You did it and are now planning your retirement income, but there are a number of tax implications to consider as you begin your understanding of Old Age Pension (OAS).
Once you are 65, you are entitled Get OAS even if you are still busy or have never worked. The word ‘entitled‘is really important here as you can delay your payments for larger payments later (the income tax decision point).
OAS payments increase over time and are adjusted quarterly in January, April, July and October to achieve an average annual growth of 1.77%.
Payment for the last quarter of 2021 will be made at $ 618.45 (about $ 4 more than 2020). The graph below shows the growth you can expect over the years and the monthly details below.
The Guaranteed Income Supplement is another program that you can enroll in at the same time you enroll in the OAS pension.
OAS Quick Facts
There are many details below, but here are quick answers to the most common questions.
What is the maximum OAS for 2021?
The maximum monthly OAS payment for 2021 is $ 618.45 for a total annual retirement income of $ 7,421.40. Continue reading.
Are the OAS benefits increasing?
The OAS benefits increase each year to take account of inflation. The average increase over the past 10 years was 1.7%. Continue reading.
Should I postpone the OAS until I am 70?
It’s very personal to your situation and in general when you have an annuity and retirement plan the numbers usually suggest they’ll be postponed until later, but you really have to do the math. The benefits are greater if you postpone CPP until you are 70 years old. Read more.
Can I collect OAS while working?
The short answer is, yes you can. The long answer is that you need to figure out the best way to preserve your OAS from a tax perspective. Continue reading.
Can I collect OAS while living abroad?
Under certain conditions only, but generally, you must have lived in Canada for at least 6 months to be eligible for OAS.
Entitlement to OAS pension
For OAS, eligibility is pretty straightforward and will depend on whether you live in Canada or not when you are 65 years old.
If you live in Canada you must:
- Be 65 years of age or older
- You must be a Canadian citizen or a legal resident at the time your OAS pension application is approved
- have lived in Canada for at least 10 years since they were 18
If you live outside of Canada you must:
- Be 65 years of age or older
- I was a Canadian citizen or legal resident of Canada the day before you left Canada
- have lived in Canada for at least 20 years since they were 18
OAS payments for 2021
How many OAS benefits you can get is a little complicated and every situation is different.
- The maximum OAS monthly payment you can receive in 2021 is $ 618.45.
- To receive OAS payments, you must have an annual income of less than $ 129,260.
To get into the details, your OAS payments are based on how long you’ve lived in Canada after you turned 18. If you’ve been in Canada for less than 40 years, your payments will be reduced by 1/40 for each year. Another way to calculate this is to use the formula below.
Your OAS Payment = Full OAS Payment * (Canada / 40 years)
If your income is greater than $ 79,845 in 2021, you may need to repay part or all of your retirement pension. This is known as clawback tax when you need to repay part or all of your OAS payments or OAS claws.
For your information, OAS payment rates are reviewed in January, April, July and October to ensure they reflect the increase in the cost of living as measured by the index of consumer prices (CPI).
- As the cost of living increases, so do your monthly payments.
- When the cost of living goes down, so do your monthly payments will not decrease.
OAS payment dates are usually towards the end of the month and can start in the first month after your 65th birthday, once your application has been fully defined and processed.
OAS payment dates for 2021
|January 29, 2020||May 27, 2020||September 28, 2020|
|February 26, 2020||June 26, 2020||October 28, 2020|
|March 27, 2020||29th July 2020||November 26, 2020|
|April 28, 2020||August 27, 2020||December 22, 2020|
How do I apply for OAS?
The application begins at the age of 64. Your employer can initiate the process on your behalf or you may need to apply. Service Canada may send you a letter when you turn 64 to let you know that you need to apply.
If you are not automatically signed in, you will need to apply. You can do this online or by filling out the required form. An important decision to make is if you delay your OAS for a larger payment.
When do OAS or OAS deferment options start?
During your application you will be asked to choose when you would like to receive your OAS:
- Start receiving your OAS pension at age 65.
- Start receiving your OAS pension at a specific time of your choosing.
However, you need to understand when is the best time to make your income expectations from the age of 65.
While you can get your first retirement pension one month after you turn 65, you can get a higher amount for each month that you want to delay your first payment. You can delay receiving OAS payments until you are 70 or 60 months (5 years) past your 65th birthday.
The longer you are late, the higher your monthly pension payment. It’s no magic, you will mostly delay getting the money due until later, which will ensure that you can minimize OAS clawbacks based on your income.
At this point, if you are still working and earning more than the maximum threshold ($ 129,260) or the minimum threshold ($ 79,845) for OAS clawback tax (or clawbacks), there is a decision you need to make. Between your earned income, your pension income and your capital income, you have to start extrapolating your income from the age of 65 to 70.
In short, can you ensure your income stays below the $ 79,845 minimum in 2021? Please see the OAS reclamation details for more information.
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How is the OAS Clawback calculated?
The formula is pretty simple and the tax rate is 15% of the income you make above the minimum threshold.
For example, if the threshold for 2019 is $ 77,580 and your 2019 income was $ 90,000, your repayment will be 15% of the difference between $ 90,000 and $ 77,580:
$ 90,000 – $ 77,580 = $ 12,420
$ 12,420 x $ 0.15 = $ 1,863
You would have to repay $ 1,863 for the period July 2020 through June 2021. When you go back to what you received above, the amount is fixed but you may have to pay tax. So be careful and be aware of any taxes that you may have to pay.
How to Minimize OAS Clawback
As you can see above, you need to minimize the amount of income you report so that you can stay below or very close to the thresholds. To do this, you have a number of options.
Maximize your TFSA as a payout are completely tax-free. If you can build a $ 1M TFSA then you can withdraw from it tax-free, and reaching the $ 1M milestone is actually easy if you contribute to your TFSA every year. See the potential TFSA growth chart below.
Income sharing is a way to allocate part of your income to your spouse (or vice versa). For example, RRIF can easily be split, but RRSP only after it has been converted to RRIF. Hence, you will need to make a deposit into your spouse’s name much earlier so that you can withdraw from any account.
Slide on OAS / CPP see you later. By deferring, you don’t have to add any extra income until you may have a lower income later. That is why it is important to understand your future income. However, you need to be careful as the future OAS income will be higher and you will have to balance everything out.
Use your RRSP contribution space if you have any available. You can contribute to an RRSP until the end of the year you turn 71. If you are still employed and earning an income, you can use the contribution room to lower your income and avoid OAS recovery as long as you don’t get yourself into financial trouble. You can also consider paying a spouse contribution if it makes sense depending on your spouse’s income.
Last but not least, Optimize your investments for income tax purposes. Make sure you have the right investments in the appropriate accounts. For example, GICs and interest income are fully taxable, while dividend tax and capital gains tax have different benefits.
|1||2009||5,000||5,000||5.250||5,500||Not pursued||Not started|
|2||2010||5,000||10,000||10,762||11,550||Not pursued||Not started|
|3||2011||5,000||15,000||16,550||18.205||Not pursued||Not started|
|4th||2012||5,000||20,000||22,628||25,525||Not pursued||Not started|
|5||2013||5,500||25,500||29,534||34.128||$ 41,742||Not started|
|6th||2014||5,500||31,000||36,786||43,590||$ 52,820||Not started|
|7th||2015||10,000||41,000||49.125||58,949||$ 56,307||Not started|
|8th||2016||5,500||46,500||57,356||70,984||$ 70,200||Not started|
|9||2017||5,500||52,000||65,999||84.034||$ 78,900||13,308 USD|
|10||2018||5,500||57,500||75,074||98.487||$ 96,937||$ 58,818|