Congratulations – as a senior, you have ‘earned’ the right to access a variety of tax credits not available to others.  Among these are the Old Age Security (OAS) program and the Age Credit that open up to you when you hit 65 years of age.  But both of these benefits are income tested, meaning that once your income exceeds a certain level they start to reduce and are eliminated entirely when your income goes beyond a certain threshold.  This is known as a ‘clawback’ and there are strategies you can use to help keep more of these benefits for yourself.

OAS is a monthly pension available to most Canadians 65 years of age or older, but higher income pensioners must repay part or all of their benefit.  This tax year, you will be required to repay 15 per cent of the amount by which your net income for tax purposes – including your OAS pension – exceeds $59,790.  Once your taxable income exceeds approximately $96,788, you’ll lose your entire OAS pension to the ‘clawback’.

Age Credit is a non-refundable tax credit available only to Canadians age 65 or older.   For this tax year, the federal amount on which the credit is calculated is $3,912.  This amount is reduced by 15 per cent of your net taxable income in excess of $29,124 and disappears entirely once your taxable income reaches $55,204.  If you don’t need your entire age amount to reduce your taxable income to zero, the unused portion can be transferred to your spouse.

‘Keep more’ strategies you can use

The key to avoiding OAS and age credit ‘clawbacks’ is to report less income – and here are three strategies that can help you keep your taxable income to a minimum.

1.      Split income with your spouse.  The goal is to move as much income as possible into the hands of the lower income spouse to benefit from their lower tax rate, while minimizing any ‘clawbacks’ that apply to you.  Spousal income-splitting strategies can include splitting CPP/QPP benefits, contributing to a spousal RSP (assuming your spouse is under age 69), and decisions regarding who pays for daily living expenses and who invests. 

2.      Withdraw the minimum from your RRIF.  RRIF withdrawals are fully taxable so by withdrawing only the minimum from your RRIF each year, you get the most in tax-deferred growth while keeping your reported taxable income as low as possible.  If you have a younger spouse, base your withdrawals on their age to produce a smaller minimum withdrawal.

3.      Seek out non-registered investments that offer preferential tax treatment.  You can keep your taxable investment income to a minimum by:

·         Investing in equities that produce capital gains. -- When  these gains are realized, only 50% of the gains will be  included as taxable income while all of the interest income generated from fixed income investments is taxable. If you use this strategy, be sure to keep an appropriate balance of equities and fixed income investments over your whole registered and non-registered portfolio.  Also, keep in mind that dividends that must be reported as taxable income after being ‘grossed up’ to 125 per cent of the amount received before applying the dividend tax credit, so this could inflate your reported income for ‘clawback’ purposes.

·         Invest in ‘tax-advantaged’ mutual funds for your non-registered portfolio.  These funds allow you to buy and sell investments inside the fund structure without paying any taxes on capital gains until you leave the structure – so you can defer the payment of these taxes to a year when your income is lower.

The right strategies can help you pay less tax, avoid ‘clawbacks’ and preserve your wealth for the years to come.  But, some of them are difficult to implement and you’ll need professional advice to be sure you’re on side with various tax rules.  A financial advisor can help you seize all the tax strategies available to you.