The OAS Clawback: Two Numbers, and Why Everyone Quotes the Wrong One

Old Age Security is Canada’s near-universal retirement benefit, and it comes with an income test. Above a threshold, you repay 15 cents of OAS for every dollar of net income. That is the OAS recovery tax, universally called the clawback.

Search for the threshold and you will find conflicting figures. Both are usually correct.

The two numbers

The reason for the lag is administrative: OAS payment years run July to June and are based on the previous calendar year’s tax return. So there is always a roughly eighteen-month gap between earning the income and feeling the effect — which is precisely what makes planning possible, if you see it coming.

What counts, and what does not

The test is net world income, line 23600 of your return.

That first exclusion is the most important line in this article, and I will come back to it.

Why a large RRSP creates the problem

You must convert your RRSP by the end of the year you turn 71, usually to a RRIF. After that, minimum withdrawals are mandatory and rise with age. That income arrives whether you want it or not.

Consider someone who did everything right — maximised their RRSP for thirty years and reached 72 with an $800,000 RRIF. Their mandatory minimum that year is roughly $43,000. Add CPP, OAS itself and any workplace pension, and they are past the threshold before making a single discretionary decision.

They then pay ordinary income tax on that money plus the 15% recovery on the excess. The effective marginal rate on those dollars is considerably higher than they expect.

Why the TFSA matters so much here

Because TFSA withdrawals are invisible to the calculation. A retiree drawing $30,000 a year from a TFSA has $30,000 of spending power and zero effect on their OAS. The same $30,000 from a RRIF counts in full.

This is why the RRSP-versus-TFSA decision you make in your forties has consequences in your seventies, and why building both — rather than only the account with the immediate deduction — is usually the more robust plan.

The planning window most people waste

The years between retiring and starting CPP and OAS are frequently the lowest-tax years of your life. That window is the natural time to draw RRSP money down, or convert it, at low rates — reducing the mandatory RRIF withdrawals that would otherwise push you over the threshold later.

Many people spend those years living off savings and taking nothing from the RRSP, because it feels prudent. Then the mandatory withdrawals arrive and the clawback with them. Deliberately drawing more early can reduce total lifetime tax, which is counterintuitive enough that it rarely happens by accident.

Other things that help

Pension income splitting can move income to a lower-earning spouse, keeping both below the threshold. RRIF income generally qualifies from age 65.

Deferring OAS to 70 increases the eventual benefit and avoids the clawback during high-income years — useful if you are still working past 65.

Timing large capital gains matters, because a single big realisation can push one year’s income over the line and cost you OAS you would otherwise have kept.

A closing thought worth holding onto

Being clawed back is not automatically a planning failure. It means your income is comfortably above the threshold, which is not the worst problem to have. The failure is being clawed back by surprise, in a year where a different withdrawal decision would have avoided it.

If you are within about ten years of retirement, projecting your income sources year by year is the exercise that surfaces these pressure points while there is still time to act on them.

Which number applies to you

The confusion is structural, not carelessness. OAS runs on a payment year of July to June, while income is measured on a calendar year. So at any moment there are two live thresholds, and articles quote whichever suits them.

Because the threshold is indexed annually and the figures shift, I have deliberately not printed a dollar amount here — a stale number on a page like this does more harm than none at all. Check the current figures on the Government of Canada's OAS page, and be sure you are reading the row for the right income year.

The mechanics, which do not change: above the threshold, 15 cents of OAS is recovered for every dollar of net income. Once income reaches a ceiling, OAS is gone entirely. The ceiling is higher for those 75 and over, because OAS payments increase at 75.

What counts toward the threshold

That last row catches people. Eligible Canadian dividends are "grossed up" for tax purposes, meaning a larger figure lands in net income than you actually received. A retiree living on dividend income can be pushed over the threshold by income they never saw. The dividend tax credit softens the tax but does not undo the effect on OAS.

