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A one-time bump in Sam’s income triggered an Old Age Security benefit clawback, and he wants to know if there is a remedy.
Q. I liquidated a large mutual fund in 2020 to transfer to an ETF with lower fees. Of course, capital gains caused my 2020 income to increase to beyond the bottom threshold for OAS recovery. I understand there is a form to fill to say next year’s income will be lower. However, if I do not fill that form, does everything “come out in the wash” for subsequent years’ tax returns? In other words, would the lost benefit become a “credit” that is then returned to me?
–Sam
A. Old Age Security (OAS) is a government pension for those aged 65 and older that is means-tested—in other words, whether or not you receive it is dependent on your income. Seniors with a low income may be entitled to a top-up called the Guaranteed Income Supplement (GIS); and at the other end of the scale, recipients with a high income may have their Old Age Security reduced due to an OAS recovery tax or clawback.
OAS clawback applies in 2021 for those whose net income on line 23600 of their tax return exceeds $79,845. A taxpayer must repay OAS at a rate of 15% of income exceeding this threshold. OAS is fully clawed back at $129,581 of income.
There are two ways that OAS recovery may impact you, Sam. The first is if your income exceeds the clawback threshold on your tax filing. In this case, there is a social benefits repayment that reduces your refund or increases your balance owing by increasing the calculation of total tax payable.
Your previous year’s tax return also impacts your OAS pension from July of the filing year to June of the following year. If your net income exceeds the recovery threshold, your subsequent OAS payments will be reduced; this is not necessarily a permanent reduction—it applies only for the applicable 12-month period. On your subsequent tax return, if your income is below the threshold, the OAS reduction will be credited back on a dollar-for-dollar basis and increase your overall tax refund or reduce your balance owing. The OAS reduction is considered a prepayment of income tax and is reported in box 22 (income tax deducted) of your T4A(OAS) tax slip.
There is a form that can be filed as a “Request to Reduce Old Age Security Recovery Tax at Source” called a Form T1213(OAS). The form is filed with the Canada Revenue Agency (CRA) and is typically processed within two months. It is used in a case like yours, Sam, to estimate your current year’s income in the event it will be lower than last year. If approved, the CRA forwards the request to Service Canada, which administers the OAS program, to reduce or eliminate the OAS recovery tax.
To answer your question, it does sort of “come out in the wash”, so the T1213 filing may not be necessary. For some OAS recipients, filing the form can be helpful to ensure they do not see an interruption in their monthly OAS payments, especially in the case the decreased pension payments may cause financial hardship.
You may have been able to reduce or avoid OAS clawback by realizing the capital gain on your mutual fund over more than one year. That said, tax should be a secondary consideration when making investment decisions. If considering a sale of a taxable investment in a non-registered account towards the end of the year, a taxpayer could potentially sell in December and January to split the sale over two tax years.
Paying capital gains tax to sell a high-fee mutual fund and invest in another lower cost investment—an exchange traded fund (ETF), in your case, Sam—may well be worth it. The short-term hit from the capital gains tax may be made up before long with lower fees. The same short-term pain for long-term gain may also apply for an investor who is overexposed to a certain stock or sector. Sometimes, paying tax can enable you to reduce risk and better diversify your portfolio.
Investors should look for ways to invest that balances tax payable, fees and investment strategy. OAS pensioners can consider filing Form T1213(OAS) to request a reduction in their OAS recovery tax but should not be worried that a temporary OAS clawback is necessarily a permanent one.
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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This case is identical to my situation only due to Health problems, I cashed in a RRIF which caused my income to be over for the tax year and cancellation of Oas. I will be applying for Oas after filing income tax for 2021.(form F1213 in the new year)
Such a greedy selfish person! OAS is for people who have little to no income in their senior years.
IF>>>>IF>>> you have ‘too much’ income, then clearly OAS is not needed for your survival.
Human greed knows no limits….good grief man, how much money do you need in your senior years? That you fish around to save a few thousands when you clearly have many tens of thousands, is oh so telling. Shameful indeed. SMH
Omg, try living on 17,000$ a year when your rent takes most of it. What joke how the rich are always looking out for one another.
Enlightens , helpful , appreciate it
Useful information.
CRA looks at line 23400 for OAS clawback, not 23600
I use this form often for clients who are recently retiring and their income from the year before their retirement is high and therefore they do not receive OAS benefits for 18 months, basically.
Jason somewhat misunderstood. Intentionally? The question was really about income leveling. A number of your ago the CRA used to allow you to income level across 5? years at I remember. This made sense for those with variable income such as Sam above where clearly his average income over 5 years would be below the threshold for payout of the OAS insurance that he paid for in his past employment years. The greed of the CRA knows no bounds; however and after a few years the CRA dispensed with income leveling. Sam, like all of us self employed people with variable annual income got “hosed” because of the basic unfairness of the Canadian tax system. The Government would go from think we were “rich” in high earning years to thinking we were “poor” in low earning years. Unfortunately the tax paid when rich is mor than the tax saved when poor.
OAS is not just for seniors who have little income. It’s for everyone over 65 who has lived in Canada for at least 10 years ( and have paid taxes ) how many years will dictate the amount. If received by people who have a great/good/ respectable overall income then the tax department steps in for their pound of flesh.
The so called OSA pension.
I would suggest that they change the name to The Poverty Pension, They lead you to believe that you receive this when you are 65 years of age . Not true, you need to be making a Poverty wage otherwise they claw it back to $0 per year. Another way the Canadian government sticks it to the lower income residents.
The OAS is clawed back after a certain income level is reached …
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B U T
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the withheld funds are a prepayment of taxes and are used as part payment of taxes on the next tax return.
How can l stop my OAS instead of doing a clawback? My income will be too high for the next 5 years.
Can I restart my OAS at that point?