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If you are a high-income senior whose Old Age Security would be fully clawed back, find out if you should still apply.
Although I am 75 and collecting CPP and my company pension, I am still working. My gross income is over $200,000.
A friend said I should apply for OAS right away even though it will all be clawed back. I am worried about the tax ramifications.
—Greg
Old Age Security (OAS) can start as early as age 65 or be deferred to age 70. For each month of deferral, the pension increases by 0.6% (7.2% annualized). To be clear, that does not mean there is a 7.2% return if you defer OAS. You give up a year of pension to have a 7.2% higher pension for life.
If you consider the cumulative OAS pension payments, if you defer by a year, you’ll be playing catch-up for the next 13 years. In other words, if you defer your OAS to age 66, it will take you until age 78 to receive more cumulative OAS compared to starting at age 65.
If you defer your OAS to age 70, it would take only 11 years, to age 81, to catch up on the cumulative payments, but you’ll be that much older and have less time to catch up as well.
There is a time value to money, such that receiving a dollar today is better than receiving a dollar next year. That is because you can invest that dollar, or you do not have to draw down your other investments as much and can keep them invested. As a result, depending on the assumptions used, you may need to live well into your 80s to be better off for having deferred OAS.
In the case of a high-income earner like you, Greg, there is a disincentive to starting the OAS pension early. This is because it is means-tested with a partial reduction in the pension for those whose net income exceeds $81,761, with a full repayment at $133,141 of income. This repayment, or clawback, is calculated as 15 cents for every dollar your income exceeds the low end of this threshold.
At $200,000 of income, you would be well past the upper end of the threshold. A 65-year-old whose income is high should probably consider deferring their OAS until their income decreases or until as late as age 70.
Given you are 75, Greg, you might as well apply at this point. You may not receive any OAS until you retire, due to your high income. However, there have been other benefits recently paid to OAS recipients—for example, a one-time payment of $300 in 2020 in response to the COVID-19 pandemic, and a one-time payment in 2021 for recipients who will be 75 or older as of June 30, 2021.
At worst, 100% of your OAS will be repayable to the government, so you would be no further ahead nor behind.
Beginning in July 2022, OAS recipients aged 75 or older will see a 10% increase in their OAS pensions. The result is that the upper end of the clawback income threshold will also increase.
One suggestion that may or may not be an option for you, Greg, but could apply to others, is to consider incorporation. If you are working on a self-employed basis or could change your relationship with your employer to legitimately become self-employed instead of an employee, there could be an opportunity to reduce your income. Business income paid into a corporation is taxable to the corporation at lower rates than personal income, and if you do not need the money for living expenses, it can remain tax-deferred. This could reduce your personal income and potentially help you keep some or all of your OAS.
Seniors who are still working after age 65 should consider deferring OAS, CPP and workplace pensions if they can. A healthy 65-year-old who is still working may be that much likelier to live well into their 80s and benefit from OAS and CPP deferral, plus they may avoid a high tax bracket that could result from an increase in income. A 70-year-old who is above the OAS clawback threshold should still likely apply for OAS. If their OAS is fully clawed back forever due to a high income, I guess that is a good problem to have.
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. If you have a question for Jason, please send it to [email protected].
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Hello Jason
I may be out to lunch but I am thinking your advise to not apply for OAS when someone is in an income bracket where the whole OAS amount is withheld.
I worked well past 65 years of age and applied for OAS ASAP. Why? My math showed that the OAS is withheld and shows up as a tax credit, while it also adds the same amount to your income. Therefore, since I don’t actually pay 100% income taxes on any additional amount earned on top of my regular income, the $6000.00 increased income , which also generates a $6000.00 tax credit, is well worth it. I paid the 50% income tax on the $6000.00 extra income which cannot change my income tax bracket since I am already at the top, so the $6000.00 tax credit actually results in me getting about 50% back in a refund.
Now tell me if I am out to lunch or not.
Retire or mentor someone or travel buy that car and don’t leave that money on the table! The government will get their hands on ever thing else when you pass!
Thank for for clarifying for your readers the following:
”To be clear, that does not mean there is a 7.2% return if you defer OAS. You give up a year of pension to have a 7.2% higher pension for life.”
I have read other writers stating that there is a “return” if you defer the OAS (or CPP), but the above is the clearest statement I have read so far.
Sorry. But I still don’t see the advantage in applying for OAS once I am 70 but am forecasting all the OAS will be fully clawed back for ever due to taxable income from Rif withdrawals, investment income and CPP well over the upper end of the threshold. It would just be money in and the same amount going out again.
I would anticipate if disaster happens and my income drops, I could apply for OAS at that point.
Please speak English so the regular Joe can understand.
Hi,
I am separated now 2 years. I am 66, working full time as a registered nurse.
I just bought a condo with 100,000 mortgage.
I panicked and just applied for CPP and OAP- it has not started but I think I made a mistake as now I will be bumped into a higher tax bracket.
Should I cancel before it,s too late?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
I am 67 year old and lived in Canada for 18 yrs. I applied for OAS at 65 in 2021 but applied for deferral after a month since my gross annual income was over $118000 and my payment was withheld. After a year, I requested Service Canada to start payment again on advice of some friend. I was paid a lump sum of $3200 approx but have not received monthly payments since. When I go to view details of payment on Service Canada website, it shows total amount as recovery tax and also says ‘Deferred’. T4A sent by Service Canada to CRA shows a payment of $243 and amount recovered as tax.
I do not understand the status of my OAS
Will I get enhanced payments when my annual income falls below the threshold limit or not
I am on ODSP, $1,546.23 (includes special diet), with under $12k net from a little self employment earned income approved by ODSP. I will turn 65 in June/25.
I am unsure what I will receive in CPP, OAS, or GIS, and can’t get a reply from ODSP.
If I continue with the self employment, does that income come off my pension(s) dollar for dollar, or do I keep it, as it’s under a threshold?
If I work for someone else, does that come off dollar for dollar?
How does either income affect OAS, CPP, GIS?
Thank you.
CJ