Year End Planning with OAS Benefits

In the final three months of 2013, seniors will receive an inflation-adjusted increased OAS benefit of $550.99 per month, which makes the total annual OAS benefits a total of $6,578.06. 

The clawback of the OAS will begin when individual net income is $70,954. The OAS is lost completely when net income reaches $114,815 in 2013. So, what can be done at year end to avoid these clawback zones and maximize OAS over time?

Remember that one-twelfth of the amount calculated is deducted from the senior’s OAS cheques beginning in July following the filing of the return. This deduction serves as a prepayment of the clawback that is expected for the coming year.

For those whose income is regularly above the clawback threshold, this may be a good thing as it reduces the chances of a large balance due when the return if filed. However, for seniors whose income spikes in a given year (for example, because they sold their cottage and reported a capital gain or because they cashed in some of their RRSPs to cover emergency costs) the reduced OAS amounts may be unwarranted as their income in the following year will be lower and they will therefore not be subject to the clawback.

Seniors in this situation can request a reduction in the amount of the “recovery tax” by filing Form T1213(OAS). On the form, current year income, deductions and credits are estimated. If the result is a net income that is below the clawback threshold, then the recovery tax deductions will be eliminated.

CRA has just released a new version of T1213(OAS). EverGreen Explanatory Notes has been updated for this release. Ideally, the form should be filed soon after preparing the tax return so that the recovery tax deduction for July can be avoided, but the form can still be filed to reduce the recovery tax for the months up to June 2014. 

Also note that the recovery tax deductions for January to June 2014 are based on 2013 income levels. For these reasons, consider deferring to 2014 other taxable payments that might be received before year end, such as dividends from a private business or holding company,  investing in an RRSP or a spousal RRSP or reducing otherwise taxable income from a proprietorship by purchasing capital assets in 2013. 

You might also consider postponing the OAS to the future if income will exceed the clawback zones between now and age 70. The deferral should be considered before applying for OAS although those who have already applied may still opt to defer if they have received less than six months of Old Age Security. In that case any OAS already received will have to be repaid. Deferrals come with the bonus of an increase in the amount of the pension by 0.6% for each month it is deferred, to a maximum of a 36% increase if the pension is deferred to age 70.

For those who are not subject to clawbacks, the break-even period for recovering the pension lost from deferral is 14 years, but for those who are subject to clawback, the break-even period could be much shorter. The question for the higher income earners is this: will the clawback ceilings change given the increase in the deferred OAS benefits? What do you think? Please join us at the Distinguished Advisor Workshops in November and January for the answers.