Whether the amount is small or large, whether it applies to a couple of years or many, Canadians don’t like their Old Age Security (OAS) pension clawed back.

The clawback is officially known as the OAS pension recovery tax. A taxpayer repays 15% of the amount by which their taxable income exceeds the threshold amount, which is $90,997 for 2024. Here are some common ways to manage the clawback.

Splitting pension income. When one spouse has taxable income exceeding the clawback threshold, they may be able to reduce or eliminate the clawback if their spouse has a lower marginal tax rate. Through pension income splitting, they can allocate up to 50% of their eligible pension income to their lower-income spouse. Eligible pension income includes registered pension plan payments and, if you’re 65 or over, Registered Retirement Income Fund (RRIF) withdrawals.

Using a TFSA. Building a large Tax-Free Savings Account (TFSA) in your income-earning years can be instrumental in helping to prevent an OAS clawback when you’re retired. Funds withdrawn from a TFSA are not included as retirement income subject to the clawback.

Managing your minimum RRIF withdrawal. The minimum required annual withdrawal from a RRIF can be a key contributor to exceeding the clawback threshold. When possible, you can reduce the annual amount by basing RRIF withdrawals on the younger spouse’s age. In addition, if an individual has lower income in the years before turning 65, they may consider withdrawing from a Registered Retirement Savings Plan (RRSP) during this period. Their lower marginal tax rate will make tax on withdrawals less burdensome, and they’ll reduce their minimum RRIF withdrawal amount.

Investing strategically. In a non-registered account, limiting your taxable income can help reduce or avoid a clawback. Equity investments that generate capital gains are better for this purpose than dividend-paying investments. That’s because only 50% of capital gains are included as taxable income, whereas eligible Canadian dividends are grossed up by 38%, so 138% of the actual dividend amount is considered taxable when determining income for the OAS threshold. Also helpful are mutual funds that provide return of capital distributions, as return of capital is not taxable income. However, note that investments must suit your overall objectives and income strategy, and not be chosen only to avoid an OAS clawback.

Depending on your situation, other strategies may be available, such as making RRSP contributions up to age 71 and selling assets before you start receiving OAS benefits if those assets will trigger large capital gains. Talk to us if there’s a possibility your retirement income may exceed the OAS threshold amount, and keep in mind that some strategies may be implemented before you retire.