Making Over $95k in Retirement? Watch Out for the 'OAS Clawback' (Recovery Tax) That Steals Your Pension
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| Making Over $90k in Retirement? |
You worked hard, saved diligently, and invested wisely. Now, you are ready to enjoy your retirement in Canada. You expect to receive your Canada Pension Plan (CPP) and your Old Age Security (OAS).
But when tax season arrives, you get a nasty surprise. The CRA tells you that because you made "too much money," you have to pay back some (or all) of your OAS pension.
This is officially known as the OAS Recovery Tax, but everyone hates it by its common name: The OAS Clawback.
It acts as a punishment for being a successful saver. If you don't plan for it, it can effectively impose a massive marginal tax rate on your retirement income. Here is how to fight back in 2026.
What is the OAS Clawback? (2026 Numbers)
Old Age Security (OAS) is funded by general tax revenue, not your contributions. Because of this, the government limits it for high-income earners.
The Magic Number: The Threshold
For the 2026 Tax Year, the projected clawback threshold has risen due to inflation adjustments.
- The Safety Zone: If your Net World Income is below approx. $95,323, you keep 100% of your OAS.
- The Clawback Zone: For every $1 you earn above ~$95,323, you must repay 15 cents of your OAS.
- The "Zero" Zone: Once your income hits roughly $154,000 - $160,000 (depending on your age bracket 65-74 vs 75+), your OAS is completely gone ($0).
The Hidden Trap: "Net World Income" Definition
You might think, "I don't have a $95,000 salary, so I'm safe."
Not so fast. The definition of income includes almost everything:
- CPP and OAS payments themselves.
- RRIF / RRSP withdrawals.
- Company Pension income.
- Capital Gains: (Now trickier! See below).
- Dividend Income: (The "Gross-Up" Trap).
⚠️ Trap 1: The Dividend "Gross-Up"
This is where smart investors get hurt. If you hold Canadian dividend stocks (like Banks or Telcos) in a non-registered account, the CRA "grosses up" the income by 38%.
Example: You receive $10,000 in actual cash dividends. But on your tax return, it looks like $13,800. That "phantom income" pushes you over the $95k limit.
⚠️ Trap 2: The New Capital Gains Rule (66.7%)
Selling a cottage or rental property? Since mid-2024, if your capital gains exceed $250,000 in a year, the "Inclusion Rate" jumps from 50% to 66.67%. This massive spike in taxable income guarantees you will lose your OAS for that year.
Strategy 1: The TFSA is Your Best Friend ($100k+ Room)
The Tax-Free Savings Account (TFSA) is the ultimate weapon against the clawback.
Why? Because withdrawals from a TFSA are not considered income. They do not appear on your tax return at all.
Action Plan: By 2026, many seniors have over $100,000 in cumulative TFSA room. If you are near the $95k threshold, stop taking extra money from your RRIF. Pull from your TFSA instead. You can take out $50,000 tax-free, and your "Net World Income" stays exactly the same, preserving your OAS.
Strategy 2: Income Splitting (Pension Splitting)
If you have a spouse, use them! You can lower your individual income by splitting eligible pension income.
Scenario: The husband has a $130,000 pension (high clawback risk). The wife has $20,000 income.
Solution: The husband allocates up to 50% of his eligible pension to his wife on their tax returns.
-> Husband's income drops to safe levels.
-> Wife's income rises but stays safe.
Result: Both are under the threshold, and the household keeps 100% of the OAS.
Strategy 3: The "RRSP Meltdown" (Plan Early)
The biggest cause of clawback is mandatory RRIF withdrawals at age 72. If you have a massive RRSP, the government forces you to take out a percentage every year, which spikes your income.
The Fix: Retire early (e.g., age 60-65) and withdraw heavily from your RRSP before you start collecting OAS. "Melt down" the account size so that when you turn 71, the mandatory withdrawals are smaller and don't push you over the $95k limit.
Strategy 4: Defer OAS to Age 70
If you are still working at 65 and making over $95,000, there is no point in taking OAS just to give it back in taxes.
You can choose to defer OAS until age 70.
- Benefit 1: You avoid the clawback while your income is high.
- Benefit 2: For every month you delay, your future benefit increases by 0.6% (That is a 36% permanent increase if you wait 5 years).
Don't Get Punished for Success
The OAS Clawback is essentially a tax on the middle-upper class. It penalizes those who saved responsibly.
However, with careful planning—using your massive TFSA room, splitting pension income, and managing capital gains—you can legally structure your income to stay below the line. Talk to a fee-only financial planner to run the numbers before you apply for OAS.
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