When it comes to the three pillars of Canada’s government-supported retirement income system, qualifying is all about expected income. The Guaranteed Income Supplement (GIS) is only available for seniors who expect to make a modest income in retirement. The Canada Pension Plan (CPP) is open to all comers, depending on how much you contributed and for how long.
In between, as popularly understood, is Old Age Security or OAS, for which most low-income and medium-income seniors will qualify once they reach age 65.
Sadly, OAS is famously “clawed back” if you generate too much net income in retirement: once you reach $77,580 (in 2019) you start paying back 15 cents of the $7,289.52 maximum basic payment for every dollar above that floor.
The ceiling is popularly believed to be $125,937 this year, at which point ALL your OAS will be lost to clawbacks. But read on!
Registered Financial Planner Aaron Hector argued last week in a blog at T.E. Wealth that there three OAS “secrets” that even the wealthy may be able to use to put a little OAS money into their pockets, or at least their heirs’ pockets.
Two of these techniques are admittedly pretty esoteric but the third is an eye opener and may be more accessible to many in the $125,000 to $145,000 annual income bracket. That $145,000 is not a typo, as the $125,000 “ceiling” is not a hard number. True, it’s the most common threshold, since it applies to the vast majority who take OAS as soon as it’s on offer at age 65. But, as Hector points out, since 2013 it has been possible to defer the commencement of OAS benefits to as late as age 70, a gambit that hikes your annual payouts by 36 per cent. That’s analogous to the similar technique of delaying CPP to 70, except the gain by deferring CPP from 65 to 70 is 42 per cent instead of 36 per cent.
But what I never knew, and I’m sure many affluent Canadians might not realize, is that the OAS ceiling effectively rises for each year you choose to defer the commencement of benefits. That’s because the clawback rate remains at 15 cents per dollar over $77,580, but the total OAS entitlement has increased by as much as 36 per cent, so it takes more income to exhaust it.
Thus the “real” OAS clawback ceiling for 2019 is $129,418 if you started OAS at 66; rising to $132,900 at 67; $136,382 at 68; $139,863 at 69; and $143,345 at 70.
Depending on retirement income sources, there may be advantages in restructuring your income flows: Some may take OAS at 65 because once an RRSP is converted to a RRIF, income might exceed even the $143,000. For others, an early RRSP drawdown combined with postponing OAS to 70 might achieve optimum results.
A second OAS secret Hector calls an OAS “superceiling” of $209,110 that can be created for a single calendar year: a high-income person above the $143,000 income ceiling could arrange to receive two years of 36 per cent enhanced OAS payments — $19,730 — for that same year. This involves precise timing in making a retroactive lump sum application while also deferring benefits to beyond age 70. (Those older than 65 when they first apply for OAS can choose an effective starting date up to a year earlier than the current date of the application, with all payments based on the earlier date, with a lump sum paid retroactively for the period between the two.)
Thirdly, there is an estate planning tip that may permit even a wealthy individual with annual income of $250,000 or more to capture a single year of OAS — or more accurately, his or her estate would capture it. If the deceased never applied on their own for OAS, an executor can have the estate apply for benefits within one year of the date of death. While benefits always cease at death, this lets the estate “reach back” and obtain a lump sum payment for the year prior to the death date — this would be included on an optional tax filing called a “Rights or Things” tax return.
One pension expert Hector consulted was Doug Runchey, founder of B.C.-based DR Pensions Consulting.
.“Overall I think Aaron makes some very good points,” Runchey said in an email. “One aspect he doesn’t discuss though is that many people believe it’s important to keep their income below the clawback floor in their 64th year, because otherwise the CRA will tell Service Canada to reduce their OAS at source based on estimated clawback amount.” Runchey views that as an unnecessary step, because “even if they fully withhold your OAS based on the income you reported in your tax return for the year you turned age 64, you’ll get it all back when you file your next year’s tax return, as long as your income in your 65th year is below the clawback ‘floor.’”
Tricky stuff but it shows that when it comes to navigating Canada’s complex retirement income system, retirees should leave no stone unturned.
Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at email@example.com.