Understanding the OAS Clawback (Recovery Tax) and How to Manage It

While Old Age Security (OAS) provides a universal benefit for Canadian seniors, it includes an income-tested reduction called the OAS clawback or Recovery Tax. This mechanism gradually reduces OAS payments for higher-income retirees.

Understanding how the clawback works and how to manage it strategically is essential for preserving your OAS benefits and optimizing your retirement income.

What Is the OAS Clawback?

The OAS clawback is a reduction in OAS payments for individuals whose annual income exceeds a government-set threshold:

Once your net income surpasses this threshold, a portion of your OAS benefit is repaid through the tax system.
The repayment increases progressively with income, up to a point where OAS payments may be fully clawed back for very high-income earners.

This clawback is calculated annually, based on your income reported on your tax return.

How the OAS Clawback Is Calculated

Each year:

Step	Description
Federal threshold set annually	Adjusted for inflation each year.
Income comparison	Net income above this threshold is subject to clawback.
Repayment rate	A percentage of OAS is repaid for every dollar above the threshold.
Administered through taxes	Collected via your annual tax return, reducing OAS payments in the next year.

At Optimize, we help you forecast your income relative to the clawback threshold and model its impact on your retirement cash flow.

Common Income Sources That Trigger the OAS Clawback

Several income streams can push retirees above the clawback threshold, including:

RRSP/RRIF withdrawals.
Employer pension income.
CPP payments.
Investment income (interest, dividends, capital gains).
Business or rental income.

Note: Managing how and when you draw income from these sources can help control your exposure to the OAS clawback.

Strategies to Minimize the OAS Clawback

While the clawback can’t be avoided for everyone, smart planning can help minimize its impact:

Strategy	Benefit
RRSP/RRIF withdrawals earlier	Reduces taxable income once OAS begins.
Pension income splitting	Lowers individual taxable income between spouses.
Use of TFSAs	Provides tax-free income that doesn’t affect clawback.
Deferring OAS	Higher payments later can offset clawback impact.
Managing capital gains timing	Avoids income spikes by spreading gains across years.

Optimize develops customized strategies based on your income sources and retirement timeline to manage clawback exposure effectively.

Why OAS Clawback Management Matters

Even though OAS may represent a modest portion of your retirement income, managing the clawback is important because:

Every dollar preserved enhances your guaranteed, inflation-adjusted income.
Effective clawback management supports overall tax efficiency.
It ensures you’re not unnecessarily giving back benefits due to poor income timing.

Optimize ensures clawback management is not just reactive but an integral part of your long-term retirement plan.

How Optimize Helps You Manage the OAS Clawback

At Optimize, we proactively manage the impact of the OAS clawback on your retirement income. We help you:

Forecast your income against clawback thresholds.
Design income withdrawal strategies to reduce clawback exposure.
Coordinate OAS planning with CPP, RRIF, and other income streams.
Incorporate tax-efficient investment and withdrawal tactics.
Monitor and adjust your plan as your income and circumstances change.

With Optimize’s guidance, the OAS clawback becomes a manageable factor in your retirement income strategy—not an unexpected penalty.