OAS Clawback: Understanding the Old Age Security Program and How to Avoid Penalties

Old Age Security (OAS) is a foundational pillar of the Canadian retirement system, designed to provide seniors with a reliable source of income once they stop working. However, for high-income retirees, the OAS clawback, also known as the OAS Recovery Tax, can significantly reduce the amount they receive. This article delves into the history and calculation of OAS, explains how the clawback works, and offers strategies to minimize or avoid it altogether. For those planning their retirement, using tools like the Retirementize online calculator can help optimize income and withdrawals, ensuring you maximize your benefits.

What is OAS? History and Evolution (Skip the history lesson.)

Old Age Security (OAS) is a government-funded pension available to eligible Canadian citizens and residents aged 65 or older. Unlike the Canada Pension Plan (CPP), which is based on an individual's contribution history during their working years, OAS is funded by general tax revenues and is not directly tied to employment history or contributions. The program’s goal is to provide seniors with a modest source of income that can help cover basic living expenses during retirement.

History of the Old Age Security Program

OAS was introduced in 1952 as a replacement for the Old Age Pension, which had been established in 1927 to provide financial support to Canadians over the age of 70. The original Old Age Pension was a means-tested benefit, meaning that only those who met specific income and residency requirements could receive it.

In contrast, OAS is a universal benefit for most Canadians aged 65 or older. Initially, the OAS benefit was set at $40 per month for Canadians aged 70 and older, but this has evolved over the years. The eligibility age was lowered to 65 in 1966, and since then, OAS payments have been adjusted periodically for inflation and rising living costs.

Evolution of OAS: Addressing High-Income Earners

In 1989, the Canadian government introduced the OAS clawback, officially referred to as the OAS Recovery Tax. This measure was implemented to ensure that higher-income seniors, who may not need the OAS benefit as much as lower-income retirees, contribute back to the system through taxation. Under the clawback mechanism, retirees whose income exceeds a certain threshold must repay part or all of their OAS benefits.

The clawback is often a concern for wealthier retirees, but with the right planning and careful management of income sources, it’s possible to minimize its impact or avoid it entirely. Using the Retirementize calculator can help you determine how to structure your retirement income in a way that reduces the likelihood of triggering the clawback.

How is OAS Calculated? Eligibility and Modifications Based on Age

Eligibility for OAS

To be eligible for OAS, you must meet several key criteria:

• Be 65 years of age or older.
• Be a Canadian citizen or legal resident at the time your OAS application is approved.
• Have lived in Canada for at least 10 years after the age of 18 (if applying from within Canada) or 20 years (if applying from outside Canada).

The amount you receive from OAS is directly tied to how long you’ve lived in Canada after turning 18. If you’ve resided in Canada for 40 years or more, you are eligible to receive the maximum OAS benefit. For individuals who’ve lived in Canada for a shorter period, a prorated amount is awarded, based on the number of years you’ve been in the country after turning 18.

OAS Benefit Amounts in 2025

As of January 2025, the maximum monthly OAS payment for a retiree at age 65 is $727.67. However, this amount is adjusted quarterly to reflect changes in the Consumer Price Index (CPI), ensuring that OAS keeps pace with inflation. Additionally, this amount increases by 10% when you reach 75 years old.

Modifications Based on Age: Deferring OAS

While 65 is the standard age to start receiving OAS, retirees have the option to defer their payments until the age of 70. For each month you delay receiving OAS, your monthly payment increases by 0.6%, up to a maximum increase of 36% if you wait until 70. This deferral option can be beneficial for individuals who plan to continue working past 65 or those with other substantial sources of retirement income.

Conversely, OAS cannot be taken earlier than age 65, so careful planning is essential to ensure you begin receiving OAS at the optimal time. Using the Retirementize income calculator can help you determine when it makes the most financial sense to start receiving your OAS benefits, factoring in your other retirement income sources like RRSP withdrawals, pensions, and investment income.

How Does OAS Get Clawed Back?

