Keep more of your OAS pension

The clawback is a term often used for repayments on income-tested benefits.  The Old Age Security basic pension is one of those benefits subject to the clawback.  For 2008, benefits begin getting clawed once net income before adjustments (line 234) exceeds $66,335 – and fully clawed back once net income reaches $107,692.

According to both Human Resource and Skills Development Canada and Canada Revenue Agency, as of June 2007 there were 4,272,000 seniors that applied and were deemed to be eligible for OAS pension benefits. Of those,  4,190,900 received benefits – and 81,100 had to repay their pension benefits in full.  As of December 2008, 210,230 taxpayers had to repay only a portion of their OAS benefits for the 2007 tax year.  Surprisingly only two per cent of taxpayers receiving OAS benefits are required to fully repay their OAS due to high income, and only approximately five per cent of people have to partially repay OAS benefits.

For the seven percent of pensioners who are subject to partial or full repayment, there are ways to structure your finances to reduce or eliminate the repayment amount.  Some tips:

Plan Ahead –  The OAS repayment calculation is based on individual income, not on family income.  This essentially allows couples more planning options throughout their lifetime.  At retirement couples should work towards equalizing both incomes, rather than one spouse having the majority of the taxable income.  Having equal incomes should reduce your household tax liability and reduce the amount of OAS clawback.

CPP Sharing – Couples have the flexibility of electing to share future Canada Pension Plan benefits with their spouse.  This is a one-time application and is generally done to decrease income (line 234) on the higher income spouse and to increase income on the lower income spouse.

Pension Splitting – These rules enable you to move some of your eligible pension income to your spouse.  This reduces line 234 for the higher income spouse and increases it for the lower income spouse.

Investment Holding Company – Some individuals may consider setting up an investment holding company. The company would report some of the income you would otherwise report on your personal tax return.  With the correct structure and a little planning, your personal income may be lowered enough for you to retain 100 per cent of your OAS. It is important to look at all costs to determine if the benefits outweigh the costs. You should discuss all benefits and costs with your accountant prior to considering this strategy.

Defer RRSP Conversion – At some point before age 72, all people have to convert their RRSP to an income source.  If you are subject to the OAS clawback then you should consider keeping your funds in an RRSP for as long as possible.  At age 72, you should consider withdrawing the minimum amount each year to minimize your net income.  You may elect to use the younger spouse’s age to reduce payments as well.

Tax Free Savings Account (TFSA) – Every individual who is subject to the clawback should open up a TFSA to shelter as much income from tax.

Dividend Income – Dividend income is considered one of the most tax efficient forms of income.  It is the dividend tax credit that makes this form of income advantageous.  One component to consider is that eligible dividend income is grossed up by 1.45 for the calculation on line 234.  The dividend tax credit is applied after line 234.  If you receive actual dividends of $20,000, for tax purposes you must report $29,000.  This is a negative for the OAS clawback calculation.  You could consider putting the highest dividend paying stocks in your registered accounts.

Structure Investments – The lower income spouse should consider having more of the higher dividend paying stocks.  If you are having some of your OAS partially clawed back because of investment income, consider shifting your highest dividend paying stocks to your registered accounts.  Investment choices for the higher income spouse should focus on growth stocks with deferment possibilities and generating primarily capital gains over time.

Gifting Assets Early – If you are having some of your OAS clawed back you may want to consider gifting securities, or money, early to adult children.  By gifting assets to adult children or grandchildren, they may be able to purchase a personal residence or pay down non-deduction debt on their home.  The benefit to you is that your income may be low enough to receive partial or full OAS.  Give a bit now and get a little more OAS.

Charitable Giving – If you are ultimately wanting some funds from your estate to go to charity you may want to consider gifting assets gradually over time.  If your income continues to grow this may allow you to obtain full credit for your donations and keep your income low enough to obtain partial or full OAS.

CPP Sharing – Sharing your Canada Pension Plan with your spouse may enable you to lower the income of the highest income earning spouse.

RRSP Contribution – Do you have income above $66,335 that is subject to the clawback?  If so, consider making an RRSP contribution up until and including age 71.  If you have unused RRSP deduction room, discuss with your investment advisor whether you should make an RRSP contribution.

Fee-Based Accounts – One of the benefits of fee-based accounts may be the ability to deduct the cost of investing annually on your tax return (line 221).  In addition to speeding up the deduction, the full amount of the fee may be deducted for non-registered accounts.

Resource Investments – Certain resource investments enable the investor to take advantage of exploration and development expense deductions.  The underlying resource companies essentially flow-through these deductions to the investor to claim (line 224).  This strategy is considered high risk and is only suitable for investors who could withstand a complete loss of capital.

Retire Earlier

At times we see individuals working longer than they need to in order to comfortably retire.  In some cases, income levels are extremely high at retirement primarily because the individual worked longer than needed.