Q: My name is Gillian and I have an incorporated company located in the Province of Alberta. I am 67 years old and still working and have an annual gross income of $98,000.
I applied for Old Age Security and Canada Pension and am now wondering if I’ve made an error in judgement as my tax advisor advises me I am above the threshold and must pay the entire OAS amount that I received back to the government, which amounts to $22,000.
What would you suggest that I do?
A: It sounds like you’ve engaged in reactive tax planning instead of proactive tax planning, Gillian. Reactive tax planning usually means paying an unexpected tax bill, since there’s often not much else you can do after the fact. Proactive tax planning gives you the opportunity to reduce tax in advance where possible.
You can apply for a Canadian Pension Plan (CPP) retirement pension as early as age 60 and as late as age 70. Old Age Security (OAS) can start anytime between 65 and 70. The earlier you start your pensions, the lower they are to reflect more years of payments. Delaying results in higher pension amounts.
You mentioned that you’re 67, Gillian. If we assume you started your CPP pension in January 2016 and that you turned 65 in December 2015, the maximum CPP pension you could have received last year was $14,567, including a year of Post-Retirement Benefit for contributing to CPP past age 65. The maximum OAS pension would have been $7,339.
That’s a total of $21,906 at most that a 66-year old could have received from their combined CPP and OAS pensions in 2016. This number is remarkably close to your accountant’s estimate of $22,000 repayable to the government, which makes me wonder if there has been some confusion.
I say this, Gillian, because at most, one would have to repay their OAS pension for 2016 and only if their 2016 net income on line 236 of their personal tax return was above $119,615. They call this OAS “clawback”. You have to repay 15% of your income exceeding $73,756 and your OAS would be completely clawed back at $119,615 ($122,683 in your case if you delayed your OAS start date by one year).
So something doesn’t jive with your accountant telling you that you will owe $22,000. You mentioned you have a $98,000 income and with at our estimated $21,906 of combined CPP/OAS income, you could be close to the maximum OAS clawback. This means you may have to repay $7,339 of OAS, but nowhere close to $22,000.
The OAS social benefits repayment gets calculated on your tax return and adds to your tax payable, thereby increasing your tax owing or decreasing your tax refund.
I wonder if you mistakenly interpreted your accountant and thought you had to repay your entire CPP pension PLUS your OAS pension?
CPP is not subject to a clawback like OAS. OAS is a means-tested retirement benefit meant to benefit those with middle or low incomes. CPP is simply based on entitlement tied to past contributions during your working years.
I should ask, Gillian, if you have the opportunity to defer some of your corporate earnings inside your corporation? You mentioned you are earning $98,000 in a company incorporated in Alberta. Just because your corporation earns money, it doesn’t mean you have to pay it out as salary.
You could be wise, particularly in this case, to defer some of your corporate earnings and not withdraw it all as income. In this way, you can reduce your personal income and possibly stay below the OAS clawback level. Your corporate tax rate on income retained corporately could be as low as 13.5% for 2016 in Alberta if you qualify for the small business tax rate.
I found it odd that your corporate earnings are exactly $98,000, which suggests to me that your company could be considered a personal services business if you only have one client and you’re paid what could otherwise be considered a “salary.” The distinction goes beyond the scope of this article, but suffice to say there may be impediments to leaving money in your corporation. I’d say talk to your accountant, but I worry about the advice they’ve given you already.
Another option going forward for you to reduce your income and avoid or reduce your clawback of OAS is to contribute to an RRSP, Gillian. Certain tax deductions, like RRSP contributions, reduce your income for purposes of determining the OAS clawback. The tax savings and reduction in your OAS clawback could save you about 51 cents for every dollar of RRSP contributions based on your salary, CPP and OAS amounts provided (ignoring any other income or deductions).
Hopefully, I’ve equipped you with a few options to maximize your OAS pension and minimize your OAS clawback going forward, Gillian. There may not be much we can do retroactively and this reinforces the benefit of proactive tax planning. It also suggests that others in a situation like yours should at least consider delaying an application for CPP or OAS. There are reasonable arguments for delaying CPP and OAS past age 65 in general, but particularly if you are still working at a high level of income after 65 and don’t otherwise really need the cash flow. Don’t just apply because you’re 65 and got an application in the mail.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.