The OAS clawback is a tax that reduces or eliminates OAS payments for higher-income individuals. This clawback kicks in when your net income exceeds a certain threshold. For 2025, that threshold is set at $93,454. For every dollar your income surpasses this amount, you are required to repay 15 cents of your OAS benefit. The clawback continues until your OAS benefit is fully eliminated, which occurs when your income reaches approximately $151,668 (age 65-74) or $157,490 (age 75 and older).

How is the Clawback Calculated?

The amount of OAS you must repay is calculated based on your income as reported on your tax return. The higher your income, the more of your OAS benefit you will have to repay. In years when you have a significant spike in income—such as capital gains from selling an investment property, a one-time bonus, or large RRSP withdrawals—you may be subject to the OAS clawback even if your usual income is below the threshold.

You can use a OAS Clawback Calculator to help estimate your recovery tax obligation.

Is There Any Living Spouse Benefit in OAS?

OAS does not directly offer spousal benefits, unlike some other retirement income programs. However, your spouse’s income can affect your eligibility for the Guaranteed Income Supplement (GIS), which is a benefit available to low-income seniors who receive OAS. If your combined household income is below a certain threshold, your spouse may be eligible for GIS even if they are not entitled to full OAS benefits.

Although OAS itself does not offer spousal benefits, married couples can take advantage of income splitting, which allows them to reduce their overall tax burden by dividing certain types of income between both spouses. Income splitting can also help reduce individual income to avoid triggering the OAS clawback. This strategy is particularly useful for retirees with significantly different income levels.

For more insights into retirement income planning for couples, explore our article on retirement phases and retirement budgeting, where we discuss the financial implications of joint retirement planning.

Examples of OAS Clawback in Action

Example 1: The High-Income Retiree

Fictitious-Fred, a 67-year-old retiree, has an annual income of $100,000 from various sources, including rental properties, dividends, and pension income. The OAS clawback threshold in 2025 is $93,454, meaning Fred’s income exceeds the limit by $6,546. As a result, he must repay 15% of this excess income in OAS, which amounts to a repayment of $981.90.

Fred’s OAS benefit is reduced accordingly. If Fred had structured his income differently—perhaps by utilizing RRSP meltdown strategies or withdrawing funds from his TFSA instead of his RRSP—he could have minimized the clawback or avoided it altogether. The Retirementize online calculator can help retirees like Fred optimize their income to avoid OAS penalties.

Example 2: The Strategic Deferral

Simulated-Sue, age 65, decides to defer her OAS until she reaches 70. By doing so, she will receive a 36% increase in her OAS payments. Meanwhile, Susan continues to work part-time and supplements her income by withdrawing from her Tax-Free Savings Account (TFSA), which doesn’t count as taxable income. When Susan retires fully at age 70, she begins receiving an enhanced OAS benefit and avoids the clawback, as her income in retirement is well below the threshold.

By carefully planning her withdrawals and using tax-efficient accounts like TFSAs, Susan maximizes her retirement income while keeping her taxes and OAS clawback to a minimum. Tools like the Retirementize calculator can show retirees like Susan how to structure their income for maximum efficiency.

Example 3: The Blind-Side

Fake-Jake, age 74, has been hitting his OAS clawback target each year, which is currently at $93,454 for 2025. Jake turns 75 in 2025, and didn't realize that his OAS was going to increase by 10%. So, without realizing, Jake has now exceeded his $93,454 target and will have to pay a clawback.

