For most taxpayers, the worst-case outcome when completing their tax return for the previous year is finding out that they owe an additional tax amount to the federal government. However, for Canadians who are receiving Old Age Security (OAS) benefits, there can be additional bad news. For such Canadians, one of the calculations made as part of preparing a tax return is a determination of whether the taxpayer received OAS benefits during the previous year to which they were not entitled. If that’s found to be the case, the taxpayer will be required to repay a portion of benefits already received – and likely already spent.

Many OAS recipients – especially those who have only recently begun to receive such benefits – are unaware that OAS benefits received may have to be repaid to the federal government, and even fewer are aware of exactly how and when they could become subject to that repayment requirement. To understand that process, and how it is administered, a bit of background is helpful.

The Old Age Security program is one of the two major public retirement income programs in Canada – the other being the Canada Pension Plan. The two programs differ in two significant ways. First, while the Canada Pension Plan is funded by employer and employee contributions, OAS benefits are financed entirely out of general federal government revenues. Second, CPP retirement benefits are based on contributions made throughout the recipient’s working life and are unaffected by their income while receiving those retirement benefits. Recipients of OAS benefits can, however, be required to repay some or all of those benefits where their net income exceeds a prescribed threshold.

That “OAS recovery tax” or clawback, as it is universally known, is administered on a one-year time lag basis. Anyone who received OAS benefits during 2025 and had net income for that year over a specified dollar amount threshold will be required to repay a portion (or all) of the OAS benefits which were received during 2025.

The federal government becomes aware of an individual’s net income for 2025 only once the tax return for that year is filed, usually by April 30 of 2026, when information on that return will disclose that OAS benefits received must be repaid. That repayment does not have to be made when the return is filed: rather, the overpayment is recovered by reducing the amount of OAS benefits paid to the recipient throughout the next benefit year.

For example, an individual who received OAS benefits during 2025 and had net income for the year over $93,454 will be subject to the clawback. They must repay OAS amounts received at a rate of 15 cents (or 15%) of every dollar of income over the clawback income threshold, as in the following simplified example.

The OAS clawback threshold for 2025 is $93,454.

If the individual’s net income in 2025 was $98,500, then repayment would be 15% of the difference between $98,500 and $93,454:

$98,500 – $93,454 = $5,046

$5,046 x 0.15 = $756.90

The individual would have to repay $756.90 of OAS benefits received.

Consequently, in the following benefit year (which covers OAS benefit payment dates from July 2026 to June 2027), OAS benefits received will be reduced by $63.08 per month ($756.90 divided by 12 months).

The OAS clawback is a perpetual irritant to those affected by it, perhaps because of the sense that they are being penalized in retirement for having lived frugally or been good managers of their finances during their working years, in order to put aside savings for a financially comfortable retirement, or to leave an inheritance for their children. While any sense of grievance can’t alter the reality of the OAS clawback, there are strategies which can be put in place to either minimize or even eliminate one’s exposure to that clawback. Like most individual tax planning, many of those planning considerations are better addressed earlier in life, prior to retirement: however, it’s not too late, once one is already receiving OAS, to take advantage of strategies to avoid or minimize the clawback in future years.

In all cases, no matter what strategy is employed, the goal is to “smooth” one’s income from year to year, so that net income for each year comes in under the OAS clawback threshold and, not incidentally, minimizes exposure to the higher federal and provincial income tax rates which in most cases apply once taxable income approaches $100,000. Some of the available strategies are outlined below.

Managing the amount and timing of RRIF withdrawals

Taxpayers who have a registered retirement income fund (RRIF) and are age 65 or over must make a minimum required withdrawal (MRW) from that RRIF each year. The amount of the MRW is a percentage of the total amount in the RRIF and is based on the taxpayer’s age.

As the name suggests, the taxpayer has no options when it comes to the MRW, which must be made each year in the required amount, with that amount included in taxable income for the year.

Once the MRW is made, however, any additional RRIF withdrawals during the year are entirely the choice of the taxpayer, and that choice can be made, or changed, at any time. Taxpayers can and should monitor both the amount and the timing of those withdrawals. All amounts withdrawn from an RRIF are fully taxable in the year they are withdrawn, without exception, and such funds can never be re-contributed to the RRIF. As well, all such withdrawals will be included in net income for purposes of determining the taxpayer’s eligibility for OAS and a number of other tax credit and benefit programs.

