it's quite likely you've come across these on many, if not all, of the…

Read more »

Hand Protecting Senior Couple
Retirement

These 2 Dividend ETFs Are a Retiree’s Best Friend

These two dividend ETFs could provide retirees with a diversified and stable income stream, while providing some price appreciation.

Read more »

coins jump into piggy bank
Retirement

Here’s the Average RRSP Balance at Age 44 for Canadians

Holding stocks like Alimentation Couche-Tard (TSX:ATD) in an RRSP is a good way to build your wealth.

Read more »