OAS and Pension Income Splitting

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What is OAS (Old Age Security)?

Canadian residents are eligible to receive a monthly annuity from the Federal Government once they are 65 years of age or older, provided they meet certain requirements on residency and net income.

Let’s talk a little bit about the net income requirements, and the potential consequences when your income exceeds the set threshold. If your individual income is less than $73,756 yearly, then you’re well positioned to receive the maximum monthly OAS payment of $578.53.

What happens when your individual pension income is higher? The dreaded CLAWBACK!

  1. When your individual pension income is under $119,615 but over $73,756, you start sacrificing a certain % of the OAS benefit by the amount your income exceeds the threshold.
  2. When your individual pension income is over $119,615 yearly: you sacrifice the entire amount of OAS benefits.

This is where pension income splitting can make a difference.

Do you have a spouse with a comparatively lower marginal tax rate? If so, how would you like to protect that maximum OAS while savings taxes? At the age of 65 or older, you can transfer up to 50% of eligible pension income to your spouse for tax purposes, thereby lowering your taxes and protecting your OAS benefit!

Eligible pension income includes the following:

  1. Annuity and registered retirement income fund (RRIF) payments
  2. Registered retirement savings plan (RRSP) annuity payments

Now, let us look at the effect of pension indexing. The OAS rate increases are calculated four times a year using the All-items Consumer Price Index. If your pension is indexed at a comparatively higher rate, over time you may exceed the maximum income threshold.  Thereby, creating a case for pension income splitting (assuming eligibility).

Example 1:

Your net eligible pension income is $80,000/year and you are not income splitting.
$73,756 (minimum income threshold) < $80,000 (pension) < 119,615 (maximum income threshold)
OAS Clawback: ($80,000 – $73,756) x 15% = $ 936.60/year

Example 2:

Your net eligible pension income is $120,000/year and you are not income splitting.
119,615 (maximum income threshold) > $120,000 (pension)
No OAS benefits can be received.

Example 3:

Your net eligible pension income is $120,000/year and you are income splitting by 50% with your spouse.
Your net pension income for tax purposes is now $60,000.
$60,000 < $73,756 (minimum income threshold)
You will receive the full OAS benefit of $578.53 monthly.

Pension income splitting is a tool we can use to save on our taxes and protect OAS benefits.

To learn more about how to maximize your retirement benefits, consider Exponent for a financial plan.

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