On the take: OAS clawback a taxing scenario
Many seniors have written to me about the subject of “clawbacks”, or “repayment of social benefits” as the government prefers to describe them. Although Employment Insurance benefits may also have to be repaid, the term as used by seniors usually refers to the forfeiture of some or all Old Age Security benefits by anyone whose net income (including OAS) exceeds $53,215 in the prior year. A senior’s OAS benefits are reduced by 15 per cent of his or her income in excess of $53,215, until the entire OAS is forfeited at an income level of about $80,000. This clawback applies to every senior as a separate individual regardless of marital status or spouse’s income (for example, one’s OAS is not forfeited just because their spouse has an income in the clawback range).
Ordinarily, if your total income is over $53,215 (including OAS) in a calendar year as reported on your tax return for that year, you will have to make a repayment of part or all of the OAS received that year. This refund of social benefits is calculated on a special tax form included in the T1 tax return package, deducted from net income on your T1 tax return at line 235, and included as a liability aline 422, page 4 of the same tax return. When this happens on your tax return in one year, your monthly OAS cheques will likely be reduced or eliminated by a “withholding tax” starting in July of the following year. The amount withheld this way is credited to your tax and clawback obligations on line 437 of your tax return the following year along with other taxes withheld at source.
Some people have pointed out in their letters that the clawback is effectively an extra 15 percentage points of tax for people finding themselves in the $50,000 to $80,000 tax bracket even for a single year, raising their top tax rate of about 50 per cent to 65 per cent. They emphasize that many people who do not have a regular income that high may find themselves caught and lose their OAS for a whole year just because they sell a cottage or receive a lump sum payment from a RRSP or RRIF or receive some other windfall in a single year.
^This did happen to a lot of people a few years ago when they responded to the government’s invitations to make final use of an expiring capital gains exemption, and unwittingly lost their OAS for a whole year although they realized no gain and received no money. The government laid this trap for seniors and didn’t explain that their offer of a last chance to increase the cost basis of a cottage or whatever, often meant loss of their OAS for a whole year.
Keep in mind, however, that OAS itself is taxable income and if clawed back at an income level of about $53,215, you are also avoiding the tax on it of close to 50 per cent. So you are not really losing the entire amount of the OAS but just the after-tax amount of about half that. Arguably, this means the top tax rate in the clawback range goes up from 50 per cent only to about 58 per cent and not really 65 per cent as mentioned earlier.
It seems extreme to cash in your RRSP/RRIF in one year just to avoid the clawback, but some seniors tell me they are so annoyed by how it works that they plan to arrange their affairs to avoid it. They see the clawback as a special penalty imposed by feder al politicians on thrifty middle-class people who have worked hard and saved for their own retirement.
My June 1999 Taxletter for Investors discusses clawbacks and retirement savings issues and reviews renown economist Diane Cohen’s new book, The New Retirement. This is the best book I have seen recently on the challenge of middle-class retirement planning in Canada. For a copy of my newsletter please send $5 to cover printing and mailing to: Donald I. Beach & Associated Inc., 2555 Highway 7, Greenwood, ON L0H 2H0