OAS (Old Age Security) is the kind of pension that is the pivoting income source for the retired demographic of Canada. On the contrary to CPP (Canada Pension Plan) where you are obliged to add money while you work, the OAS in Canada comes from the government coffer for seniors who qualify certain criteria. Now the question is, do you pay taxes on OAS in Canada? If yes, what is the aggregate amount, and what are the do’s and don’t of OAS clawback or recovery tax? Let’s find out.
What is OAS?
OAS is retirement security or benefit that is offered by the government of Canada to Canadian retired residents who have reached the age of 65 and have been a resident of Canada for not less than 10 years after they reached 18.
If you are a retired Canadian abroad, you must’ve lived in Canada for 20 years before moving after the age of 18 if you want to be eligible for the OAS. You can defer your OAS benefit until you turn 70. This can increase the benefit from up to 36%.
OAS was launched in 1927 through the Old Age Pension Act by the Canadian Government and is meant for Canadians whose income fell less than $365. The criteria were further extended in 1952 to individuals who have income less than $480. In 1967, the GIS (Guaranteed Income Supplement) also became a part of the OAS.
Are There Any Taxes on the OAS in Canada?
Taxes on OAS in Canada are imposed for a year based on the income slab that you belong to. At the end of every tax year, you will acquire the T4A (OAS) tax slip through Service Canada which will inform you about the tax amount that you are obliged to pay on your OAS and the tax that is deducted.
This slip is generally received during the February end. You can see the taxes in box 18 and the amount in line 113 in the tax return column. In case the OAS recovery tax is already deducted from your pension, you can check the same in box 20 in the T4A (OAS) tax slip.
You are also allowed to make payments for taxes each month instead of a lump sum or quarterly payment by requesting the same from the Federal income taxes. For this request, just fill out the form ISP 3520.
Those who qualify for the OAS but stay abroad are needed to pay 25% withholding taxes on OAS in Canada if they are considered a non-resident of Canada.
Remember that if you have not resided in Canada after the age of 18 years for at least 20 years, you will not qualify for this benefit, and the payments will be curbed after you have stayed abroad for 6 months. However, these payments are restarted once you come to Canada.
What About OAS Recovery Tax?
If your annual income is more than $79,054 for the 2020 tax year and July 2021 to June 2022 recovery tax time), you might be obliged to pay back some of your OAS benefits.
If your income is more than $128,149, you will not qualify for the OAS benefit. The threshold for July 2022 to June 2023 recovery is decided as $129,075. The default recovery tax period on OAS is dependent on the time when you started accumulating it.
In case you started receiving the payments of your OAS pension during July 2022, the tax return for the year 2021 will also play a role to impact your threshold of the OAS recovery period or OAS clawback. The reason being, the period that the OAS calendar runs from is July to June.
The recovery taxes on OAS in Canada amounts to 15% of each dollar which is more than the threshold amount up to the point where OAS payments are fully stopped.
Here are the real numbers for It:
- The period for recovery tax runs from July 2021 to June 2022.
- The recovery threshold for 2021 stands at $79,054.
- The maximum recovery limit for 2021 is $128,149.
- Income tax is applicable on the tax return of 2020.
Hence, if you earn over $95,000 during 2020, you will have to repay:
- $95,000-$70,054 = $17,420.
- $15,946* 0.15% = $2,391 OAS recovery tax.
Hence, you will be paying back $2,392 from July 2021 to June 2022 period. Hence, $199 will be deducted from your OAS payments monthly from July 2021. You can see what recovery tax is paid in box 20 of form T4A-OAS.
If your income is less, it can bring more OAS clawback under your belt. As such, you will be handed the excess amount back once you file your tax return. If you have a fair idea of your income being less for next year, you can avoid the high taxes by the CRA by filing for form T1213 (OAS).
Ways to Reduce the OAS Clawback aka Recovery Tax
Your worldwide total income is taken into account when the OAS clawback is decided which includes capital gains, interest income, dividends, etc.
Here are some of the strategies to lower this clawback:
- You will incur trigger capital if you collect your OAS before you turn 65.
- Use the amounts in TFSA before anything because these withdrawals are non-taxable.
- Collect CPP only when your income level falls a bit.
- Lower your net income by splitting the pension with your partner or spouse.
- Fill up the limit for your tax deductions like using your RRSP room. And if you are more than 71 years old with some contribution room left, you are still eligible to contribute to the RRSP, assuming that your partner is still less than 71 years old.
Are There Taxes Imposed on the GIS?
The GIS (Guaranteed Income Supplement) is a pension benefit like OAS and it is also paid to people with low income who are also getting the OAS. GIS payments are not burdened with any taxes. And the qualification for GIS and needed income changes based on the following factors:
- Your partner is receiving the OAS pension or not.
- You are married, single, widowed, or divorced.
- Your spouse receives some allowance or not.
Let’s take a look at the GIS amounts that people stand to receive in 2022 if they are also getting the full OAS benefits.
- If your spouse receives an allowance then you will get a maximum payment of $577.43 and the maximum annual limit for this is $46,656 for the combined income of both partners.
- In case you are divorced, single, or widowed, you will receive a maximum monthly payment of $959.26 if your income is within the annual income threshold of $19,464 (individual).
- If your spouse does not receive the OAS benefits then you will receive a maximum amount of $959.26 monthly, if your income falls within the annual income threshold of $46,656 (combined).
- If your spouse qualifies for the OAS pension then you will receive a monthly payment of $577.43, given that your income does not exceed $25,728 (combined).
Your income is reviewed by Service Canada every year, and the OAS and GIS benefits are stopped if your income exceeds the above-mentioned limit. They can also stop if you leave Canada for more than 6 months. You will get a buffer of $3,500 in GIS clawback (recovery tax), which was hiked to $5,000 from 2020. Well, that’s all you need to know about taxes on OAS in Canada. Hope you find it helpful!