Maximize Your Retirement: Avoiding OAS Clawback & Unforeseen Taxes

Any employment income that you had in the year, your Canada pension plan, which is also a taxable benefit. So all of these different line items add up to a total. And that can bring your total into that clawback scenario, often quicker than you would anticipate. And the actual income paid from the OAS itself goes into that total. As an example, let's say you sold a rental property in a given year. Probability is it could blow you right past the entire maximum. So you could have no old age security paid out at all. So that could represent, you know, roughly speaking, an 85 to $9,000 quote, unquote hidden tax in that it's money that you did not receive because you sold a property in that year. That's something to be aware of when you consider strategic property sales or income events that might come up almost as a surprise event to some degree in different years. You really want to start planning and thinking those things through to see how you can mitigate how much of the clawback scenario you would put yourself into.

Just how does this old age security thing, where in Canada work anyway? What is it? How do we get it? Who gets it? How much do you get? More importantly, how much is going to be clawed back? That sounds like a fun thing, doesn't it? How much of that income that you're supposed to receive is going to be clawed back from you if you do too. Good. So we're going to talk a little bit about all those things with the old age security pension plan in Canada. And I'm joined a course here with Henry Wong to have a fun conversation. So Henry, where do we want to begin as we talk about old age security in 2023?

Yeah, let's talk about why old age security is such an important element, especially on what Canadians depend on. And the first part is old age security, short for oas, is a government program that provides financial benefits to eligible individuals. So I'm just emphasizing specific words who are 65 years of age or older. And it's designed to provide a basic income to seniors to support their retirement. So Canadians, if you're listening to this, when it comes to retirement, this is one of those source of incomes that you are looking to receive from the government. And this is where as part of the financial plan for retirement, when you're trying to collect all of your understandings of what sources of incomes you have coming into to support your retirement, this is one of those sources. So to be eligible for OAS, you have to meet three criteria. The first is you must be 65 age, years of age or older, you must be a Canadian citizen or a legal resident at the time of your OAS application and you must have resided in Canada for at least 10 years after the age of 18.

So this is part and parcel in terms of what a lot of people want to understand. Do I get old age security? As long as you meet those three criteria, then you'll be eligible for it. Now, in terms of the benefit, the old age security benefit actually comes in two forms, believe it or not. There's what's called the old age security pension and then there's the guaranteed income supplement. But what we're going to focus on specifically is the old age security pension. And this pension is a monthly amount payable available to all eligible individuals for the amount of the pension. And it's determined by how long you have lived in Canada after the age of 18.

One thing to highlight here too is that unlike certain other things that you may have, with the old age security pension, they measure roughly every quarter. So they typically do it in, I believe it's January, April, July and October. So each quarter they take a look at the effective cost of living increases as measured by the Consumer Price Index or the CPI in Canada. And then there is slight adjustments to the payout amount that would be distributed to people who are receiving the OAS at that time.

That's correct. Now there is actually a website at the government of Canada specifically focused on estimating how much your old age security benefits benefits would be. So I just wanted to share really quickly what that would look like. So I'm just going to put in some information here which is in terms of old age security, here's sort of where it is. When Were you born? January 1958-65. And in this case, because you're going through that, you click the no and then next step, go all the way to estimate my benefits. And then here, based on this calculation, here's how much old age security you would get. $698.60, which is about $700.

And if you scroll down there, actually Henry, if you bring that back up again, if you scroll down, it does show on that estimator if you were to defer those payments. So perhaps you're still working, you're gainfully employed, maybe you're just really just hitting your stride and you're not actually looking to get out of the workforce for any reason. It shows if you were to delay receiving those payments by each year, how much that goes up. And you know, so it looks like Roughly speaking, about $50 a month per year, with the exception of looks like a lower jump or lower increase from age 69 to 70, it's not quite as high of, of an adjustment that's made there. So that just gives you an indication if you, again, if you're expecting longevity in your life, if you've got a good history of longevity in the family, again, you're still gainfully employed, you're happy working and love what you do, you'd probably continue to work and you could defer that income for a later period. It's also important to understand that this is a taxable benefit of income. Henry so do you want to speak to that a little bit.

Before I talk about the taxable benefit for it? The application process, you've got to do it online and you've got to show your proof of identity. You log into your Service Canada website. So the most common question that we always get is should I delay my old age security or should I accept it right now? And in all honesty, it's a personal choice. And that personal choice would come down to really, in my opinion or in our opinion, what your personal circumstances look like as it pertains to your options. If you have limited options available to you, then you may want to take it immediately. If you have more abundant options available to you, maybe you want to delay it. I'm of the philosophy that this amount has come, I have contributed to this in some way, shape or form in some way in terms of the government system. I would actually want to receive that early, irrespective of the extra $50 per month that I would get, or $600 per year. And waiting until 70. I would not want to wait until 70 to actually start clawing my income back from the taxes that I would have contributed for that.

