Although I am 75 and collecting CPP and my company pension, I am still working. My gross income is over $200,000.
A friend said I should apply for OAS right away even though it will all be clawed back. I am worried about the tax ramifications.
Old Age Security (OAS) can start as early as age 65 or be deferred to age 70. For each month of deferral, the pension increases by 0.6% (7.2% annualized). To be clear, that does not mean there is a 7.2% return if you defer OAS. You give up a year of pension to have a 7.2% higher pension for life.
If you consider the cumulative OAS pension payments, if you defer by a year, you’ll be playing catch-up for the next 13 years. In other words, if you defer your OAS to age 66, it will take you until age 78 to receive more cumulative OAS compared to starting at age 65.
If you defer your OAS to age 70, it would take only 11 years, to age 81, to catch up on the cumulative payments, but you’ll be that much older and have less time to catch up as well.
There is a time value to money, such that receiving a dollar today is better than receiving a dollar next year. That is because you can invest that dollar, or you do not have to draw down your other investments as much and can keep them invested. As a result, depending on the assumptions used, you may need to live well into your 80s to be better off for having deferred OAS.
When is OAS clawed back?
In the case of a high-income earner like you, Greg, there is a disincentive to starting the OAS pension early. This is because it is means-tested with a partial reduction in the pension for those whose net income exceeds $81,761, with a full repayment at $133,141 of income. This repayment, or clawback, is calculated as 15 cents for every dollar your income exceeds the low end of this threshold.
At $200,000 of income, you would be well past the upper end of the threshold. A 65-year-old whose income is high should probably consider deferring their OAS until their income decreases or until as late as age 70.
Given you are 75, Greg, you might as well apply at this point. You may not receive any OAS until you retire, due to your high income. However, there have been other benefits recently paid to OAS recipients—for example, a one-time payment of $300 in 2020 in response to the COVID-19 pandemic, and a one-time payment in 2021 for recipients who will be 75 or older as of June 30, 2021.
At worst, 100% of your OAS will be repayable to the government, so you would be no further ahead nor behind.
Beginning in July 2022, OAS recipients aged 75 or older will see a 10% increase in their OAS pensions. The result is that the upper end of the clawback income threshold will also increase.
Should working seniors incorporate?
One suggestion that may or may not be an option for you, Greg, but could apply to others, is to consider incorporation. If you are working on a self-employed basis or could change your relationship with your employer to legitimately become self-employed instead of an employee, there could be an opportunity to reduce your income. Business income paid into a corporation is taxable to the corporation at lower rates than personal income, and if you do not need the money for living expenses, it can remain tax-deferred. This could reduce your personal income and potentially help you keep some or all of your OAS.
Seniors who are still working after age 65 should consider deferring OAS, CPP and workplace pensions if they can. A healthy 65-year-old who is still working may be that much likelier to live well into their 80s and benefit from OAS and CPP deferral, plus they may avoid a high tax bracket that could result from an increase in income. A 70-year-old who is above the OAS clawback threshold should still likely apply for OAS. If their OAS is fully clawed back forever due to a high income, I guess that is a good problem to have.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. If you have a question for Jason, please send it to firstname.lastname@example.org.
MORE FROM JASON HEATH:
- How to avoid OAS clawbacks when you’ve had a temporary increase in income
- Would a senior get a tax credit for selling their house if they move out?
- How to leave money to your grandkids
- Do RRIF beneficiaries pay tax?
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