Tax and Benefits Analysis: Example For Retirees Over Age 65

After age 65, and after OAS benefits have begun, there are new government benefits and clawback rates to focus on.

When OAS starts there is now an additional clawback for high income retirees in the form of the Old Age Security Recovery Tax. The clawback rate for OAS is 15% of any taxable income above the income threshold. This quickly increases the marginal effective tax rate to the high 40% and low 50% range. Although the OAS clawback rate is 15% on OAS benefits, because OAS is a taxable benefit, the net effect is a bit lower.

When OAS starts there are also additional government benefits available that are tied to OAS. These are the Guaranteed Income Supplement, or GIS, and the Allowance. These government benefits are targeted towards lower income seniors, and although they are very generous, they have very high clawback rates that range from 50% to 75%. Approximately 1 in 3 seniors receive these benefits in retirement so avoiding these clawbacks is very important for many people.

During this time, it can sometimes make sense to plan strategic withdrawals from TFSA and non-registered assets to help keep taxable income as low as possible. In some cases, RRSP contributions can even be planned after OAS has begun to help reduce taxable income to zero and maximize government benefits for a few years. An RRSP contribution is considered a deduction and can be used strategically to reduce taxable income, line 23600 on your tax return. Of course, these RRSP contributions must be withdrawn at some point. This type of planning is complex and is best done with the help of an advice-only financial planner.