Q: I am 70 years old and did not apply for OAS at age 65 because of my annual income from pensions and investments. It would be completely clawed back. It’s my understanding that I would still have to declare it as income . . . phantom income . . . which may impact federal taxes owed.
Is this correct? Or should I have applied?
A: Old Age Security (OAS) is a pension you can begin between age 65 and 70. If you start your pension later than 65, the monthly payments are higher for each month you defer.
For someone turning 65 in 2019, the maximum annualized pension is $7,217 if you have lived in Canada for at least 40 years after the age of 18. For someone who defers their pension to age 70, the annual maximum in 2019 rises to $9,816 (0.6 per cent for each month of deferral).
High income earners must contend with OAS recovery tax or “clawback”, Eileen. The way clawback works is if your net income on line 236 of your 2018 tax return exceeds $75,910 ($77,580 for 2019), your OAS pension is reduced by 15 per cent of the excess. Regular income tax is also payable on your net OAS pension – net of the clawback – with rates starting at 28 per cent and rising depending on your actual income and province or territory of residence.
Because you are 70, Eileen, in order to have your full pension clawed back, your net income would have to exceed $141,348 on your 2018 tax return. A 65-year old in 2019 would be subject to full clawback at only $123,386 of 2018 income.
At worst, you could have 100 per cent of your OAS clawed back, so while this may seem like “phantom income”, as you put it, you’d have nothing gained and nothing lost (except your time to apply).
You can also receive up to 12 months of retroactive OAS, Eileen, assuming you are currently past your 70th birthday.
Even if your income exceeds the upper threshold of the OAS clawback limit, I think I would still apply for OAS. It’s at least possible the rules change or your income changes or something results in an OAS entitlement in the future. The application is a one-time process and reasonably straightforward. The form to apply can be found here.
If your income exceeds even the upper threshold of $141,348 for the maximum age 70 pension, Eileen, receiving OAS may not have moved the needle much for you financially. Regardless, working with seniors who have their OAS clawed back, I appreciate that it can be frustrating, and some people want to find ways to reduce that clawback.
Amongst the best options:
- Maximize your Tax Free Savings Account (TFSA), where investment income and capital gains are tax-free.
- Invest for deferred capital gains in your non-registered account, as interest and dividends give rise to current year income and therefore increase OAS clawback.
- Consider tax-enhanced investment options like corporate class or swap-based funds, investments that pay a return of tax-free capital, flow-through shares, or life insurance strategies, if appropriate.
- Maximize all available tax deductions like split-pension deductions, carrying charges, and so on to ensure your net income is minimized.
- Consider gifting assets to children, grandchildren, or charity, if doing so won’t compromise your own retirement, as a means of decreasing your taxable investment income.
- Consider a family trust or estate freeze as a means of spitting income with lower income family members like children or grandchildren.
In summary, Eileen, you may be correct, in that your OAS pension may just be phantom income if your other income is high enough. Regardless, I think you should apply, retroactive to your 70th birthday, and then consider if there are strategies to lower your income and increase your OAS entitlement.
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