From a financial planning perspective, the optimal annual withdrawal from an RRIF is the amount which, when combined with other retirement income sources, enables the taxpayer to live a comfortable lifestyle while minimizing the amount of income tax they must pay, or their exposure to the OAS clawback.

Retirement income needs fluctuate over time, with expenses usually higher in the earlier retirement years and then decreasing. As well, life circumstances change (a spouse dies, a family home is sold to downsize to a smaller and less costly residence) and retirement income needs change as a consequence of those changed life circumstances. Many taxpayers set the amount of annual RRIF withdrawals when the plan is set up at age 71 and that arrangement simply remains in place. However, optional RRIF withdrawals should be based, not on a fixed, unchanging amount, but the amount which fits current life circumstances and income requirements.

Consequently, a withdrawal plan in which the MRW is made at the beginning of the calendar year and further withdrawals are made on an as-needed basis will ensure that the taxpayer has sufficient funds to support a comfortable retirement while minimizing the risk of negative tax and clawback consequences that can follow where amounts in excess of annual income requirements have been withdrawn unnecessarily from the RRIF.

Similarly, where a large, one-time RRIF withdrawal is planned – whether early in retirement to pay for long-deferred travel plans or, in later years, to finance home renovations needed to accommodate changed health circumstances – splitting that withdrawal between two taxation years (for instance, one-half in December of 2026 and one-half in January 2027) will minimize net income and consequently exposure to both a higher tax rate and the OAS claw back in both years.

Sheltering investment income within a Tax-Free Savings Account (TFSA)

Taxpayers who are over the age of 71 have relatively few available means to shelter income from tax. Investment income earned within an RRIF is of course not taxable as it is earned, but all RRIF withdrawals, whether they represent amounts saved or investment income earned, are fully taxed on withdrawal. As well, investment income of any kind subsequently earned on such withdrawals will become taxable income in the year that investment income is earned.

Practically speaking, the best strategy (and for those over age 71, the only strategy) to shelter investment income earned on amounts withdrawn from an RRIF is to contribute those RRIF withdrawals to a Tax-Free Savings Account (TFSA), to the extent that the taxpayer has contribution room. Unlike RRIFs and RRSPs, a TFSA can be opened and held by a taxpayer of any age. Amounts contributed to a TFSA are not deductible from income, but all investment income earned within the TFSA accumulates free of tax. Finally, any and all amounts withdrawn from a TFSA (whether original contributions or investment income earned) are not taxed on withdrawal, and are not included in income for purposes of the OAS clawback.

Especially where amounts withdrawn from an RRIF are substantial, the amount of investment income earned throughout the year on those withdrawals can have a real impact on an individual’s tax liability. Contributing RRIF withdrawals to a TFSA where such funds can be invested, and withdrawn as needed, will eliminate that liability.

Detailed information on how to determine one’s contribution limit and on the rules governing contributions to and withdrawals from a TFSA can be found on the Canada Revenue Agency website at Tax-free Savings Account (TFSA) – Canada.ca.

Pension income splitting

For married taxpayers, pension income splitting is likely the most valuable strategy available to minimize both tax liability and exposure to the OAS clawback.

Using pension income splitting, the spouse who has income over the OAS clawback threshold re-allocates the “excess” income to their spouse on the annual return, and that income is then considered to be income of the recipient spouse, for purposes of both income tax and the OAS clawback. To be eligible for pension income splitting, the income to be reallocated must be private pension income, which is generally income from an RRSP or RRIF, or from an employer-sponsored pension plan. CPP and OAS benefit amounts do not qualify for pension income splitting.

There are two reasons why pension income splitting is a particularly attractive strategy for avoiding or minimizing the OAS clawback. First, there is no need to actually change the source or amount of income received by each spouse, as the reallocation of income is “notional”, existing only on the return for the year. Second, no decision has to be made on pension income splitting until it’s time to file the return for the previous year, meaning that spouses can easily calculate exactly how much income has to be reallocated to produce the desired result. More information on the kinds of income eligible for pension income splitting, and the mechanics of the process, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/pension-income-splitting.html.

Detailed information on the OAS clawback can be found on the same website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/repayment.html.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.