I would only speak that to one degree because 50 bucks extra a month or $600 a year, well, your very first payment is about 650 bucks. So in, in one payment, on the very first payment at 65, you get back more than if you waited one full year, essentially, that you would earn for that extra year. And if you take 12 months times about $650 a month, that's almost $7,800. So by delaying, although, yes, you'll get a slightly increased amount of income, that increase only being about $50 per month, you're, you're giving up an entire year's worth of income potential of 7,800. So each year that you delay, that's how much money you're foregoing. And if, you know, we just use a little bit of logic, you're gonna die at the same point in time. So whether you're 65 and you die at 85 or you're 70, you died at 85. The probability that you're going to make up that five years of gapped income that you didn't take, I would say is pretty low. Especially if you could put that money to work in some functional area of your life.

Exactly. Just so looking at it from here, if you were to declare benefits at 65, it would be $700. Just rounding it nicely, you wait a year, 750. 50 times 12 is 600. So by delaying one whole year of 7, 700 times 12, 8400, waiting one year of missing 8400, you're trying to get an extra 600, you're kind of tripping penny for dollars in my, in my, in our opinion. Yeah. Now the next point of discussion which you is to talk about this. Old age security is actually a taxable benefit coming into. So when you receive it from the government, it's going to be part of the equation of accumulating income when it relates to how much you are receiving in, in the years that you are as a source of income that you're getting. And this source is coming from the government. And one of the most important things when it comes to retirement. And I'm actually going to bring this down to a very specific level. And a lot of people who entrust us their tax professional to fill out their tax returns, they've ever, they've not really ever may have, sorry, they've never really had a chance to potentially look at the specific volume of boxes it takes to fill out someone's tax return. And so I just wanted to share my screen and on this particular part, this particular excerpt that I have and that you see in front of you is a tax return specifically on the details. And you'll see for a tax professional who's filling out the sources of income as if you've fly them with T slips and everything like that, they're filling these numbers in into these particular boxes. And this is just one of the many forms in here. This is page four as an example. And this is one of the many pages that the tax professional would go through in terms of filing the T slips that she provided. So they would go through and fill that out after they filled it all out. There is a particular line item called the net income before adjustments, which is this 23,400 box and this number is very, very important when you are looking to consider for your retirement because this, this is the part that we're going to dive into where this could have some potential impacts too. So this number, whether you receive sources of dividends eligible or ineligible, whether you receive capital gains, whether you receive income, sources like this from old age security, whether you receive employment income, all of that is going to accumulate into this final line item. Not final but pro free tax. Calculated line item of 23,400. This line item here. The reason why it's important is to kind of expand back as part of the sources of building to get to that line item. There are that dividend numbers eligible and ineligible. So line 12,000. So this is for those of you who are now looking into the details of this interest which is 12,100 and taxable capital gain 12 12,700. All of these particular boxes in terms of the sources of income you receive. So if you have some unregistered stocks that are paying you dividends, that's going to go into this line 12,000 or this box 12,000. And why am I talking about dividends as it pertains to box 12,000? Well, since the old age security is a taxable benefit, there's actually another criteria that is involved when it comes to income. When you are look, when you're looking at your retirement, you're looking at your income. The part that you're looking about income and why it impacts this, especially when it comes to old age security is there's some, there's a design mechanism that exists for the old age security called a clawback that. And how does this clawback work? Well, the first part of this clawback is the old age security has a income limit before or this clawback starts coming in and it's called a recovery tax. And this recovery tax is the government's term to use that if you've earned too much income beyond a specific threshold, they start charging or clawing back the benefit. And if you were to look at it in a different perspective, if you've earned too much income, the government is not going to support you as much related to this old age security and they're going to recover back the pension or taxes on it. And you can definitely read a lot more about this as it pertains to on the government's website. Again, we'll provide the information related to that. And so the minimum income threshold as it pertains to the recovery tax is let's say for 2023. The way that it would be looked at is in from July 2022 to June 2023, the minimum income threshold is 79,845. So if you've earned income in terms of your retirement, that's and you're taking old age security and it's less than the 79,845, that is where you are free to get 100% of your old age security as soon as you start earning more than that 79,845, up to the amount of 129,757. So if you earn in terms of all of your sources of income combined, and this is also including worldwide, not just Canada, as soon as you reach 129,757, you will lose and not have any old age security. So that 700 of a monthly benefit that you thought you were getting before, if you have earned excluding the Old Age Security 129, 757, you would get zero or old age security. So this is where most Canadians try to optimize how much they're trying to earn in the form of income that is being declared in those box forms.

The important thing about this clawback is many things in all the different income lines that Henry mentioned are going to work together to add up to that total. So that includes if you're withdrawing money from a registered retirement savings plan or a rrif, any employment income that you had in the year, your Canada pension plan, which is also a taxable benefit. So all of these different line items add up to a total. And that can bring your total into that clawback scenario, often quicker than you would anticipate. And the actual income paid from the OAS itself goes into that total, I believe as well, does it not, Henry? And then if you, as an example, let's say you sold a rental property in a given year, well, now you're probably looking at a large capital gain. So if you have a large capital gain, probability is it could blow you right past the entire maximum. So you could have no old age security paid out at all. So that that could represent, you know, Roughly speaking, an 85 to $9,000, I guess, quote, unquote hidden tax in that it's money that you did not receive because you sold a property in that year. So that's something to be aware of when you consider strategic property sales or income events that might come up almost as a surprise event to some degree in different years. You really want to start planning and thinking those things through to see how you can mitigate how much of the clawback scenario you would put yourself into.

