How Much Taxable Income You Can Earn Before OAS Clawback

Retirement is a big life decision that has mental, emotional, financial, and tax implications. Everyone, from low to high-income earners, goes through it. The Canada Revenue Agency (CRA) helps retirees financially by offering multiple benefits in cash or through reduced tax, especially to low and medium-income earners. One such taxable cash benefit is Old Age Security (OAS) pension, which is paid to individuals above 65 whose net annual taxable income is within a defined threshold. High-income earners can also get OAS through proper planning.  

What is the OAS benefit?

OAS pension starts at age 65 and continues till death. Unlike the Canada Pension Plan (CPP) and other benefits, you or your employer does not contribute anything to get OAS. The CRA funds it from general tax revenues. But like other benefits, the Old Age Security amount depends on the taxable income you reported in your previous year’s income tax filing.

The CRA announces the maximum OAS amount every year, adjusting for inflation. For the July 2025 to June 2026 period, the Old Age Security amount is $734.95 for individuals aged 65–74 and $808.45 for individuals aged 75 and above.

Although OAS starts at age 65, you can delay receiving the benefit till age 70. The CRA will increase the benefit amount by 0.6% for every month of delay, up to 36% for a full five years. Whether to delay your OAS or claim it needs proper retirement income planning, as you will have to consider the tax angle of this taxable benefit. For this, you need to understand how Old Age Security works.

How OAS works 

Once you turn 65, you become eligible for OAS if you meet specific eligibility criteria:

Place of living: The OAS benefit is only applicable to Canadian citizens or legal residents, whether living in or outside Canada.

• If you are living in Canada, you must have lived in Canada for at least 10 years after turning 18 at the time of OAS application approval.
• If you are living outside of Canada, you must have been a Canadian citizen or a legal resident on the day before you left Canada and have lived in Canada for at least 20 years after turning 18.

Income threshold: Every year, the CRA determines and adjusts the OAS income threshold for inflation. The minimum income recovery threshold for the 2025 income tax year is $93,454, and the maximum threshold is $151,668 for ages 65-74 and $157,490 for ages 75 and above. Note that the income threshold for the respective year will apply even if you delay Old Age Security receipts.

After you turn 64 and are eligible for OAS, the CRA will send you a letter asking you to apply. Here, you will have to choose when you want to start receiving the pension. After receiving your application, the CRA will send a letter about their decision along with details of the amount you will receive each month, the date for your first payment, and any past payments that may be owed to you.

At this point, consider your decision, perform the necessary calculations, and plan your retirement income to avoid losing your Old Age Security to the recovery tax.

How the OAS recovery tax works

The CRA will pay you the maximum Old Age Security if your income is below the minimum threshold. If it is above the minimum threshold, it will deduct 15% of the surplus income from the OAS benefit as recovery tax.

For instance, Mary has a 2024 taxable income of $110,000; the CRA will claw back her OAS from July 2025 to June 2026. The minimum income threshold for 2024 was $90,997, which means she had a surplus income of $19,003. The CRA will claw back 15% of this amount, which comes $2,850.45 in a year or $237.54 per month.

The CRA automatically deducts recovery tax and gives you a reduced OAS amount, so you need not worry about paying it separately. For those living outside Canada, the CRA also deducts non-resident tax from monthly Old Age Security pension payments. It sends a letter informing you of any recovery tax deductions being withheld from your OAS pension payments, which also appear on your Notice of Assessment.

The OAS recovery tax is not under your control, but the taxable income on which OAS is calculated is. Hence, you should plan your retirement income in a way that meets the OAS minimum threshold.

How To Minimize OAS Clawback?

The CRA uses the term “taxable” income, which includes salaries, dividends, rent, capital gains, Registered Retirement Savings Plan (RRSP) withdrawals, CPP, and other taxable cash benefits. While calculating the OAS income threshold, the CRA takes gross dividend income at 138% of the actual dividend amount. 

Non-taxable income, such as gifts, inheritances, life insurance policy payouts, and Tax-Free Savings Account (TFSA) withdrawals, is excluded from the OAS income threshold. Before you decide to receive OAS:

Using TFSA: Consider using TFSA for most of your high-capital returns investments. As TFSA withdrawals are not included as taxable retirement income, your OAS benefit remains unaffected.

Selling securities: For investments in non-registered accounts, consider selling them and living off the investment income before starting OAS. If you do not want to delay OAS, you can donate appreciated publicly traded securities to a registered charity and eliminate the capital gains tax.

Managing RRSP: The RRSP contributions are tax-deductible, while Registered Retirement Income Fund (RRIF) withdrawals are taxable.

• You could continue your RRSP contributions and reduce your taxable income to the OAS threshold amount.
• Another option is to keep your RRIF withdrawals and other income sources within the OAS income threshold.
• Or you could delay OAS and live off your RRIF withdrawals in the initial years.

Pension income splitting: You can also consider splitting up to 50% of eligible pension income with your lower-income spouse. Eligible pension income includes registered pension plan payments and, if you’re 65 or over, RRIF withdrawals.

Maximize deductions against taxable income: Certain expenses are tax-deductible, such as interest on mortgage loans for investment properties and lines of credit used to buy stocks. RRSP contributions, charity, and other such deductions can also be used to reduce taxable income.

Executing the above strategies requires a lot of calculation and analysis of your financial situation. You also need to verify eligibility, ensuring that both the charity receiving your investment securities and the pension income you wish to split are qualified.  

Contact KSSP Partners LLP in Markham to Help You Plan Your Retirement Income

A qualified accountant can guide you on which strategy to use to minimize OAS clawback and maximize retirement income. At KSSP Partners LLP, our accountants and tax advisors can provide services such as planning and filing taxes. To learn more about how KSSP Partners LLP can provide you with the best accounting and tax planning expertise, contact us online or by telephone at 289-554-5997.