Many people are afraid that their Old Age Security will be reduced by the government just when they need income the most. Kim Parlee talks to Chris Gandhu, a Tax and Estate Planner with TD Wealth about what you need to know about minimizing an OAS clawback.
- There is often a lot of confusion and concern about income in retirement. A lot of people think that your CPP and OAS can both be clawed back by the government. Here to help dispel some of those myths and understand what is true is Chris Gandhu. He's a High Net Worth Planner with TD Wealth. Let's start with the myths, I'd say what's out there, in terms of a clawback. And let's start with CPP, the Canadian Pension Plan. Can that be clawed back?
- No. CPP is something that you've contributed to in your working life. That money and that plan belongs to you, not the government. So it cannot be clawed back. Now of course, when you receive the CPP pension, that is income to you. So you should have a tax strategy in place to make sure you minimize tax and keep more of your money in your pockets.
- OAS, can that be clawed back?
- Yes, definitely. So unlike a CPP, it's not a pension you have contributed to. It is a government benefit. Every Canadian is entitled to it at age 65 if they've lived in Canada and been a Canadian resident for 10 consecutive years. There is about a $600 monthly max benefit. But going back to the clawback, the clawback is not automatic. It's income tested.
So for 2019, if your income exceeds around $77,500 as a threshold, then the clawback begins. Its $0.15 on every dollar in excess of that. And it's about $125,000 when you have your OAS fully clawed back.
- So what can you do to prevent that OAS reduction?
- So your threshold question should be, in my income, am I even getting hit with a clawback? If not, there's nothing to worry about. If the clawback does apply to you, the obvious way to reduce that is to reduce your income. You could do that by income splitting. So if you're a retiree and you have a spouse, it could be as easy as checking the box on your tax return, and now, your pension income is split with your spouse.
But of course, there's other income splitting options out there with other family members, not just your spouse. So talk to your advisor about that. You may also have the option to defer some income. So some of your pension income, you don't have to receive it at 65. You could receive it in the later years, including OAS. You could also defer that.
- Let's talk a bit about the income splitting option, because you have an example here. And we can bring up the board to show people. You've got an income from, let's say, the wife, it's the $130,000, to which her OAS is being fully clawed back. The husband's income, $20,000, which means he's getting his full OAS payment. And then option 3 we're seeing here is that if you split, they both get it.
CHRIS GANDHU: Right. So by splitting income, we have got both of them at the same overall income level. But each of them is below the threshold amount, because they're at $77,000. And the threshold is $77.5. So now, you've preserved both OAS entitlements.
- You mentioned that you can delay your OAS. Tell me a bit more about that.
- Right. So you do have the option to not receive OAS at 65. In fact, if you delay it, there's a benefit, because you get a bump of 0.6% for every month that you delay receiving the OAS, and that maxes out at 60 months. So perhaps if you're working at age 65, why receive OAS only to have it clawed back? So it may be beneficial to defer it. But if you need the money, even there's partial clawback, then perhaps it still makes sense to receive it.
- In the last budget, I understand there was some proposed legislation, which has another way or, an interesting way of, deferring some of these this income. What was that?
- Right. So it's called the Advanced Life Deferred Annuity. So typically, your RRSPs mature into RRIFs and must pay as a pension beginning the year you turn 72. Under this proposed law, you can take 25% off your RRSP balance, up to a $250,000 max, put it into this ALDA, and by doing so, you don't have to receive income on that at age 72. You could defer it until as late as age 85, so another option to take some income and push it into the future years.
- Proposed legislation not in place yet.
- Not in place yet.
- Just in terms of things to keep in mind, just to round it all up, what are the key things to remember when it comes to this clawback?
- Right. So it obviously is very fact specific. There may be some things you can do to avoid a clawback, but not if they tie up your finances into the future. So talk to a professional.
- Chris, thanks so much.
- Thank you.