Why a large RRSP creates the problem

An RRSP is a deferral, not a forgiveness. At some point the money comes out and is taxed as ordinary income — and by the year you turn 71, it must be converted to a RRIF, which then has a minimum withdrawal every year whether you want the money or not.

That minimum rises with age. For someone with a substantial RRIF, the required withdrawal alone can exceed the clawback threshold, on top of CPP, OAS and any other income. The result is a retiree taking money they do not need, paying tax on it, and losing OAS as well.

The mechanism nobody planned for: decades of diligent RRSP saving producing a mandatory income stream that penalises itself.

The planning window most people waste

The years between retiring and starting OAS, or between retiring and 71, are the most valuable planning years available — and they are usually spent doing nothing, because income is naturally low and there seems no reason to act.

That is precisely why they matter. Drawing down RRSP funds deliberately during those low-income years, at a low marginal rate, reduces the balance that will later force large mandatory withdrawals. Money drawn now at a modest rate is money not drawn later at a higher rate with 15% OAS recovery stacked on top.

A rough way to think about it: the combined cost of an extra dollar of income above the threshold is your marginal rate plus 15%. For many Ontario retirees that lands well above 45%. Moving income out of those years and into the low-rate window before OAS starts is where the arithmetic works.

What else helps

• Pension income splitting. Eligible pension income, including RRIF withdrawals after 65, can be split with a spouse. Because OAS is assessed individually, moving income to the lower-income partner can keep both under the threshold.
• Using the younger spouse's age for RRIF minimums. Basing the minimum on a younger partner's age reduces the forced withdrawal.
• Deferring OAS. OAS can be deferred past 65 for a permanently increased payment, which sometimes suits someone still working.
• Prioritising the TFSA for decades beforehand. The most powerful lever of all, and the one that must be pulled early.

Why the TFSA matters more than it looks

A TFSA withdrawal is invisible to the OAS calculation. Not taxed lightly — invisible. It does not appear in net income, so it cannot trigger recovery.

A retiree with a large TFSA can draw on it in a high-spending year — a new roof, a car, a major trip — without touching their OAS. A retiree whose savings sit entirely in an RRIF cannot: the same expense means a larger withdrawal, more taxable income and potentially a full year of reduced OAS.

This is why the decision about where to save, made in your forties and fifties, shapes the tax you pay in your seventies. See the TFSA page and the RRSP page for how the two work together — and a closing thought worth holding onto: being clawed back means your retirement income is high, which is not a failure. The goal is not avoiding the clawback at all costs; it is not paying it unnecessarily.

A worked example of the real cost

Take an Ontario retiree at 68 with net income comfortably above the threshold, considering an extra $10,000 RRIF withdrawal to fund a renovation.

The income tax on that $10,000 is at their marginal rate. On top of it, 15% — $1,500 — of OAS is recovered. For someone in a middle Ontario bracket, the combined effect is often above 45 cents on the dollar. The $10,000 withdrawal nets somewhere near $5,500 of usable money.

The same $10,000 taken from a TFSA costs nothing in tax and nothing in OAS. It nets $10,000.

That is the entire argument for building TFSA room during working years, expressed as a single decision in retirement. Not a marginal advantage — nearly double the usable money for the same withdrawal.

Common misunderstandings

• "The clawback is based on household income." It is not. Each person is assessed on their own net income, which is exactly why pension income splitting can help so much.
• "If I go over, I lose all my OAS." Only above the upper ceiling. Between the two figures it is partial — 15 cents per dollar, not a cliff.
• "OAS itself pushes me over." OAS is taxable income, but the recovery is calculated in a way that does not compound on itself in the manner people fear.
• "I should avoid RRSPs entirely." Overcorrection. The RRSP deduction at a high working-age marginal rate is often worth more than the clawback later. The problem is an unbalanced retirement, not the RRSP itself.
• "There is nothing I can do once I am 71." Less room, but splitting, a younger spouse's age for RRIF minimums, and careful timing of large withdrawals all still help.

What to actually do, by age