Navigating OAS and GIS Benefits: A Guide for Families with Trust Income

In this blog post, we explore the foundational aspects of Old Age Security (OAS) and Guaranteed Income Supplement (GIS) programs, and how trust income can impact these benefits for your elderly parents. Although we often get seniors who are disappointed when they have to pay back these benefits or do not qualify for them, it is important to note that some seniors simply make too much money to qualify.  However, the OAS and GIS should be considered when planning family remuneration such as discretionary trust distributions to individuals who would otherwise qualify for this benefit.  Our guiding principle, ‘Tell us your ambitions and we will guide you there,’ reflects our commitment to aligning your financial strategies with your family’s long-term goals.

The Basics of OAS and GIS

Before delving into the implications of trust income, it’s crucial to understand what OAS and GIS are. The OAS program provides a monthly pension to Canadians aged 65 and over, based on residency and legal status, aimed at ensuring a minimum income level for seniors. The GIS is an additional monthly payment available to low-income seniors who already receive the OAS pension, designed to provide further financial support to those in need.

For January to March 2024, the maximum OAS pension amounts are $626.49 for individuals aged 65 to 74 and $677.95 for those aged 75 and over. GIS amounts vary depending on the recipient’s marital status and other income, with a maximum monthly payment of $916.38 for a single person who receives an OAS pension.

OAS Recovery Tax Thresholds for 2024

In 2024, the minimum income threshold triggering the OAS claw-back is set at $90,997. This means if your net world income exceeds this amount, you’ll need to start repaying part or all of your OAS pension. The maximum income thresholds, which vary slightly based on age, are $148,065 for individuals aged 65 to 74 and $153,771 for those aged 75 and over. Crossing these thresholds indicates a full claw-back of the OAS pension.

How the OAS Claw-back Works

The OAS recovery tax is calculated as 15% of the difference between your net world income and the threshold amount for the year. Let’s consider an example to understand the calculation for 2024:

Assume your net world income in 2024 is $110,000.

The threshold for triggering the recovery tax in 2024 is $90,997.

The difference between your income and the threshold is $110,000 – $90,997 = $19,003.

The OAS recovery tax would be 15% of $19,003, which equals $2,850.45.

This amount ($2,850.45) represents the total you’d need to repay as part of the OAS recovery tax for the period of July 2025 to June 2026, based on your 2024 income.

Repayment Process and Considerations

In January following the income year, you’ll receive an Old Age Security Return of Income form, which is crucial for calculating your official recovery tax amount. It’s essential to complete and submit this form by April 30 to avoid any interruptions in your OAS payments. The estimated recovery tax is divided monthly and deducted from your OAS pension payments.

For those living outside Canada or in situations where the recovery tax deduction could cause financial hardship, there are provisions to request a review of your case by the Canada Revenue Agency (CRA). It’s important to note that the total of non-resident tax and OAS recovery tax cannot exceed the total OAS benefits received.

Strategic Planning for 2024

Understanding these thresholds and planning accordingly can help minimize the impact of the OAS clawback on your parent’s retirement income. Consider strategies like income splitting, timing of income realization, and investments in tax-efficient vehicles to manage your net world income effectively.

Trust Income and Its Impact on OAS and GIS

Introducing trust income into your parents’ financial mix necessitates a careful analysis due to its potential impact on OAS and GIS eligibility. The OAS clawback, formally known as the recovery tax, reduces OAS benefits for recipients whose income surpasses a specific threshold, as detailed in Part I.2 of the Income Tax Act. The clawback is calculated on an individual’s “adjusted income,” which includes all sources of net income, with trust distributions being a notable component.

The key to managing the impact of trust income on OAS and GIS benefits lies in strategic planning. Since the GIS targets low-income seniors, even modest increments in income could significantly affect eligibility and payment amounts. Thus, optimizing the timing and amount of trust distributions is paramount to maintaining your parents’ financial well-being without compromising their entitlement to these benefits.

Strategic Approaches to Trust Income Distribution

To navigate the potential reduction in OAS and GIS benefits due to trust income, consider these strategies:

• Careful Timing: Distribute trust income at times that minimize its impact on your parents’ benefit eligibility, taking into account their overall income profile and changes in income thresholds.
• Income Balancing: If possible, structure trust distributions to even out income between parents, leveraging the benefits of lower tax brackets and minimizing the reduction in government benefits.
• Investment Choices: Select investment vehicles within the trust that yield capital gains or return of capital, which are taxed more favorably than other forms of income and may less adversely affect OAS and GIS benefits.

Final Thoughts

For families providing trust income to elderly parents, a nuanced understanding of OAS and GIS programs is essential. Strategic income planning can ensure that your support enhances their financial security without unintentionally diminishing their government benefits. Given the complexity of these issues, personalized professional advice is invaluable in navigating the specific implications of your family’s situation.

To ensure that trust income supports your parents’ needs without triggering significant reductions in their OAS and GIS benefits, meticulous planning and consultation with a tax professional are advisable. By adhering to our principle of guiding families toward their ambitions, we commit to navigating the intricacies of tax planning for your family-owned enterprise, safeguarding and enhancing your legacy for future generations.

 

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.