Five ideas to reduce the clawback of OAS benefits

You gotta love laptop spell-checks. As a private finance specialist, I take advantage of the time period “clawback” very often in my work. My spell-checker by no means fails to flag this time period and suggests “name again” or “clambake.” Right here’s the place the story will get bizarre. Some associates of ours have been speaking about having a “clambake social gathering” (sure, there’s such a factor) the place we’ll take pleasure in some laughter, lobster, crab and different seafood.

My spouse, Carolyn, has been attempting to co-ordinate dates with these associates, and she or he e-mailed me a few days in the past to announce that she received a “call-back concerning the clambake.” I instantly thought concerning the clawback of Previous Age Safety (OAS) advantages. That’s how my thoughts works. And that, of us, is how I used to be impressed this week to put in writing about minimizing the clawback of OAS advantages (individuals usually ask how I consider issues to put in writing about; now you understand how it really works).

The fundamentals

You can begin gathering OAS advantages when you’re 65, are a Canadian citizen or authorized resident, and have lived in Canada for a minimum of 10 years for the reason that age of 18 (should you’re dwelling outdoors of Canada, you should still be capable of acquire should you meet sure checks).

How a lot are you able to acquire? It could change quarterly, however is presently $613.53 a month. For 2019, it is going to be a complete of $7,272. These advantages are clawed again on the charge of 15 cents for each greenback of revenue over $77,580 and can disappear fully as soon as your revenue reaches $126,058 for 2019.

There could also be some easy concepts you may implement to scale back the clawback of your OAS advantages – which provides you with more cash to spend on a clambake, or another presents for your self.

The concepts

Contemplate these 5 concepts to scale back the OAS clawback.

Break up pension revenue. If you happen to’re gathering eligible pension revenue (most pension revenue aside from OAS and Canada Pension Plan/Quebec Pension Plan), you might be able to have your partner pay tax on as much as half of this revenue. This reduces your taxable revenue – and will cut back the clawback. You can also make this election in your tax return for 2019 by submitting Kind T1032 (each spouses ought to file it).

Use your TFSA. In case your funding revenue is adequate to create a clawback drawback, it’s going to make sense to speculate as a lot as you may inside a tax-free financial savings account the place the revenue out of your portfolio contained in the TFSA gained’t present up in your tax return.

Management your asset location. Not all revenue is taxed equally. Curiosity and overseas dividends are taxed at your full marginal tax charge, whereas capital positive factors are taxed at half these charges. Canadian dividends are taxed someplace in-between. You’ll wish to maintain your interest-bearing investments in your registered plans, the place there isn’t a tax yearly, to the extent you may. You may even contemplate holding a few of your Canadian dividend-paying equities in these plans since these dividends are “grossed-up” and may make your clawback drawback worse (some math needs to be achieved right here to see if that is worthwhile). Ideally, belongings held outdoors registered plans needs to be extra tax-efficient – reminiscent of equities which can be held for development.

Defer your RRSP deduction. If you happen to’re nonetheless contributing to your registered retirement financial savings plan, however count on to run right into a clawback drawback later whenever you begin gathering OAS advantages, contemplate deferring your RRSP deduction (for maybe just a few years) and declare it in these years whenever you wish to cut back your revenue to attenuate clawbacks.

Use your holding firm. When you’ve got an organization, you may contemplate transferring a few of your investments to the company (chances are you’ll want to finish a “tax-deferred rollover” to keep away from tax right here) and take again an interest-free promissory word in trade. It will take away funding revenue out of your private tax return, minimizing your annual clawback. Your company will now earn funding revenue and may declare (however doesn’t have to pay) a dividend to you annually equal to the quantity of its after-tax earnings. This dividend gained’t be taxable to you till it’s really paid. If you happen to want money to reside on, your organization will pay out these funding earnings as a tax-free compensation of the word it owes to you – which might go on for a few years. You’ll additionally save tax upon demise as a result of the dividends payable to you’re a legal responsibility of the corporate and can cut back its worth, which can cut back the tax that can in any other case be owing in your firm shares at the moment. Additionally, any dividends nonetheless owing to you upon your demise could also be topic to preferential tax therapy on a separate “rights or issues” tax return. Complicated? Positive. So, communicate to a tax professional concerning the execs and cons for you.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an writer, and co-founder and CEO of Our Household Workplace Inc. He will be reached at tim@ourfamilyoffice.ca.