Adapting to OAS Pension Recovery Tax for High-Income Earners in 2024

For individuals accustomed to higher earnings transitioning into retirement, the Old Age Security (OAS) pension may introduce an unexpected element to financial planning: the recovery tax. Here’s how it plays out and strategies for managing it as you start receiving OAS pension in 2024.

Timing Matters: OAS Pension Initiation and Income Assessment

When you commence your OAS pension can significantly affect the initial amount you receive due to the recovery tax. This tax is determined by your income from past tax returns. If your pension starts in the first half of 2024, the calculation is based on the income reported on your 2022 tax return. Conversely, if your pension begins in the latter half of 2024, the determination uses your 2023 income.

Example Scenario:

For OAS pensions initiated from January to June 2024, the recovery tax references your 2022 income. Pensions starting from July to December 2024 will consider your 2023 income. Once you file your 2024 tax return, any adjustments to the recovery tax will be made according to your actual income for 2024, potentially leading to a refund or additional tax.

It’s essential to understand that the OAS pension is not lost during claw-back; rather, it’s reduced by a withholding tax. This is depicted on your year-end OAS tax slip, showing both the gross OAS income and the tax withheld, impacting your net income and potentially your tax payable after recalculations.

Lower Income in 2024? Act to Reduce Recovery Tax

If you anticipate a significant drop in your income in 2024, thereby reducing or eliminating the claw-back, you can proactively request a reduction of the OAS recovery tax. This is done by completing Form T1213(OAS), which requires an estimate of your taxable income for the year, including deductions. Note that certain deductions, like pension splitting, may not be allowed on this form based on the latest guidelines.

Filing Form T1213(OAS) well in advance of your pension start date can prevent unnecessary deductions if you’re expecting a lower income year.

Recovery Tax (Claw-back) Calculations and Your Tax Return

The amount of OAS recovery tax or claw-back you’re subject to is calculated using the Federal Worksheet in your tax return. If your income exceeds the set thresholds, the claw-back amount is deducted, reducing your taxable income and affecting your total tax payable.

Calculating the Claw-back: An Example for the 2024 Tax Year

Let’s delve into a practical example to illustrate how the OAS recovery tax operates, using updated thresholds relevant for 2024. This example will help clarify how much you might need to repay if your income exceeds the specified minimum threshold for the OAS pension recovery tax.

For the 2024 period (July 2025 to June 2026), the minimum income recovery threshold is set at $90,997. This figure is pivotal because it determines the point at which the OAS recovery tax begins to apply.

Example Calculation:

Imagine your net world income for the 2024 tax year is projected to be $110,000. To determine the OAS recovery tax:

• Identify the difference between your income and the minimum threshold for 2024, which is $90,997.
  • $110,000 (your income) – $90,997 (threshold) = $19,003 (the amount exceeding the threshold).
• Calculate 15% of this excess amount to find out the recovery tax you’re required to repay.
  • 15% of $19,003 = $2,850.45.

Therefore, based on an income of $110,000 in 2024, you would need to repay $2,850.45 in OAS recovery tax for the period covering July 2025 to June 2026. This repayment represents a reduction in your OAS pension, effectively serving as a mechanism to adjust benefits for higher-income recipients.

Key Points to Remember:

• The OAS pension is not lost due to the claw-back; rather, it’s adjusted according to your income level to ensure the system’s fairness.
• The recovery tax acts as a withholding tax, reducing the OAS pension you receive based on your previous income levels.
• If you anticipate a significant decrease in your income for 2024, you can proactively seek to adjust the recovery tax deducted from your OAS pension by submitting Form T1213(OAS), which may result in a reduced claw-back if approved.

This recovery tax mechanism ensures that the OAS program provides more support to those in greater financial need while adjusting benefits for those with higher incomes. Understanding this process and planning accordingly can help you manage your retirement income more effectively. If you’re navigating this situation, consulting with a tax professional can provide personalized advice and strategies tailored to your unique financial landscape.

Managing Capital Gains and OAS Claw-back

Capital gains can increase your income, potentially impacting your OAS claw-back and age amount deductions. Even with carried-forward losses that offset gains, the calculation for the clawback is based on your gross income before adjustments. Therefore, if you’re nearing 65 and have significant unrealized capital gains alongside carried-forward losses, it might be wise to trigger some gains before you start receiving OAS to mitigate the claw-back.

Canadian Dividends, OAS Claw-back, and Tax Planning

The inclusion rate for Canadian eligible dividends can elevate your income to a level that triggers the OAS claw-back. However, swapping dividends for interest income, though reducing taxable income, could result in higher taxes due to the lack of dividend tax credits. It’s a delicate balance that underscores the importance of strategic investment and income planning as you approach retirement and begin receiving OAS pension.

Conclusion

As you navigate the complexities of transitioning into retirement and managing your OAS recovery tax, the value of expert guidance cannot be overstated. Consulting with a seasoned tax professional from Shajani CPA ensures that your financial strategy is meticulously tailored to meet your retirement goals while optimizing your tax situation.

At Shajani CPA, our team of dedicated professionals is committed to providing you with personalized advice that not only aligns with your objectives but also minimizes your tax burdens. Let us help you navigate these important financial decisions with confidence. Reach out to Shajani CPA for your tax planning needs, and take a proactive step towards securing your financial future.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.