When to watch out for OAS clawbacks

Q: I have been trying to find out how much extra income a person can earn without having to report the income while drawing OAS and CPP.

I have tried looking this up online, but every site I have been to wants to charge me just to get the answer or does not answer my question and ends up talking about other things.

I just need to know the limit they are allowed to earn before they need to report it.

—Marcella

A: By default, Marcella, you should assume that most income sources are taxable and need to be reported on your tax return. There are a few exceptions, like GST/HST credits, Canada child benefits, lottery winnings, gifts, inheritances, post-secondary scholarships for full-time students, and Tax Free Savings Account (TFSA) withdrawals.

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There are also amounts that may end up being tax-free, like if your income is low, or if you have lots of tax credits, or on the sale of certain types of assets, like a business or farm.

READ: When not to apply for OAS

But since most income needs to at least be reported on your tax return, whether it is taxable will depend on your other income sources, tax deductions and credits for the year.

It’s also important to note that Canadian residents are taxed on their worldwide income, so earning income in another country doesn’t exempt it from Canadian tax reporting requirements. Quite to the contrary, sometimes the requirements are even more strict for foreign income.

Canada Pension Plan (CPP) and Old Age Security (OAS) are government pensions that you can receive in retirement. CPP starts as early as age 60 or as late as age 70 and is paid for life. OAS starts between 65 and 70 and is also a lifetime pension.

You can work and receive both pensions. You can also earn other sources of income besides employment or self-employment income, Marcella.

If you’re working while receiving CPP, and you’re under the age of 65, you still need to contribute to the CPP pension. You can opt out of contributions after the age of 65, but you need to file a form with CRA to do so.

If you’re receiving OAS and your net income on line 236 of your tax return is more than $75,910 for 2018, you will be subject to OAS clawback. Clawback results in your OAS pension for the subsequent year, paid between July 2019 and June 2020, being reduced by 15 cents for every dollar your net income exceeds the $75,910 threshold. If you have a net income of $122,843 or more for 2018, your OAS is fully clawed back and reduced to zero.

If you are working and want to reduce your income, Marcella, you can always contribute to a Registered Retirement Savings Plan (RRSP) account if you or your spouse are under the age of 72.

Getting information online about your finances can be difficult. I do online financial research sometimes myself and even though I know what I’m looking for, I find it’s still difficult to know what is reliable and what is not. I’m partial, but I think you need to stick with personal finance sites like MoneySense.ca and other known Canadian media, bank or accounting firm websites. At least you know they’re somewhat vetted because of the experts who contribute and the readers who would correct an error if it were inadvertently published.

That said, there’s no promise online information is up-to-date, Marcella. So, look for recent articles or posts, as something that applied five years ago or even last year, for that matter, may no longer apply.

And if you have a few tax questions, consider paying a professional for their advice. I find there can be a real reluctance to do so when there’s so-called “free” advice on the internet. But if it’s free bad advice, maybe it ends up costing you more in the long run.

Few people would think to Google how to perform a root canal, let alone try it themselves. But lots of people try DIY tax and financial advice. If you don’t have an accountant, contact one and buy an hour of their time. Bring a list of questions or send them beforehand, so you can get an income tax “check-up.” It may be well worth it even if you only do it once in your life or at least once in a while, Marcella.

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.

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MORE ABOUT OAS:

• What to expect when receiving OAS at 65
• How business owners should time CPP and OAS
• Key to ‘rich’ qualifying for GIS is large TFSA
• Do bonds still belong in an RRSP?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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