Yeah, that's, that's very, very fair. Because if you are liquidating a property, you would receive a capital gain. And when you receive that capital gain, then that is going to include in your old age security. Now, if you are receiving your old age security as part of your retirement plan, as part of your lifestyle and what you're living and you've now sold the property, now you've got a capital gain, what's going to happen is when you file your tax return in the following year. So let's say it's 2022 and you sold the property in 2022, collecting the full Old Age Security, and now it's 2023, April, you're filing your personal tax return and you're declared, now you've sold the property. Here's what's going to happen. All of that old age security that you're going to get, they're going to ask you to repay all of that amount right from there. And that also is going to impact your go forward until that period of June and July that they reassess for old age security. So this is where it catches a lot of retirees off guard because they're not aware of the fact that the clawback is not going. It's not a proactive forward, it's a reactive meaning once you've reported your income, the government has now the information, you've earned that income, they're like, oh, we've been paying you all day security, give it back to us. So they're going to demand repayment, it's back to them.

That sounds fun.

And for those of you who then now recognize income is a very important part of the equation, the other part to consider is also what's called Canadian dividends. And a lot of Canadians may not understand the complexity and the treatment of how dividends work for Canadians. And when someone receives dividends, it depends on where you are receiving the dividends from. The first source of dividends is that people are may be aware about is eligible dividends. So if you're receiving dividends from a public company who earns income higher, generally higher than 500,000, that is not eligible for the small business deduction. If they're paying taxes at the high profitable rate and they pay dividends to their shareholders, that is an eligible dividend. And an eligible dividend is what's called grossed up at 138%. So if you received dividends of $10,000 from a public company that amount, this is the part that I want to really highlight. The amount that you would be that would be recorded from your T slip that would get therefore trickle into your tax return would be 13,800. So this is additional pressure that would push you above as possible likelihood that you could be pushed into OAS clawback zone. So this is something that a lot of Canadians are also not very aware about when they're planning for their retirement and the composition of their portfolio as it pertains to where they're receiving their sources of income. Ineligible dividends get taxed at a different rate and again further discussions can be found. However, the key concept to take away is eligible dividends or ineligible dividends get grossed up as part of their tax stream which gets included into your tax return at that grossed up number. So therefore you fall into greater threat of OAS clawback.

This is particularly important if you have, let's say a large dividend paying stock portfolio as part of your retirement planning. That's where you would see the impact of that. And then additionally, if you're a corporate owner and you pay yourself through income structuring through the use of dividends, you might be in the eligible or ineligible category depending on your situation. And that's going to also create that higher gross step impact which could then have the causal effect of squeezing your oasis income potential because of the clawback scenario.

Absolutely. And so the most important element that if you're as you're watching this video to take away is every individual that the tax, income tax system, the government programs, the government entitlements, which is the income tax system, old age security are very complex things because of all of the rules and the set of rules that the government has set out for multiple situations. And this is where it's really important to get connected with a professional to evaluate your individual circumstance. It's very hard to give you a general plan or idea of things because we don't know how your specific situation has played out. And that's why we definitely encourage you to work with someone like that. So what does that mean for all of you here who are watching this video? A part of a very often neglected strategy that very many Canadians miss out because there's either a misunderstanding of it or a missed opportunity of it because they haven't heard about it is about becoming your own banker and building your own source of financing as you are alive. And while you are planning to take on retirement, then this is where a very good plan can be designed. Depending on how early you start and how much you contribute and your ability to be coached by the right people can help in offsetting or building a more optimal retirement strategy portfolio. And when you design something or when you work with the right people for this retirement plan, you now can, if it's designed properly and structured properly and set up based on what you fund, it can be an additional supplement to your retirement or it can replace your retirement. And it all comes down to how much you do and what you decide to do with it. And the best part of it is when it's designed properly, you can access the funds in the form of cash flows instead of income. And as I talked about, why it's important because when it's sourced in the form of income, that comes out into the declaration boxes on your income tax return. Whereas when you build a properly designed plan to access for retirement, then they are cash flows that don't fall into those categorization boxes. So this is a very, very powerful plan that gets set up for many of the Canadians and our clients that we work with. And if you really want to learn a lot more about this concept, you can definitely watch Visit our site, watchibc.com to begin the process of learning about becoming your own banker and then learning and meeting with us as we have plenty of videos in our channel that talk about how this can supplement or even replace your retirement income. Perfect. There you go.

That's everything you need to know about the old age security pension plan in Canada. Maybe not everything, but a pretty good summary and with some great resources to direct yourself to. So happy planning happy retirement. And for those of you that have already embraced it, happy becoming your own banker. Till next time.