Following the publication of my column last week on the disbursement of RRSPs, a reader, Serge, wrote me the following message: “Why do we never talk about the disbursement ceiling which leads to a the amount of the Old Age Security (OAS) benefit? At retirement, if a person is already receiving retirement income and the Quebec Pension Plan (QPP) and OAS are added, withdrawal from their RRSP portfolio could reduce this benefit to zero. So why recommend people wait to withdraw their RRSP? »
Let’s start from the beginning. OAS is a pension program that provides a monthly amount to all Canadians aged 65 and over. For many, the pension will automatically begin the month following this anniversary, although it is possible to postpone it in order to benefit from an increase in the amount. If this avenue is aimed particularly at taxpayers who have acquired a large investment portfolio at retirement, the Guaranteed Income Supplement (GIS) provides for the payment of an additional non-taxable amount to seniors with low incomes.
Our reader therefore got it right: it is true that if your taxable income exceeds a certain threshold ($81,761 in 2022), you will have to repay part or all of the OAS amount. But it is important to debunk a few persistent myths as to the magnitude of that amount.
A marginal situation
In fact, the calculation is quite simple: the amount to be reimbursed for OAS is 15% on the difference between the income you earn and the established threshold. For example, if in 2022 you had taxable income of $100,000, you would have to repay 15% tax of $18,239, or about $2,736. This amount must be reimbursed from your benefits for the following year (the calculation is always made from July to June).
Thus, at age 65, the OAS will be fully recovered if your income exceeds $134,626. Same thing if at age 74 your income exceeds $137,331. This is moreover what probably explains the fact that our reader considers that this is an issue that is little covered when it comes to the disbursement plan: few retirees are, in fact, concerned by this full recovery of the SV.
Moreover, it is important to specify that the real cost of this clawback is not really 15% since Old Age Security benefits are taxable. Therefore, the refunded portion reduces the amount of taxable benefits the following year. Thus, according to the Quebec Tax Training Center (CQFF), a taxpayer who had to repay all of his benefits would see his marginal tax rate increase by approximately 8%.
Strategies to consider
As discussed in last week’s column, a disbursement plan must be personalized according to the real needs of each retiree. Our reader’s proposal to disburse a certain amount of RRSP earlier, before the maximum age for conversion into a registered retirement income fund (RRIF), may be interesting in certain situations, but it is impossible to generalize this strategy. Indeed, accelerated withdrawals increase taxes in the short term and it is important to take this into account, as well as the loss of compound interest and the tax-sheltered return.
The tax optimization of the portfolio also plays a key role in anticipation of retirement. If you hold a small non-registered portfolio, you could also consider at the beginning of retirement the use of tax-advantaged funds, allowing the distribution of capital and limiting dividend income or capital gain.
Finally, this reflection on OAS should appeal to you just as much if you are far from retirement. In the context of joint planning, particular attention should be paid upstream, in order to provide you with strategies allowing income splitting and to balance the tax bases as much as possible in retirement. For example, for couples where one member enjoys higher taxable income, joint RRSPs should be considered, taking into account legal and legal issues for unmarried couples.