Are single seniors unfairly penalized at tax time?

Q. I am a senior with an income of about $115,000, single and in receipt of $7,364 in OAS benefits annually.  I keep only about $200 a year out of that for myself.  Yesterday, while doing my income tax return, it worked out that I ended up owing an extra $2,000 to $3,000 in income tax, although nothing else had changed in my money situation. Is this due to the social benefits repayment and, if so, can I have OAS payments stopped? Or am I going to have to pay the social benefits recovery no matter what I do?  

I also am in receipt of online payments totalling around $7,000 annually, which the CRA has included in my world income. This does not seem right to me, and I would appreciate your professional opinion.
–Karen

A. Karen, you’ll be subject to the social benefits repayment no matter what you do.

If your income is high enough to trigger a clawback of Old Age Security (OAS) payments, based on the income you’ve reported on your tax return, the physical payments are normally stopped. However, you will still receive a T4A showing that you received the full OAS. The social benefits recovery offsets this.  

The social benefits recovery is not something you pay.  Essentially, it shows the amount of the OAS that was clawed back so that you don’t end up paying tax on an OAS amount you didn’t physically receive.

In regard to your second question: I’m not sure if you have a business where you are collecting revenue from around the world, or if you are receiving pension income from another country, which isn’t being taxed in that country.  In either case, you have to claim that income on your tax return, which it sounds like you did, and this is the most likely cause of the increase in your tax owing.

If you are receiving pension income from another country, and Canada has a tax treaty with that county, it may be possible to pay the tax on the pension in the originating country. This may reduce your taxes owing in Canada. 

Is the tax system right, wrong, or fair? I suspect it is never going to seem fair to everyone.

Take OAS, for example. Probably the best strategy to maximize OAS benefits is pension income splitting, which is obviously only available to couples.  

Looking at your situation, you earned $115,000 + OAS of $7,437.83 in 2020 and, after paying tax, and having most of the OAS clawed back, you were left with $85,174.96.

Now imagine a neighbourhood couple with total pension income, before OAS, equal to your income of $115,000. They would be able to split their income for tax purposes and report $57,500 each, and they would each receive the full OAS pension. 

After taxes, your neighbours will be left with $106,866.50, or $21,691.64 more than you, based on the same income. You paid more tax and had most of your OAS clawed back. 

Karen, I know you are not excited about paying tax. The good news is that we are allowed to handle our financial affairs, within legal limits, to minimize the amount of tax we pay. The bad news is, when you are single and receiving pension income or RRIF income as your only sources of income, you are limited to what you can do in that regard.  

Allan Norman, M.Sc., CFP, CIM, RWM is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected]

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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