Strategies to Optimize OAS

To maximize your Old Age Security (OAS) take-home, you can use various strategies to either delay your benefits for higher payments or minimize the OAS clawback. Here are some effective strategies:

• Delay Your OAS Payments: For each month you delay receiving OAS after age 65, your payments increase by 0.6%. This translates into a 7.2% increase per year. If you wait until age 70, your OAS benefit can increase by up to 36% compared to taking it at 65. This is best for people who have other income sources and don't need OAS right at age 65. It’s also ideal if you expect to live a longer life, as the higher payments could make a big difference in your later years.
• Pension Income Splitting: If you're married or common-law, you can split up to 50% of your eligible pension income with your spouse. This could lower your individual net income, which might keep you below the OAS clawback threshold. This works for couples where one partner has a significantly higher income than the other. By lowering the higher earner’s taxable income, you reduce the chance of triggering the OAS clawback.
• Defer Registered Retirement Savings Plan (RRSP) Withdrawals: RRSP withdrawals are considered taxable income and can push you over the OAS clawback threshold. By delaying your RRSP withdrawals until after 70 (when OAS is already maxed), you avoid reducing your OAS payments. Great for those who have the flexibility to control when they take income from their RRSP. Using other sources of income before dipping into your RRSP can help maximize your OAS benefits.
• Use a Tax-Free Savings Account (TFSA) for Withdrawals: TFSA withdrawals are not considered taxable income, which means they don’t affect your net income for OAS clawback purposes. Using a TFSA for income instead of RRSP withdrawals can help you avoid surpassing the clawback threshold. Works best for Canadians who have built up significant TFSA savings. You can take out as much as you need from your TFSA without worrying about losing OAS benefits.
• Control Capital Gains: Capital gains from selling assets (like stocks or rental properties) increase your taxable income, potentially triggering the OAS clawback. If possible, stagger the sale of investments to minimize the taxable income in any given year. Ideal for tax-payers with large investments or properties. You can plan your asset liquidation strategically to spread out the income and avoid pushing your total income over the clawback limit.
• Optimize RRIF Withdrawals: Once you convert your RRSP into a Registered Retirement Income Fund (RRIF), you must start taking mandatory withdrawals. By strategically planning the timing and size of your RRIF withdrawals, you can minimize your income and avoid the OAS clawback. Needed for those nearing age 71 (the age you must convert an RRSP into a RRIF). By taking smaller withdrawals and coordinating them with other income sources, you can stay under the OAS clawback threshold.
• Consider Using a Corporation: If you're a business owner, consider leaving retained earnings in the corporation instead of taking them as salary or dividends. This keeps the money inside the corporation and lowers your personal income, which can help you avoid the OAS clawback. Best for business owners who don’t need all of their business income for personal use. This allows you to accumulate wealth without triggering the clawback.
• Time Your Retirement Date: If you have significant income sources leading up to retirement (e.g., a large salary or bonuses), delaying your retirement until the following tax year can reduce your taxable income. This allows you to avoid the clawback in the year you start OAS.
• Use Income-Deduction Strategies: Certain deductions (like charitable donations, medical expenses, or investment-related expenses) can reduce your net income, lowering your chances of hitting the OAS clawback threshold. There are many creative ways to reduce your tax obligation.
• Manage Dividends and Interest Income: Dividend and interest income count toward your taxable income and can push you into the OAS clawback range. Consider holding interest-earning investments in a TFSA or deferring dividend payouts from your investments to avoid triggering the clawback.
• Consider Spousal RRSP Contributions: Spousal RRSP contributions allow the higher-income spouse to shift income to the lower-income spouse. When the lower-income spouse makes withdrawals in retirement, it reduces the overall household taxable income, potentially keeping both spouses under the OAS clawback threshold.
• Moving to a Lower Tax Province: Provincial income taxes also affect your overall tax burden. By moving to a province with lower taxes in retirement, you can reduce your taxable income, helping to keep more of your OAS benefits.
• Use Retirement Income Tools: Using an online retirement income calculator, like the completely-free Retirementize, can help you map out your income streams and figure out the best time to take your OAS benefits. These tools can also help you project your taxable income and determine whether you’re at risk for the clawback.

Conclusion: How to Maximize OAS and Minimize the Clawback

The OAS clawback can significantly reduce the benefits that retirees receive, particularly for those with higher incomes. However, with careful planning, it is possible to minimize or avoid the clawback altogether. Let's face it, if you must have more than $143k per year, then you're going to have to get creative to avoid the clawback!

---

---