Seniors receive many benefits and tax credits from the federal government that are not available to others. You should know that some benefits are income tested and can result in “clawbacks”. Old Age Security (OAS) payments and the Age Credit are two examples of benefits that can be clawed back without proper income planning.
OAS is a monthly benefit available to most Canadians age 65 or older. You will be required to repay 15% of the amount by which your net income for 2018 – inclusive of the OAS benefit – exceeds $75,910. If your net income exceeds $123,386, your entire OAS benefit will be clawed back. July 2018 to June 2019 OAS payments are based on your 2017 net income, while July 2019 to June 2020 are based on your 2018 net income.
Age Credit is a non–refundable tax credit available to Canadians age 65 or older at the end of the year. For 2018, the maximum amount you can claim for the Age Credit is $7,333. This amount is reduced by 15% of your net income when you exceed $36,976, and is completely eliminated when your taxable income reaches $85,863.
You can avoid the OAS and Age Credit clawback by keeping your net income to the absolute minimum required to meet your needs. Here are some tips to do that:
Pension Income splitting – You are permitted to allocate up to 50% of “eligible pension income”, which includes payments from Registered Pension Plan (RPP), and Registered Retirement Income Fund (RRIF) to the lower earning spouse, which can reduce your family’s overall tax bill and clawbacks.
Reduce the amount of income from Canadian source dividends. These amounts are “grossed up” for determining income. There is a dividend tax credit which will reduce the amount of taxes paid, but it does not reduce your net income.
Withdraw the minimum from your RRIF – Withdrawals that you make from your RRIF are fully taxable, so consider withdrawing the minimum each year. To produce a smaller withdrawal base the withdrawal on the younger spouses age.
Invest in a TFSA – Investments held within a Tax-Free Savings Account generate tax-free investment income, the withdrawals are not taxable are not added to your net income so do not result in clawbacks.
Seek non-registered investments that offer preferential tax treatment – Only 50% of capital gains are included in income. Equity investments often distribute less investment income than fixed income investments. And as you know, less net income results in less of your income-tested benefits being subject to clawbacks.
You can avoid clawbacks, reduce your tax burden and reserve your wealth. Be careful to fully understand each option and don’t run afoul of complex tax rules by using inappropriate strategies.
This column is written by Michelle Weisheit CFP, IG Wealth Management and presents general information only and is not a solicitation to buy or sell any investments. Please contact your own advisor for specific advice about your situation.