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.
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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.
